Global Economy
According to its September Global Economic Outlook report, Fitch Ratings has revised up its forecast for world growth in 2023 by 0.1% to 2.5%, reflecting surprising resilience so far this year in the US, Japan, and emerging markets (EM) excluding China. Fitch has raised US growth by 0.8% to 2.0%, Japan by 0.7% to 2.0% and EM ex. China by 0.5% to 3.4%. This has more than offset a 0.8% cut to China (to 4.8%) and a 0.2% cut to the eurozone (to 0.6%). According to Fitch Ratings, the differential between growth in EM ex. China and developed economies is expected to rise towards historical norms this year partly reflecting the earlier timing of the monetary policy tightening cycle in emerging markets. In the UK, according to the Office of National Statistics, the UK economy shrank in July by 0.5% amid industrial action and extremely wet weather, official figures indicate, heightening fears of a recession in the second half of the year. The decline in output went beyond those sectors affected by strikes and rain, with all three major sectors – manufacturing, services and construction – contracting for the first time since the summer of 2022. Elsewhere, the European Central Bank raised its key interest rate to a record high of 4.00% but, with the weak economic growth in the euro zone, signaled that the hike, its 10th in a 14-month-long fight against inflation, was likely to be its last.
Domestic Economy
Earlier this week, the Central Bank of Nigeria (CBN) released a letter indicating a new guideline to the banking sector. This letter directed banks not to use FX revaluation gains, following the FX policy reform, for dividends or operational expenses, but rather as a counter-cyclical buffer in case of future exchange rate losses. The letter also stated that banks breaching the Single Obligor Limit (SOL) due to FX policy changes can seek forbearance, but this applies only to existing facilities as of the FX policy’s effective date. Furthermore, banks exceeding Net Open Position (NOP) prudential limits due to FX revaluation can also apply to the CBN for forbearance. Also, earlier today, the National Bureau of Statistics (NBS) released the Consumer Price Index (CPI) report for August 2023. According to the report, Headline inflation jumped by 172bps Year-on-Year (YoY) to 25.80% (vs 24.08% in July 2023). The increase is attributed to a substantial rise in food inflation (+235bps YoY to 29.34%) and Core inflation (+67bps YoY to 21.15%). On a Month-on-Month (MoM) basis, Headline inflation increased by 29bps to 3.18% MoM, Food inflation surged by 41bps to settle at 3.87% MoM while Core inflation jumped by 7bps to 2.18% MoM.
Equities and Stock Recommendation
Bearish sentiments permeated the Nigerian Equities market this week following the reclassification of Nigeria’s market status from Frontier to Unclassified by Fitch Russell and the CBN’s guidance to banks on FX gains. Consequently, the NGX All Share Index (ASI) dipped by 110bps WoW to 67,395.74 points and the market’s year-to-date (YtD) returns declined to 31.50% (vs. last week’s print: 32.96% YtD). During the week, all sectors under our coverage ended in the negative territory, except for the Insurance sector, which managed to record a 0.46% WoW gain. Notably, the Banking sector took the hardest hit as the banking index plunged by 3.24% WoW. Additionally, the Oil and Gas sector, Consumer Goods sector and Industrial Goods sector lost 2.02% WoW, 1.84% WoW and 0.28% WoW, respectively. BERGER (+42.9% WoW to NGN11.00), CWG (+29.8% WoW to NGN7.50) and CORNERST (+12.9% WoW to NGN1.40) led the gainers’ chart this week, while ABCTRANS (-33.6% WoW to NGN0.75), OMATEK (-31.0% WoW to NGN0.40) and ETRANZACT (-26.5% WoW to NGN7.35) topped the losers’ chart. In the coming week, we anticipate mixed sentiments in the market as investors continue to engage in profit taking and speculative activities.
Fixed Income
At the primary NTB auction held this week, the average stop rate rose by 81bps to 8.83% (vs 8.02% at the previous auction) while the average bid-to-cover ratio stood at 4.23x (vs 4.10x at the previous auction). In the secondary market, the NT Bills market ended the week bearish as the average yield rose by 5bps WoW to settle at 7.98%. Following the recent bond auction, the DMO sold NGN251.49bn worth of bonds across the re-opening of four (4) instruments (APR-2029: NGN43.65bn, JUN-2033: NGN10.45bn, JUN-2038: NGN25.69bn, and JUN-2053: NGN171.71bn). The average bid-to-cover ratio fell to 0.81x (vs. 0.87x at the last auction) while the average stop rate surged by 46bps to 15.44%, from 14.98% observed at the last auction. The bearish sentiment at the bond auction trickled down to the secondary bond market as average yield increased by 24bps WoW to 14.40%. Overall, the Naira Fixed income market closed the week bearish as average yield went up by 14bps WoW to close at 11.19%. We believe short term rates may remain at elevated levels in the short term, but could moderate however, as more debt maturities and coupons kick in over the course of the month.
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