This is a brief summary of the economic events that occurred this week in the global and domestic space. This report also provides investment strategies for investors in the coming week.
Global Economy
Earlier this week, the US Federal Reserve (Fed) announced a hike in its benchmark rate for the 11th time since its hiking campaign began in March 2022. The Fed announced a 25bps increment, raising the Fed Fund rate to a range of 5.25% to 5.5% in July 2023. This is the highest benchmark rate level in over 22 years, since early 2001. Following the meeting, the Fed committed to fully reining in inflation to its target level of 2.00%, while also noting a sustained reduction of its bond holdings. While the apex bank remained somewhat mute on the future direction of rates, the Fed Chair, Jerome Powell, in a meeting said the apex bank would continue to make data driven decisions on a meeting-by-meeting basis and did not rule out the possibility of another rate hike. Elsewhere, the European Central Bank also raised its benchmark rates in July 2023. The Bank’s Governing Council noted the downward trend in inflation but expressed concerns around the persisting divergence from its policy target rate of 2.00%. It therefore decided to raise the three key ECB interest rates by 25 basis points. Accordingly, the interest rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility will be increased to 4.25%, 4.50% and 3.75% respectively.
Domestic Economy
Earlier this week, The Monetary Policy Committee of the Central Bank of Nigeria voted to increase the benchmark interest rate by 25 bps to settle at 18.75%. This represents the eighth (8th) consecutive increase since May 2022. Similarly, the asymmetric corridor was tightened to +100/-300 basis points around the MPR. This is the first adjustment to the tool since September 2020. The narrowing of the asymmetric corridor were implemented with the primary objective of addressing the high liquidity levels in the system and curbing demand-side factors that contribute to the persistent rise in inflation. While this move is a positive step towards achieving these goals, we believe that the effectiveness of adjusting the asymmetric corridor hinges on the Central Bank’s decision to revise upward, the limit on the Standing Deposit Facility (SDF). However, other policy parameters remained constant. Furthermore, the international benchmark for crude oil, rose to a high of US$84pb on Wednesday, fueling speculations that Nigeria might witness another hike in the pump price of Premium Motor Spirit, popularly called petrol, in the coming weeks.
Equities and Stock Recommendation
This week, the Nigerian Equities Market closed negative in three (3) out of the five (5) trading days of the week. Despite this, the market managed to end the week on a positive note as the NGX All-Share Index advanced by 8bps WoW to 65,056.39 points. This pushed the year-to-date returns to 26.94%, a slight improvement from the previous week’s 26.83%. However, it is worth noting that all sectors under our coverage closed the week with losses, except for the Oil and Gas sector, which saw a notable 9.28% WoW gain. The losses across sectors can be associated to the recent hawkish stance of the Monetary Policy Committee (MPC) and their decision to tighten system liquidity, leading to expectations of higher yields in the fixed income market. Furthermore, the disappointing H1:2023 earnings reports of some companies might have played a role, particularly in the Consumer Goods sector (-2.36%). SKYAVN (+43.8% to NGN23.30), NASCON (+24.1% to NGN36.00) and SEPLAT (+21.0% to NGN1693.60) registered the highest gains this week. Conversely, CADBURY (-26.8% to NGN12.45), MULTIVERSE (-19.7% to NGN2.98) and ACADEMY (-18.8% to NGN2.20) won top spots as the highest losers for the week. Looking ahead to the coming week, we anticipate that investors will engage in dividend-hunting activities as they carefully analyze the recently released earnings reports.
Fixed Income
This week, the Monetary Policy Committee (MPC) voted unanimously to raise the Monetary Policy Rate (MPR) by 25bps to 18.75% and tightened the asymmetric corridor to +100/-300 basis points around the MPR. Consequently, the average stop rate surged 462bps to 8.72% (vs 4.10% at the previous auction) while the bid-to-cover ratio dipped by 337bps to settle at 1.51% (vs 4.88% at the previous auction) indicating a decline in demand for the instruments. However, there was an increase in demand for the 91-day bill, as its bid-to-cover ratio rose 4.52x from 2.11x at the last auction). The bearish sentiment at the primary market trickled down to the secondary Treasury Bills market as it ended the week on a negative note with average yield soaring by 434bps WoW to settle at 7.12%. Similarly, the secondary bond market ended the week bearish as average yield increased by 41bps WoW to settle at 13.14%. This is following selloffs in the short-end and long-end of the curve.
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