Please click the link “Geopolitical Tensions Dampen Growth Expectations” to access Q1 2022 Report.
Activities in the global economy were relatively mixed in Q1 2022. The United States economic performance for FY 2021 was released In January 2022, with a real GDP growth of 5.70% YoY in FY 2021 from 3.40% output decline in FY 2020. The GDP growth reflected a recovery achieved across the major sectors of the economy, on the back economic reopening and improved vaccination. However, inflationary pressures remained a downside risk. The disequilibrium between aggregate demand and aggregate supply in the economy resulted to higher price level in the economy. On aggregate demand, the prior policy responses, in the form of monetary policy easing and direct fiscal transfers supported demand recovery. However, the lingering effect of coronavirus-induced supply disruptions led to a weaker-than-expected aggregate supply. Specifically, manufacturers of semiconductor chips found it difficult to produce during the year, and this impacted negatively on the production of vehicles.
According to the United States Bureau of Labor Statistics, the U.S. inflation rate rose to 7.90% in February 2022 – the highest level since 1982. In response to the heightened inflationary pressure, the Federal Reserve’s focus changed to hiking of interest rates to rein in the persistent inflationary pressures. In March 2022, the Fed hiked rates by 0.25% – the first increase since December 2018.
In other regions, geopolitical tensions escalated, as the Russian President, Vladimir Putin, declared military attacks on neighbouring country Ukraine, due to the latter’s decision to join the North Atlantic Treaty Organisation (NATO). Consequent to the Russian government’s moves, a flurry of sanctions were placed on Russia from several private and public institutions. The commodities market responded strongly to the conflict. Given Russia’s status as one of the global oil exporters, the tensions drove crude oil prices to $100+ levels, the highest since 2014. Other energy prices including aluminum, palladium, nickel etc. have also risen. These higher energy prices have further worsened inflationary pressures in the United States and other economies of the world. The grains market also responded to the conflict, as prices of wheat and grains have increased.
On the back of the geopolitical crisis in the Eastern Europe, the International Monetary Fund (IMF) could revise global growth lower to reflect a dampened outlook of global consumption and production. As capital outflows increase, financial market conditions are expected to tighten across the emerging markets in the near to medium term.
The Nigerian economy grew by 3.40% YoY in FY 2021, from a 1.92% decline in FY 2020. The growth in FY 2021 was driven by sustained monetary and fiscal policies, economic reopening, and improved fundamentals in the global crude oil market. The Agricultural sector grew by 2.13% YoY in FY 2021 (FY 2020: 2.17%), the Services sector grew by 5.61% YoY in FY 2021 (FY 2020: -2.22%) – driven by Trade GDP and Finance & Insurance GDP. The Industrial sector, however, declined by 0.47% YoY due to lower oil production. Notably, increased calls on the government to reduce the spate of oil theft in the economy was a major theme in Q1 2022. According to the Nigerian Upstream Petroleum Regulatory Commission (NUPRC), Nigeria loses 150,000 barrels of oil per day to oil theft. The situation has resulted to below-than-average production, which hindered the full crystalisation of the price upside in the global crude oil market.
Inflationary pressures mounted in Q1 2022. Based on the most available data by the National Bureau of Statistics, the headline inflation rose to 15.70% YoY in February 2022 from 15.63% as of year-open. Core inflation rose to 14.02% in February 2022 from 13.87% as of year-open. We expect headline inflation to rise to 15.77% in March 2022. The major factor that accounted for the rise in domestic inflation in Q1 2022 was higher energy prices. The prices of diesel and petrol recorded a marked increase, on the back of supply bottlenecks, amid influx of contaminated products into the market. We also believe that subsidy-related issues also impacted on the fuel supply. In addition, the pass-through effect of high oil prices in the global crude oil market significantly put pressure on air travel costs, as several airlines across the economy hiked fares. The inflationary pressures witnessed in the economy significantly constrained purchasing power of households during the quarter.
Fixed Income Market
Yields in the fixed income market declined in Q1 2022, driven by increased financial system liquidity. Average yields on one-year and ten-year benchmark government securities to 4.84% and 11.15% in March 2022 from 6.56% and 12.69%, respectively.
The equities market advanced by 9.95% in Q1 2022 – the highest quarterly price appreciation since Q4 2020. Factors that were responsible for the market rally in Q1 2022 were corporate actions including BUA Foods Plc listing and corporate earnings releases. We believe that investors’ positioning for dividends played a role in the positive market sentiment. Furthermore, increased liquidity in the financial system due to some fixed income maturities and other inflows (coupons, FAAC etc.) were not adequately absorbed in the fixed income market due to low yields. As a result, we believe that some of those funds found their way into the equities market.
On a sectoral basis, the Oil & Gas index delivered the highest return of 28%, reflective of the positive swing in the global crude oil market. Investors positioned in Seplat Energy Plc, thus, the stock appreciated by 43% in Q1 2022. Totalenergies Marketing Plc also appreciated by 19% due to a strong rebound in earnings, after experiencing significant operational headwinds in the past two years. Other stocks that accounted for the Oil & Gas index growth were Oando Plc (+9%), Conoil Plc (+12%), and Eterna Plc (+9%).
The Industrial index delivered the second-highest return of 5%, majorly driven by price gains in Dangote Cement Plc (+6%) and BUA Cement Plc (+6%). Both companies recorded a stellar FY 2021 performance with double-digit revenue and net profit growth. As a result, we attribute the buy-interest on the two stocks to investors’ positioning for dividends. Notably, Dangote Cement increased its dividend by 25% to N20.00 per share for FY 2021.
The Banking index grew marginally by 0.71%. Although ETI (+38%), Access Bank (+5%), Fidelity (+25%), and Wema Bank (+26%) all delivered relatively higher returns, the downside impact of heavyweight banking stocks such as GT HoldCo (-14%) and Zenith Bank (-11%) dragged the overall index.
The Insurance index (-6%) and Consumer Goods index (-6%) lagged in Q1 2022.
Foreign Exchange Market
The exchange rate was stable for most of the quarter and closed at N416.17 in Q1 2022. However, the external reserve declined during the quarter despite higher prices in the global crude oil market. We attribute the declining trend to the mixed effect of the Nigerian economy being an exporter of crude oil and importer of refined products simultaneously. On crude oil exports, the below-average production capacity resulted in lower crude oil receipts that should have accrued to the reserves. Meanwhile, on refined products importation, the widening subsidy outflows eroded the gains of higher crude oil prices.
During the quarter, some Deposit Money Banks (DMBs) notified their customers about a downward review of the international transaction limits on their Naira debit cards. This development suggests to us of increased pressure om exchange rate stability due to declining supply. Towards the end of Q1 2022, the Debt Management Office of Nigeria (DMO) issued a $1.25bn Eurobond to finance the FG budget. The debt inflows were accretive to the external reserve, but it might not be enough to stabilise the market unless dollar supply improves. However, at the current external reserve levels, the CBN is equipped to stabilise the foreign exchange market in the near term.
Fixed Income Market
We expect to see a reversal in the trend of fixed income yields in the near term. Our expectation is premised on significantly higher government borrowings. We believe that the FG’s revenue is constrained amid rising obligations. This is due to the development in the global crude oil market where prices have risen to $100+ per barrel, thus leading to higher subsidy payments.
The significant financial system liquidity in Q1 2022 will likely flow through the early parts of Q2 2022, however, we expect it to lose steam in subsequent towards the end of Q2 2022. Therefore, there is a likely possibility for higher yields in the subsequent quarters of 2022, starting from early Q3 2022.
The direction of the equities market is skewed towards the negative territory. We posit that the drivers of market performance in Q1 2022 were combined impact of liquidity in the financial system and anticipation of dividends. The dividends season has ended; thus, we expect to see profit taking by investors. The direction of the fixed income market will also guide the level of activities in the equities market. In addition, elevated political risks might raise the risk premium in investing in the equities market, as the 2023 general elections close in.
Foreign Exchange Market
We expect to see increased demand pressure in the foreign exchange market in the near term. However, we do not see any material shift in exchange rate. This is because we believe that the external reserve, though declining, is adequate for the CBN to intervene in the FX market. Also, the trend of rising crude oil prices is likely to remain in the near term. Therefore, we expect to see some accretion to the external reserve, even if marginal. Lastly, we believe that the CBN might deploy unorthodox policies aimed at FX demand management.
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