The Nigerian equities market mirrored the downbeat mood across global stocks, as investors booked profits on bellwether stocks. Precisely, the All-Share index shed 0.9% to close at 49,026.62 points.
September 23, 2022/Cordros Report
The Federal Open Market Committee (FOMC) voted to increase the target range for the federal funds rate by 75bps to 3.0% – 3.25% (previously: 2.25% – 2.5%), representing the third consecutive 75bps rate increase and the highest level since early 2008. The FOMC noted that the decision to hike rates by 75bps was necessitated to ease the inflationary pressures amid the (1) robust job gains in recent months, (2) increased consumer spending and (3) lingering impact of the Russia- Ukraine conflict. Notably, the Fed’s dot plot for September shows the key policy rate will reach 4.4% by year-end, above the 3.4% projected in the June meeting, and settle at 4.6% in 2023. Considering the underlying tone of the Committee and the near-term impact of the Russia-Ukraine conflict on inflation amid the resilient job numbers, we expect the Fed to remain hawkish and further raise the policy rate by at least 50bps at its next meeting in November. In addition, we highlight the potential risk of unemployment following job cuts and a recession due to the Fed’s steep rate rises.
In the same vein, the Monetary Policy Committee (MPC) of the Bank of England (BOE) increased the key policy rate for the seventh consecutive time by 50bps to 2.25% – the highest rate since November 2008 (3.0%). The voting pattern was mixed, with three members wanting a more aggressive 75bps increase, five voting for a 50bps hike, and one member preferring a 25bps rate hike. The Committee highlighted that an increase was warranted given the (1) tight labour market conditions amid wage increases and (2) domestic inflationary pressures. That said, the Committee also voted to reduce the BOE’s GBP838.00 billion government bond holdings by GBP80.00 billion over the next 12 months. Given the tight labour market conditions and higher inflationary pressures, we expect the Committee to hike rates further in the coming months. However, we think a continuous moderation in inflation data could prompt the Committee to be less hawkish at its next meeting.
Equities around the globe settled lower as the Fed’s outlook for subsequent rate hikes dampened investors’ sentiments and reignited concerns over a Fed-induced recession. Accordingly, US (DJIA: -2.4% and S&P 500: -3.0%) stocks slipped over recession fears following the Fed’s latest 75bps rate hike. Likewise, European equities (STOXX 600: -2.3% and FTSE 100: -1.1%) were on course for a weekly loss as investors reacted negatively to rate hikes announcements by global central banks. Similarly, in Asian markets, the Nikkei 225 (-1.5%) declined, taking a cue from the rout on Wall Street. Likewise, the SSE (-1.2%) recorded a weekly loss, driven by losses in Chinese tech companies and developers amid concerns about rising borrowing costs. The Emerging (MSCI EM: -2.3%) and Frontier (MSCI FM: -2.2%) markets also settled lower following the losses in China (-1.2%) and Vietnam (-2.5%), respectively.
According to the recent data by the Debt Management Office (DMO), Nigeria’s public debt increased by 3.0% q/q to NGN42.85 trillion in Q2-22 (vs Q1-22: NGN41.60 trillion). The increase was primarily driven by the higher domestic debt stock in line with the increase in FGN’s bond (+6.7% q/q) and NTB (+2.2% q/q) issuances. Accordingly, the total domestic debt stock outstanding increased by 5.0% q/q to NGN26.23 trillion, while the total external debt stock outstanding was unchanged at NGN16.62 trillion. Given the persistent increase in global interest rates in line with the global central banks’ monetary policy tightening measures, we expect the FG to continue to hold off its external borrowing plans for the rest of the year. Based on the preceding, we expect most of the borrowing plans for 2022E to be carried out in the domestic capital market even as the FGN increases its reliance on CBN’s Ways & Means advances. Accordingly, we maintain our expectations of yield increase in the fixed income market over the short-to-medium term. Overall, we expect the public debt to settle at NGN46.96 trillion or 25.5% of GDP in 2022E.
According to the recently released data by the Nigerian Upstream Petroleum Regulatory Commission (NUPRC), Nigeria’s crude oil production (including condensates) declined by 10.4% m/m to 1.18mb/d in August (July: 1.31mb/d). The persistent low crude oil production volume reflects the passthrough impact of (1) infrastructure decay, (2) massive theft and vandalism, and (3) IOC divestments, given the challenging business environment amid the move to cleaner energy sources. Notably, crude oil production declined across the Qua Iboe (-0.4% m/m), Egina (-10.1% m/m), and Agbami (-1.8% m/m) production terminals, while the Escravos (+14.1% m/m) and Odudu (+2.8% m/m) production terminals recorded increased output. The consistent low crude oil production volume suggests that the oil GDP could drag overall growth in 2022FY amid the continued resilience of the non-oil sector. Overall, we do not expect a significant improvement in crude oil production over the short term, given the nature of challenges hampering production. Despite the rally in crude oil prices, we expect the government’s oil revenue performance to remain underwhelming over the short term.
The Nigerian equities market mirrored the downbeat mood across global stocks, as investors booked profits on bellwether stocks. Precisely, the All-Share index shed 0.9% to close at 49,026.62 points. The downturn was impacted by losses in BUACEMENT (-10.4%), TOTAL (-10.0%), GUINNESS (-5.6%), GTCO (-4.6%) and SEPLAT (-3.9%) stocks. Consequently, the MTD loss increased to -1.6%, while the YTD gain moderated to +14.8%. Activity levels were mixed, as trading volume declined by 21.8% w/w while value traded increased by 17.8% w/w. Sectoral performance was broadly negative following losses in the Oil & Gas (-4.7%), Industrial Goods (-3.9%), Insurance (-2.1%), and Consumer Goods (-0.2%) indices. The Banking (+2.1%) index was the sole gainer of the week.
In the week ahead, we believe investors will be focused on the outcome of the MPC meeting scheduled to hold next week to gain further clarity on the movement of yields in the FI market. As a result, we envisage an extension of the cautious trading theme, especially from domestic investors. Notwithstanding, we reiterate the need for positioning in only fundamentally sound stocks as the weak macro environment remains a significant headwind for corporate earnings.
Money market and fixed income
The overnight (OVN) rate oscillated in the double-digit region through the week, eventually rising by 483bps w/w to close at 15.0% on lower system liquidity. Notably, the average liquidity level for the week settled lower at a net short position of NGN26.87 billion (vs NGN212.55 billion in the previous week) as debits for the FGN bond (NGN261.50 billion) and FX auctions offset inflow from FGN bond coupon payments (NGN157.84 billion).
We expect the OVN rate to maintain its upward trend next week as we believe the outflow from CBN’s auctions (OMO, NTB & FX) and possible CRR debits may outweigh the expected inflow from FGN bond coupon payments (NGN131.20 billion).
Bullish sentiments persisted in the Treasury bills secondary market this week as the ample system liquidity, specifically at the beginning of the week, supported participants’ demand for bills. As a result, the average yield across all instruments contracted by 37bps to 8.0% – the average yield at the OMO segment dipped by 113bps to 9.4% and contracted by 15bps to 7.4% at the NTB segment
Following the expected tighter liquidity in the system next week, we expect bearish sentiments to dominate the T-bills market and drive higher yields. Also, we expect market focus to be shifted to the NTB PMA holding on Wednesday (28 September), with the CBN expected to roll over NGN141.34 billion worth of instruments.
Elsewhere, trading in the Treasury bonds secondary market ended on a bearish note as investors re-priced bonds in anticipation of the MPC meeting scheduled to hold Monday and Tuesday next week. Consequently, the average yield expanded by 15bps to 12.9%. Across the benchmark curve, the average yield expanded at the short (+41bps), and long (+7bps) ends following investors’ profit-taking activities on the MAR-2024 (+110bps) and APR-2037 (+76bps) bonds, respectively; but was unchanged at the mid segment. The DMO conducted the September 2022 FGN bond PMA on Monday (19 September). At this auction, instruments worth NGN225.00 billion were offered to investors through the reopening of the 13.53% MAR 2025 (Bid-to-offer: 0.6x; Stop rate: 13.50%), 12.50% APR 2032 bond (Bid-to-offer: 0.8x; Stop rate: 13.85%) and 16.25% APR 2037 (Bid-to-offer: 1.9x; Stop rate: 14.5%). Total subscriptions across the offer instruments settled at NGN246.43 billion, with the DMO eventually allotting instruments worth NGN229.20 billion, resulting in a bid-cover ratio of 1.1x.
We maintain our view of an uptick in bond yields in the medium term, as the FGN’s borrowing plan for 2022FY and expected fiscal deficit point towards an elevated supply.
Nigeria’s FX reserves decreased for the third consecutive week, falling by USD162.89 million w/w to USD38.49 billion (22 September). Across the FX windows, the naira was flat at NGN436.33/USD at the I&E window but depreciated by 0.4% to NGN712.00/USD at the parallel market. At the IEW, total turnover (as of 22 September) increased by 1.9% WTD to USD421.81 million, with trades consummated within the NGN425.00 – NGN453.03/USD band. In the Forwards market, the naira weakened at the 1-month (-0.8% to NGN439.24/USD), 3-months (-0.9% to NGN444.21/USD), 6-months (-1.1% to NGN457.57/USD) and 1-year (-1.7% to NGN484.03/USD) contracts.
Although the CBN has enough liquidity to support the FX market over the short term, we highlight that foreign inflows are paramount for sustained FX liquidity over the medium term. Moreover, considering the tepid accretion to the reserves given the (1) low crude oil production level and (2) elevated PMS under-recovery costs, FPIs that historically supported supply levels in the IEW will be needed to sustain FX liquidity levels in the medium to long term. Hence, we think (1) further adjustments in the NGN/USD peg closer to its fair value and (2) flexibility in the exchange rate would significantly attract foreign inflows back to the market.