Despite the rout across the global equities market, the rally in the Nigerian equities market remained unscathed as intense bargain hunting activities in cyclical stocks pushed the All-Share Index higher by 4.3% w/w to close at 53,100.21 points.
May 13, 2022/Cordros Report
The United States’ headline inflation appears to have peaked in 2022. According to the Bureau of Labor Statistics (BLS), headline inflation moderated by 20bps to 8.3% y/y in April after hitting a 41-year high in March (+8.5% y/y). However, the inflationary pressures remain significantly elevated given (1) strong consumer demand, (2) food and energy shortages arising from the Russia-Ukraine conflict, and (3) COVID-19 restrictive measures in China’s major production cities (Shenzhen, Guangzhou, Shanghai, and Beijing) which provide critical supplies to the US factories. Decomposing the breakdown, we highlight that price pressures remained elevated in food (9.4% y/y vs March: 8.8% y/y), new vehicles (13.2% y/y vs March: 12.5% y/y, and energy (30.3% y/y vs March: 32.0% y/y). On a month-on-month basis, the headline inflation rose by 0.3% (March: 1.2% m/m) – the lowest since August 2021 (0.3% m/m). Despite the moderation, we expect inflationary pressures to remain significantly above pre-pandemic levels in the short to medium term, given the existing factors limiting supply amidst elevated consumer demand. Accordingly, we expect the FOMC to raise the key policy rate further by up to 50bps at its next meeting in June.
According to the Office for National Statistics (ONS), the United Kingdom’s real GDP grew by 0.8% q/q in Q1-22 (Q4-21: +1.3% q/q) – the lowest since Q1-21 (-1.6% q/q). We understand that GDP in the review period is now 0.7% above the pre-pandemic level. Analysing the breakdown, we highlight that the growth in gross fixed capital formation (+5.4% q/q vs Q4-21: +1.1% q/q) and private consumption (+0.4% q/q vs Q4-21: +0.5% q/q) were enough to offset the decline in general government expenditure (-1.7% q/q vs Q4-21: +1.5% q/q). On a year-on-year basis, GDP increased by 8.7% in Q1-22 (Q4-21: 6.6% y/y), driven by the favourable base from the prior year. Although the country has removed all COVID-19 restrictive measures, we expect the growth momentum to weaken in the near term given the troika impact of the (1) Russia-Ukraine conflict, (2) higher consumer prices, and (3) tightening of financing conditions. Accordingly, we imagine that the government could be pressured to provide more support to households to cushion the pass-through impact of the lingering Russia-Ukraine conflict on the citizens.
Risk-off sentiments reverberated across global markets as investors assessed the risk of a slowing global economy against the Federal Reserve’s aggressive monetary tightening moves. Accordingly, US (DJIA: -3.6%; S&P 500: -4.7%) stocks posted huge losses as investors reacted negatively to Federal Reserve officials comments on further tightening of monetary policy. European markets (STOXX Europe: -0.4%; and FTSE 100: -0.9%) were set for a weekly loss as global growth and inflation concerns remained elevated in the region. Asian markets posted mixed performances, as the Japanese Nikkei 225: (-2.1%) closed lower mirroring selloffs on Wall Street. Elsewhere, the SSE: (+2.8%) reversed weeks of losses as authorities ruled out the imposition of a lockdown in Beijing amid measures to contain the spread of the coronavirus. Emerging (MSCI EM: -4.2%) and Frontier (MSCI FM: -5.0%) market stocks mirrored the bearish trend across global stocks consequent upon losses in South Korea (-1.5%) and Kuwait (-7.3%), respectively.
The Nigerian Communications Commission (NCC) has rejected the demand of Mobile Network Operators (MNOs) to increase tariffs for voice and Short Messaging Services (SMS) by 40.0%. Specifically, the Commission stated that the operators would effect no tariff increase without due regulatory approval by the Commission. Besides, the operators are not allowed to do such without recourse to the NCC following the outcome of cost-based and empirical studies, which is not the case for now. Recall that the MNOs wrote a letter to the NCC to increase tariffs by 40.0% due to the high cost of running their operations. Overall, we think it is highly unlikely that the NCC will approve a 40.0% tariff hike. Suppose the telecom tariffs are eventually raised by 5.0% – 10.0% which is our baseline expectation, we expect the direct impact on inflationary pressures to be muted, given that communication (1.3% of the Core inflation basket) constitutes an insignificant portion of the inflation basket. That said, we believe it could be a windfall for the MNO’s revenue growth, given that the demand for telecommunication services is price inelastic.
Nigeria’s oil sector continues to grapple with low crude oil production, reflecting age-long challenges facing the sector. Based on the OPEC’s Monthly Oil Market Report (MOMR), Nigeria’s crude oil production (excluding condensates) declined for the third consecutive month, averaging 1.32mb/d in April (March: 1.34mb/d) – 24.1% below the OPEC+ production agreement (1.74mb/d) for the month. Accordingly, average crude oil production settled at 1.38mb/d in Q1-22 (Q4-21: 1.32mb/d). We highlight that the key factors limiting crude oil production volume include (1) massive theft and vandalism, (2) difficulties in restarting the oil wells for operation after the COVID-19 induced shutdown, (3) infrastructure decay, and (4) divestments given the challenging business environment amidst companies’ move to cleaner energy sources. Accordingly, we do not expect a significant improvement in crude oil production over the short term, given the nature of challenges hampering production. Consequently, despite the rally in crude oil prices, we expect the government’s oil revenue performance to remain underwhelming over the short term.
Despite the rout across the global equities market, the rally in the Nigerian equities market remained unscathed as intense bargain hunting activities in cyclical stocks pushed the All-Share Index higher by 4.3% w/w to close at 53,100.21 points. Notably, strong buying interest in INTBREW (+30.4%), OKOMUOIL (+26.5%), FLOURMILLS (+20.1%), MTNN (+15.0%), WAPCO (+14.2%), NB (+10.0%), and SEPLAT (+8.3%) drove the benchmark index higher, its fifth-consecutive weekly gain. Accordingly, the MTD and YTD returns for the index increased to +7.0% and +24.3%, respectively. Likewise, activity level mirrored the upbeat performance, as volume traded rose by 13.6% w/w while value traded rose by 38.7% w/w. Performance across sectors was mixed, as the Oil and Gas (+6.9%), Consumer Goods (+5.4%) and Industrial Goods (+2.3%) indices recorded gains, while the Insurance (-1.9%) index declined. The Banking index closed flat.
In the near term, we think the bears are likely to book profit across most counters given the five-week bullish run in the market. Thus, we see more of a “choppy theme” as cautious trading takes center stage ahead of the MPC meeting scheduled later in the month. Notwithstanding, we advise investors to take positions in only fundamentally justified stocks as the weak macro story remains a significant headwind for corporate earnings.
Money market and fixed income
In line with our expectations, the overnight (OVN) rate expanded by 424bps w/w, to 9.2%, as funding pressures for CRR debits, CBN’s weekly OMO (NGN30.00 billion), FX auctions and NTB net issuance (NGN10.39 billion) outpaced the sole inflow from OMO maturities (NGN38.08 billion). We highlight that system liquidity still remained healthy as the net liquidity position averaged NGN264.92 billion.
We expect the outflows for next week’s auctions (OMO and FGN bond) and arbitrary CRR debits, if any, to offset the inflows from OMO maturities (NGN35.00 billion) and FGN bond coupon payments (NGN8.50 billion). Thus, we expect the OVN to trend northwards.
The Treasury bills secondary market sustained last week’s bullish sentiments following the liquidity-driven demand for bills at the secondary market. Thus, the average yield across all instruments contracted by 7bps to 3.7%. Across the segments, the average yields contracted by 5bps and 7bps to 4.0% and 3.6% at the OMO and NTB secondary markets, respectively. At the OMO auction this week, the CBN fully allotted NGN50.00 billion worth of OMO bills to participants and maintained stop rates across the three tenors – 103DTM: 7.0%, 180DTM: 8.5% and 355DTM: 10.1% – as with prior auctions. Elsewhere, at the NTB PMA, demand continued to outweigh supply, as there was an oversubscription of 2.7x on NGN127.47 billion worth of bills on offer. As a result, the auction closed with the CBN allotting NGN1.02 billion of the 91-day, NGN2.83 billion of the 182 – day and NGN134.01 billion of the 364-day – at respective stop rates of 1.74% (unchanged), 3.00% (unchanged), and 4.70% (previously 4.79%).
With system liquidity expected to tighten in the coming week, we anticipate an increase in the average yield on T-bills from current levels.
Proceedings in the Treasury bills secondary market turned bullish this week as investors cherry-picked instruments with attractive yields across the bond curve. Consequently, the average yield dipped by 3bps to 11.2%. Across the benchmark curve, the average yield contracted at the short (-1bp), and long (-6bps) ends as investors took a keen interest in the JAN-2026 (-26bps) and APR-2037 (-33bps) bonds, respectively.
In the coming week, we expect the outcome of the May 2022 FGN auction holding on Monday (May 16) to influence the direction of yields in the bonds secondary market. At the auction, the DMO will be offering instruments worth NGN150.00 billion through re-openings of the 13.53% FGN MAR 2025, 12.5000% FGN APR 2032 and 13.0000% FGN JAN 2042 bonds. In the medium term, we maintain our stance of uptick in yields as the FGN’s borrowing plan for 2022FY points to elevated supply.
Nigeria’s FX reserves dipped by USD234.81 million w/w to USD39.07 billion (11 May 2022). Across the FX windows, the naira depreciated by 0.5% and 1.7% to NGN419.00/USD and NGN599.00/USD, at the I&E window and parallel market, respectively. At the IEW, total turnover (as of 12 May 2022) increased by 60.2% WTD to USD575.81 million, with trades consummated within the NGN410.84 – NGN453.25/USD band. In the Forwards market, the naira was flat at the 1-month (NGN418.27/USD) and 3-months (NGN424.04/USD) contracts, but depreciated at the 6-months (-0.4% to NGN434.65/USD) and 1-year (-0.6% to NGN452.03USD) contracts.
In our view, the CBN has enough supply to support the FX market over the short term, given inflows from the recently issued Eurobond and the IMF’s SDR. However, foreign inflows are paramount for sustained FX liquidity over the medium term, given our expectation that accretion to the reserves will be undermined by the nation’s low crude oil production levels. Thus, FPIs which have historically supported supply levels in the IEW (53.8% of FX inflows to the IEW in 2019FY) will be needed to sustain FX liquidity levels. Hence, we think (1) further adjustments in the NGN/USD peg closer to its fair value and (2) flexibility in the exchange rate would be significant in attracting foreign inflows back to the market.