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The Markets in Review: The Return of Risk is Good for Nigeria – Coronation Research

Jan 24, 2023   •   by Coronation Research   •   Source: Coronation   •   eye-icon 306 views

Across the world equity and bond markets are rising, risk is back in vogue. The great shake-out that characterised 2022 is either over or is coming to an end. 

 

The Return of Risk is Good for Nigeria 

Risk is back. Buying risky assets, such as equities and emerging market bonds, is in fashion after long time - most of 2022 - when it certainly wasn't. As we set out in Coronation Research: Investment Outlook, Better Times in 2023, 11 January, global markets are likely to anticipate the decline in inflation and start trending upwards again this year. Instances of good news are set to accumulate and translate into a well-founded upturn in global equity and bond markets.

 

Is this happening already? The process may have started in several developed markets. Over the past six months one major US equity index, the S&P 500, and one European index, the STOXX Europe 600, found support levels as early as October. The Nasdaq index of technology stocks hit a support level at the end of December (close to levels also seen in October and November). Year-to-date the S&P 500 is up 4.5%,the STOXX Europe 600 up 6.9% and the Nasdaq is up 8.5%. 

 

China is a big part of this story. A narrative developed during 2022 that China was retreating into a kind of isolation with its zeroCovid-19 policies and lockdowns. That narrative swiftly changed when China opened up again and a raft of liberalising measures were introduced. The Shanghai Shenzhen CSI300 index is up 19.2% since the end of October and up 8.0% year-to-date. 

 

Markets operate, during a turnaround, by selectively interpreting bad news as good news. The US technology sector is believed to have shed 200,000 jobs over the past 12 months, 50,000 of these from four companies alone: Alphabet (the parent company of Google), Amazon, Meta (parent of Facebook) and Microsoft. Recent announcements of layoffs have been seen as realignment of strategy with reality and have been greeted with stock rallies. 

 

There is also straightforwardly good news, notably the decline in year-on-year US inflation from 7.1% in November to 6.5% in December. (Note that Nigeria's headline rate of year-on-year inflation also fell, from 21.47% in November to 21.34% in December.) Nobody expects the Federal Reserve in the US to relent in its anti-inflationary measures anytime soon, but the belief that it has inflation under control (or soon will do) is critical to generating market confidence. To that end the markets seem happy with the idea that the Federal Reserve is likely to keep its policy rates high for much of 2023. 

 

The markets and the economy 

What about the underlying economies of the world? The strange thing about global forecasts is that they continue to forecast growth in 2023 (which does not rule out the possibility of some localised and temporary slowdowns). The latest IMF World Economic Outlook paper forecasts global economic growth of 2.7% in 2023, down from its previous forecast of 2.9%, but that its still growth.

 

Some corroboration can be seen in commodity markets, where copper prices have been rallying since the end of October and are up 11.2% year-to-date. The price of oil has not been doing so well, but then oil prices are strongly influenced by a cartel, the Organization of the Petroleum Exporting Countries (OPEC) and its ally Russia (OPEC+) and their combined power seems to have waned recently. And weak oil prices are helpful to keeping inflation down in developed and emerging markets. In any event, oil prices have been trending upwards recently in response to forecasts of strong demand in 2023

 

Some Nigerian assets benefit directly from the rise in global risk appetite. Yields of Federal Government of Nigeria (FGN) US dollar Eurobonds have been falling since the third week of October. The change has been significant, with the yield of the FGN's 6.5% coupon US dollar Eurobond, due in November 2027, falling by 577 basis points (bps) from 15.68% to 9.92% at the end of last week, a mark-to-market gain of 26.81% over three months.


 

Does this mean that foreign investors are buying Naira-denominated assets, such as Naira-denominated FGN bonds and NGX Exchange-listed equities? The answer is most likely no, unfortunately, as foreign exchange issues and problem with repatriation of funds persist. Foreign participation in Naira fixed income and equity markets is at low levels and likely to stay so until foreign exchange issues are resolved. 

 

The fall in FGN Eurobond yields raises the intriguing possibility of Nigeria returning to borrow US dollars in the Eurobond markets later this year, if yields continue to fall and reach the point at which the government believes it makes economic sense to issue bonds. Nigeria did not share the fate of Ghana last year, which needed restructure its high-yielding domestic and international debt, and so Nigeria remains a credible Eurobond debtor. The return to risk could, at some point this year, directly benefit Nigeria’s finances.

 

FX

Last week, the exchange rate at the Investors and Exporters Window (I&E Window) gained 0.09% w/w to close at N461.50/US$1. Elsewhere, the foreign exchange (FX) reserves of the Central Bank of Nigeria (CBN) slipped by 0.01% to US$37.20bn, as the CBN continues interventions across the various FX windows. 

 

The FX reserve position remains close to its historic high, and we doubt that the CBN wishes to see the exchange rate slip as we approach general elections. Therefore, we believe that the current I&E Window rate, or something very close to it, can be maintained for at least several months.

 

Bonds & T-bills

Last week, the Federal Government of Nigeria (FGN) bond secondary market was bearish as the average benchmark yield for bonds rose by 63bps to close at 13.42%. Across the curve, the yields on the 3-year (+34bps to 12.05%), 7-year (+36bps to 13.86%) and 10- year (+67bps to 14.19%) bonds expanded. The Debt Management Office (DMO) released its Q1 2023 bond issuance calendar and is expected to offer between N720bn – N900bn (US$1.56bn to US$1.95bn) across the February 2028 (reopening), April 2032 (reopening) and April 2037 (reopening) maturities. Our view remains that elevated Federal Government domestic borrowing will drive yields upwards overthe course of the year. 

 

Activity in the Treasury Bill (T-Bill) secondary market was bearish as the average yield for T-bills rose by 16bps to 3.47%. However, the yield on the 307-day T-bill fell by 1bp to close at 6.21%. At the T-bill auction this week, the CBN is expected to roll over N220.53bn worth of bills. Elsewhere, the average yield for secondary market OMO bills declined by 48bps to 2.87%, while the yield on the 102-day OMO bill closed flat at 3.03%.

 

Oil

Last week, the price of Brent extended gains forthe second consecutive week, up 4.28% to settle at US$87.63/bbl, the highest point since 22 November 2022. Consequently, Brent is up 2.00% year-to-date and is trading at an average of US$82.93/bbl, 16.31% lower than the average of US$99.09/bbl in 2022. 

 

Optimism around China's reopening continued to drive oil prices higher. In addition, both the Organisation of the Petroleum Exporting Countries (OPEC) and the International Energy Agency (IEA) raised their global demand forecasts for 2023, arguing that the second half of this year would see rapid growth in Asian buying. The IEA in its monthly report expects the lifting of coronavirus restrictions in China to propel global oil demand to its highest on record, soaring from its current 100 million barrels per day (b/d) to almost 104 million b/d by the end of 2023. 

 

Our view is that upside from Russia’s supply ban and easing of strict Covid-19 measures in China is likely to be sustained. Hence, 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 0.16% w/w to settle at 52,594.68 points. Consequently, its year-to-date return rose to +2.62%. Presco (+9.67% w/w), Airtel Africa (+3.87% w/w) and Flour Mills of Nigeria (+3.00% w/w) closed positive while International Breweries (-7.00% w/w), Geregu Power (-6.85% w/w) and Zenith Bank (-4.31% w/w) closed negative. Performances across the NGX sub-indices were broadly negative as the NGX Banking (-2.60% w/w) led the laggard’s log, followed by NGX Industrial Goods (- 1.06% w/w), NGX Pension (-0.64% w/w) and NGX Consumer Goods (-0.40% w/w) while the NGX Insurance (+1.78% w/w), NGX Oil/Gas (+0.35% w/w) and NGX-30 (+0.18% w/w) sub-indices closed higher. 

 

Model Equity Portfolio

Last week the Model Equity Portfolio rose by 0.16%, matching the rise in the NGX All-Share Index of 0.16%. Year-to-date it has risen by 2.46% compared with a rise of 2.62% in the NGX All-Share Index, underperforming it by 16bps. 

 

The drivers last week were a rise in Airtel Africa (we have an index-neutral notional position in it) which delivered 84 basis points (bps) while Dangote Cement cost 35bps and Zenith Bank cost 15bps. Last week, and as we advised a week ago, we moved towards making neutral notional positions out of Nigerian Breweries, Guinness Nigerian and Flour Mills of Nigeria, and we began to do this with notional purchases. Our thinking behind this is that the current rally in the main stocks by market capitalisation could turn into a broad-based rally


 

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