Losses recorded in the shares of top telecommunication player AIRTELAFRI (-6.0%), on the penultimate trading day of the week, ensured the market closed lower, as the local bourse suffered its second consecutive weekly loss. Specifically, the All-Share Index declined by 0.1% w/w to close at 52,107.55 points.
May 19, 2023/Cordros Report
Global Economy
According to the United States Department of Labor, the initial jobless claims in the US declined by 22,000 or 8.3% w/w to 242,000 in the week ending 13th May (vs the week ending 6th May: 264,000) – below market expectation (254,000). The preceding continues to highlight that the US labour market remains relatively firm as employers are reluctant to reduce headcounts, despite the tight monetary & financial conditions as well as elevated inflation. The data breakdown shows that significant declines recorded across Massachusetts (-14,000), Missouri (-2,300), and New Jersey (-1,100) were primarily responsible for the decline in unemployment claims in the review period. Although the market currently expects the US Fed to adopt a ‘HOLD’ stance in its June policy meeting, the stubbornly tight labour market suggests that the FOMC may likely resume additional rate increases at subsequent meetings if labour market conditions do not ease significantly over the short to medium term.
Economic activities in Japan grew beyond market expectation (+0.1% q/q) in Q1-23 as the post-COVID consumption rebound and the government’s lifting of tough border controls helped to offset the lingering global headwinds. According to the Japanese Cabinet Office, Japan’s real GDP grew by 0.4% q/q in Q1-23 after recording no growth in Q4-22 (0.0% q/q). We highlight that the growth reflects the increase in private consumption (+0.6% q/q vs Q4-22: +0.2% q/q) and better-than-expected rise in capital expenditure (+0.9% q/q vs Q4-22: +0.7% q/q). On a year-on-year basis, the Japanese economy grew by 1.6% in Q1-23 (Q4-22: 0.4% y/y), driven by the favourable base from the prior year and improved business activities as government reopens its borders. We expect private consumption to continue to support near-term growth as the removal of COVID restrictions boosts services and tourism spending. Notwithstanding, we believe global uncertainties will partly weigh on growth and intensify supply and commodity cost pressures. Overall, the IMF expects Japan’s growth to settle at 1.3% in 2023E compared with 1.1% y/y growth in 2022FY.
Global Markets
One of the key drivers of the market this week has been rising expectations that the US government will be able to prevent a devastating default on its debt. Additionally, sentiments received a boost from strong corporate earnings released during the week. In line with this, US equities (DJIA: +0.7%; S&P 500: +1.8%) were headed for a weekly gain amid positive reactions to better-than-expected Q1 earnings from big companies like Deree, Walmart, and Target. Likewise, European equities (STOXX Europe: +0.4; FTSE 100: +0.1%) were on course to close higher, as US debt ceiling talks boosted investors’ sentiments. In Asia, Japanese equities (Nikkei 225: +4.8%) surpassed the 30,000 threshold for the first time in about 20 months, as investors reacted positively to the robust Q1-23 GDP expansion (+1.6% y/y) and solid corporate earnings. Meanwhile, Chinese equities (SSE: +0.3%) gained marginally as investors anticipated more supportive government policies in light of weak economic data from China. Elsewhere, the Emerging (MSCI EM: +0.5%) index closed positively following gains in China (+0.3%) while the Frontier (MSCI FM: -0.1%) market index dipped consequent upon bearish sentiments in Vietnam (-0.6%).
Nigeria
Domestic Economy
Nigeria’s headline inflation maintained its uptrend for the fourth consecutive month, rising to the highest level in 17 years. According to the National Bureau of Statistics (NBS), consumer prices rose by 18bps to 22.22% y/y in April (March: 22.04% y/y). Analysing the breakdown, food inflation (24.61% y/y vs March: 24.45% y/y) rose in line with the (1) festive-induced demand given the Easter and Ramadan celebrations, (2) higher transport costs, and (3) low food supplies exacerbated by the below-historical average cultivation activities. Similarly, core inflation (+28bps to 20.14% y/y) increased to its highest level since May 2004 (23.43% y/y) as the existing factors stoking non-food prices remain dominant in the review period. On a month-on-month basis, headline inflation increased by 5bps to 1.91% (March: 1.86% m/m). In May, we anticipate the upward trajectory of headline inflation will persist due to the (1) ongoing planting season, (2) higher taxes, (3) lingering currency pressures, and (4) increased transportation costs. As a result, we forecast the headline inflation will settle at 1.89% m/m in May, and translate to 22.35% y/y.
The amount disbursed by the Federation Accounts Allocation Committee (FAAC) to the three tiers of government in April (from the total revenue generated in March) declined by 8.2% m/m to NGN655.93 billion (March: NGN714.63 billion). For the review period, we note that declines in inflows from the Petroleum Profit Tax (PPT), Companies Income Tax (CIT), Oil and Gas Royalties, Import and Excise Duties, and Value Added Tax (VAT) led to the fall in revenue. Furthermore, the distributed amount was composed of distributable statutory revenue (NGN364.65 billion), distributable Valued-Added Tax revenue (NGN202.76 billion), inflow from Electronic Money Transfer Levy (NGN14.52 billion), NGN50.00 billion augmentation from Forex Equalisation, and Non-Mineral revenue of NGN24.00 billion. We maintain our expectation that non-oil revenue will continue to support aggregate revenue, given the sustained improvement in economic activities and the impact of the provisions of the 2022 Finance Act. However, we expect oil revenue to remain underwhelming due to lower crude oil prices, reduced crude oil production relative to pre-pandemic levels, and high PMS under-recovery costs.
Capital Markets
Equities
Losses recorded in the shares of top telecommunication player AIRTELAFRI (-6.0%), on the penultimate trading day of the week, ensured the market closed lower, as the local bourse suffered its second consecutive weekly loss. Specifically, the All-Share Index declined by 0.1% w/w to close at 52,107.55 points. Consequently, the MTD loss moderated to -0.4% while the YTD return settled at +1.8%. Activity levels were weak, as traded volume and value declined by 16.2% w/w and 8.4% w/w, respectively. Sectoral performance was mixed as the Insurance (+5.2%), Banking (+2.9%), and Consumer Goods (+1.9%) indices posted gains, while the Oil and Gas (-1.7%) index declined. The Industrial Goods index closed flat.
Looking ahead, we believe investors will focus on the outcome of the MPC meeting scheduled to hold next week to gain further clarity on the movement of yields in the Fixed Income market. As a result, we expect cautious trading from domestic investors in the short term. Overall, we reiterate the need for positioning in only fundamentally sound stocks as the uninspiring macro story remains a significant headwind for corporate earnings.
Money market and fixed income
Money market
In line with our expectations, the overnight (OVN) rate increased by 300bps w/w to 15.6%, as funding for the May FGN bond auction (NGN368.15 billion) pressured the system and outweighed the inflow from OMO maturities (NGN10.00 billion). As a result, the average system liquidity settled lower at a net short position of NGN29.89 billion (vs a net long position of NGN660.01 billion in the previous week).
Next week, we expect the system to be awash with liquidity, following expected inflows from FAAC allocation (NGN407.13 billion) and FGN bond coupon payments (NGN17.87 billion). Thus, the OVN rate is likely to temper from current levels next week.
Treasury bills
Activities in the Treasury bills secondary market turned bearish this week, as local investors looked to raise funds, triggered by the depressed system liquidity in the market. As a result, the average yield across the market expanded by 33bps to 7.0%.
We envisage lower yields in the Treasury bills secondary market next week, with system liquidity expected to be buoyant. In addition, we expect market focus to be shifted to the NTB PMA holding on Wednesday (24 May), where the CBN is scheduled to roll over NGN180.45 billion worth of bills.
Bonds
This week, the FGN bonds secondary market closed mixed, albeit with a bearish tilt as the average yield expanded by 5bps to 14.1%. We attribute these sentiments to the tepid demand for instruments in this space, given that most investors got filled at the primary auction on Monday. Across the benchmark curve, the average yield expanded at the short (+7bps) and long (+8bps) ends following selloffs of the MAR-2024 (+49bps) and APR-2037 (+35bps) bonds, respectively. Conversely, the average yield was flat at the mid segment. At this month’s auction, the DMO offered instruments worth NGN360.00 billion to investors through re-openings of the 13.98% FEB 2028 (Bid-to-offer: 0.8x; Stop rate: 14.10%), 12.50% APR 2032 (Bid-to-offer: 0.1x; Stop rate: 14.90%), 13.00% JAN 2042 (Bid-to-offer: 0.6x; Stop rate: 15.69%), and 12.98% MAR 2050 (Bid-to-offer: 3.8x; Stop rate: 15.80%) bonds. The subscription level settled at NGN478.92 billion, translating to a bid-to-offer ratio of 1.3x (vs bid-to-offer ratio of 1.2x at the previous auction). Eventually, the DMO over-allotted instruments worth NGN545.26 billion (including non-competitive allotments: NGN177.10 billion), resulting in a bid-to-cover ratio of 0.8x.
We maintain our view that the significant borrowings expected from the FG for the year will result in an uptick in bond yields in the medium term, as investors demand higher yields in the face of elevated supply.
Foreign Exchange
This week, Nigeria’s FX reserve advanced slightly by USD8.22 million w/w to close at USD35.20 billion (17 May). Meanwhile, the naira depreciated by 0.1% to N463.00/USD at the I&E window (IEW), with total turnover at the window (as of 17 May 2023) decreasing by 21.1% WTD to USD554.11 million, as trades were consummated within the NGN460.00 – NGN481.58/USD band. In the Forwards market, the naira rates recorded for the 1-month (-0.7% to NGN477.70/USD) contract declined but increased for the 3-month (+0.1% to NGN517.99/USD) and 1-year (+4.0% to NGN574.74/USD) contracts. Meanwhile, the rate was flat at the 6-month (NGN557.61/USD) contract.
We believe FX liquidity issues will remain over the short-to-medium term as we do not see any positive signals which point towards an improvement in FX supply relative to the pre-pandemic levels. Moreover, considering the tepid accretion to the reserves given (1) low crude oil production and (2) elevated PMS under-recovery costs, FPIs who have historically supported supply levels in the IEW will be needed to sustain FX liquidity levels in the medium to long-term.
