Global markets have been up and down this year, something that is clear when we look at the S&P 500 and the Nasdaq indices in the US. As we wrote two months ago (see Coronation Research, 2023 Investment Strategy, Better times in 2023, 11 January) global markets will at some point anticipate the easing of US policy rates and perform again. Yet recent news of a strengthening US economy is seen as bad for US inflation and therefore bad for US policy rates, which in turn depresses equity markets. Later this year, we believe, matters will resolve themselves as US inflation moderates, but for now investors need to be patient. 

Global Markets So Far in 2023

2023 started off with global markets recovering from the woes of 2022. The recovery stemmed from: a) market optimism that the US Federal Reserve is likely to slow down its interest rate hikes; b) the disinflationary trend in headline CPI; and c) the slowdown of the US economy as reflected in multiple economic indicators such as wage growth, and private and public sector jobs growth. Consequently, equities staged a rebound with the S&P 500 (+8.45%) and NASDAQ (+15.74%) returning peak year-to-date performances as of 7 February. While expectations of ‘higher-for-longer’ rates in order to bring down headline inflation to the 2.0% target kept US treasury yields elevated across the curve, the 2-year treasury (-34bps to 4.08%) and the 10-year treasury (-50ps to 3.73%) yields eased between the beginning of the year and 18 January, the lowest levels since 21 September 2022

However, just after the US Federal Open Market Committee (FOMC) hiked rates by a quarter of a percentage point at the conclusion of its January meeting, economic indicators for January 2023 revealed a stronger-than-expected economic recovery, suggesting a more hawkish Federal Reserve policy path in future. According to data from the US Labor department, the consumer price index, which measures a broad basket of common goods and services, rose by 0.5% in January (vs consensus estimate of 0.4%), which translated to a 6.4% year-on-year rise (vs consensus estimate of 6.2% y/y) as increased shelter, gas and fuel prices took their toll. In addition, the US labor market showed resilience as non-farm payrolls posted their biggest gain since July 2022 and the unemployment rate trended downwards. Non-farm payrolls increased by 504,000 for January, above the consensus estimate of 187,000, while the unemployment rate fell to 3.4%. As a result, advance retail sales for the month rose by far more than expected in January, up 3.0%, compared with expectations for a rise of 1.9%.

The surprising resilience of the US economy has renewed worries of the Fed keeping rates ‘higher for longer’ offsetting earlier optimism of a rate cut by the end of the year. This has seen the S&P 500 (+0.58% ytd) and the NASDAQ (+6.42% ytd) indices fall from their 18 January peaks. US treasury yields began to surge with the 2-year yield reaching as high as 5.07%, its highest level since 2007. The 10-year yield also rose to as high as 4.06%, its highest level since November 2022. As a result, market participants began pricing in a 70% chance of a half percentage point hike at the next FOMC meeting due on 21 and 22 of March as against another quarter of a percentage point. 

The Federal Reserve Chairman, Jerome Powell’s two-day congressional testimony contributed to the rout in the market as he maintained his hawkish monetary policy stance. Economic data for February so far (February CPI is expected later this week) has done little to ease market worries as Non-farm payrolls has remained elevated at 311,000 (vs consensus estimate of 225,000), even though down significantly from January’s level (504,000). 

We expect the Federal Reserve to remain hawkish in its monetary policy stance at the next FOMC meeting. Factors likely to impact the meeting’s outcome include: a) February’s CPI data; and b) the failure of Silicon Valley Bank (SVB) which could prompt the FOMC to go easy on interest rate hikes in the short term. Whatever happens, the US markets are not yet convinced that interest rate rises are over, northat equities have a clear run ahead of them

FX

Last week, the exchange rate at the Investors and Exporters Window (I&E Window) gained 0.05% to close at N461.50/US$1. Elsewhere, the foreign exchange (FX) reserves of the Central Bank of Nigeria (CBN) decreased by 0.54% to US$36.41bn, as the CBN continues to intervene across the various FX windows. At this point it seems to us that the CBN does not need to hurry to change its policy. Gradual devaluation of the I&E Window rate has been compatible with keeping a high (by historic standards) level of FX reserves. We expect the exchange rate to trade quite close to the current rate for several more weeks, if not months.

Bonds & T-bills

Last week, the Federal Government of Nigeria (FGN) bond secondary market was bullish as the average benchmark yield for bonds fell by 18bps to close at 13.07%. Across the curve, the yields on the 3-year bond declined by 26bps to settle at 11.15%, while the yields of the 7- year (14.16%) and 10-year (14.42%) bonds remained unchanged. Our view remains that elevated Federal Government domestic borrowing will drive yields upwards over the course of the year. 

Activity in the Treasury Bill (T-Bill) secondary market was also bullish as the average yield for T-bills fell by 39bps to 3.63%. However, the yield of the 335-day T-bill closed flat at 3.79%. At the T-bill primary auction, the DMO allotted N324.50bn (US$703.15m) worth of bills. Demand was strong relative to the last auction. The auction recorded a total subscription of N906.21bn, implying a bid-to-cover ratio of 2.79x (vs 1.13x at the last auction). The auction result was mixed as the stop rate on the 91-day bill declined by 156bps to 1.44%, while the stop rate on the 182-day (+276bps to 6.00%) and the 364-day (+10bps to 10.00%, implying a 11.11% yield) bills expanded. At this week's T-bill primary auction, the CBN is expected to rollover N161.87bn (US$350.74m) worth of bills. Elsewhere, the yield on the 53-day OMO billremained unchanged at 3.01%

Oil

Last week, the price of Brent retreated 3.55% to settle at US$82.78/bbl. Brent is down 3.64% year-to-date and is trading at an average of US$83.80/bbl, 15.43% lower than the average of US$99.09/bbl in 2022. Ending two consecutive weekly gains, oil prices declined following prospects of higher and likely even faster interest rate hikes by the US Federal Reserve. Elsewhere, some US senators have reintroduced the NOPEC, potentially allowing US authorities to file lawsuits against OPEC+ national oil companies for price collusion. Nevertheless, we maintain that prices are likely to remain well above the US$75.00/bbl set in Nigeria’s government budget.

Equities

Last week, the NGX All-Share Index gained 0.48% to settle at 55,794.51 points. Consequently, its year-to-date return rose to 8.87%. Dangote Cement (+3.60%), Guinness Nigeria (+1.45%) and MTN Nigeria (+1.35%) closed positive while Ardova (-8.09%), Honeywell Flour Mills (-5.98%) and FBN Holdings (-5.58%) closed negative. Performances across the NGX sub-indices were broadly negative as NGX Oil/Gas (-3.82%) led the losers log, followed by NGX Banking (-1.82%) and NGX Pension (-0.57%), while NGX Industrial Goods (+1.71%), NGX Insurance (+0.70%) and NGX-30 (+0.62%) closed positive

Model Equity Portfolio

Last week the Model Equity Portfolio gained 0.66% compared with a rise in the NGX All-Share Index of 0.48%, outperforming it by 18bps. Year-to-date it has risen by 9.53% compared with a rise of 8.87% in the NGX All-Share Index, outperforming it by 67bps

Last week, we further increased our overweight position in Dangote Cement to four hundred and thirty percentage points above its index-neutral weight, given the positive market response to its stellar FY 2022 results. In addition, we are optimistic about the imminent share-buyback programme which has been approved by the Securities and Exchange Commission. This helped significantly in putting us ahead of the market offsetting the rout in Tier-1 banking names. 

Elsewhere, we maintained our notional position in Seplat as we continue to monitor the impact from global oil price volatility overthe coming weeks. 

We are pleased with the positive attribution from MTNN of which we are currently index neutral. We plan no changes this week