BY Vetiva Capital
What shaped the last week?
World: The rout in global markets continued this week, with major indices outside of China closing deep in the red. In the Asia-Pacific region, the Chinese market was the only bright spot, with the Shanghai Composite Index up 0.97% w/w; while the Japanese Nikkei-225, Hong Kong Hang Seng and South Korean Kospi all fell 6.69%, 3.35% and 5.97% respectively. The Nikkei-225 was the worst performer across the board as tightening by major central bankers weighed on the yen. Turning to Europe, the Swiss National Bank and Bank of England’s rate hike decision weighed on sentiment in the region, as investors awaited the release of inflation data for the EU.
In addition, concerns over rising gas prices weighed on markets following the announcement by Russian state energy company Gazprom that the transfer of gas to Italian energy company Eni SpA would be reduced to 65% of the initial volume. demand. As a result, natural gas futures jumped 23% amid growing gas supply concerns and updates on Gazprom deliveries; Germany, Italy and France are expected to see a reduction in gas deliveries from Russia. Over the week, the German Dax, the French CAC and the London FTSE-100 fell by 4.73%, 4.37% and 3.53% respectively. Finally, in the United States, the Federal Reserve’s decision to raise interest rates by 75 basis points did not surprise the market as the bank seeks to fight inflation. Growth stocks fell sharply this week, with NASDAQ the worst performer w/w, falling 5.96%; the S&P500 and the Dow Jones Industrial Average recorded significant losses and also lost 5.62% and 4.53% respectively.
Domestical economy: Headline inflation hit a 10-month high of 17.71 percent year-on-year, according to the National Bureau of Statistics. This increase was driven by low load interruptions during the long holiday season amid high distribution costs, which resulted in fuel shortages in some northern states. Food inflation reached 19.50% as high transport costs fueled food prices. Going forward, inflation may remain elevated as the incidences of the fuel shortage recur.
Shares: Local equities fell sharply this week as general bearish sentiment across the global space seeped into the domestic market. Losses across the index were widespread, with the banking sector falling sharply, down 5.20% w/w, ending the week as the worst performer. Investors largely sold off their counters across the space, with ZENITHBANK, ACCESSCORP and FBNH dropping 6.35%, 5.10% and 8.06% respectively. Moving on to the consumer goods space, the positive sentiment in the space seen over the past few weeks has given way to muted activity on the sell side this week. The sector lost 1.16%, mainly due to the losses of INTBREW. The brewer saw its share price drop 14.97% w/w to ₦6.25/share. Similarly in the Oil & Gas space, losses in the oil marketing space saw the sector ease 1.80% w/w, note that OANDO and ARDOVA fell 6.67% respectively. and 9.97% w/w. Finally, the industrial goods space was also not spared from the bearish sentiment, as evidenced by the 0.08% loss seen in the sector over the week.
Fixed Income: Trading activity in the fixed income market was light this week, with yields trending higher in the NTB and OMO spaces, while the bond segment traded quietly. Minimal activity in the bond sector resulted in average returns closing flat for the week. On the other hand, bearish sentiments persisted in the OMO and NTB segments as market sell-offs drove average yields higher by 27bps w/w and 29bps w/w, respectively.
Currency: The naira depreciated by ₦0.12 w/w at the I&E FX window to close at ₦421.25.
What will shape the markets over the coming week?
Equity market: With continued heavy selling amid bearish sentiment in the market, we expect mixed trading sessions next week as investors continue to trade cautiously.
Fixed Income: Over the coming week, we expect the bond market to trade on a tepid note ahead of Monday’s bond auction. Meanwhile, the treasury bill market should trade in line with the level of liquidity in the system.
Currency: We expect the naira to remain broadly stable across the various windows of the currency space as the CBN maintains its interventions in the foreign exchange market.
Macroeconomic outlook H2’22 – A rude awakening
The escalation of Russian aggression, culminating in its invasion of Ukraine, plunged both the warring states and the rest of the world into a frenzy of unpleasant events. Ukraine under attack, torn apart by a humanitarian and economic crisis, has suffered the tragic loss of civilian lives, the destruction of key infrastructure and the overnight transformation of its peaceful streets into a war zone. After months of denying any intent to invade, Russia launched a full-fledged attack, deploying sophisticated infantry and arsenals to destroy its sister state. While the West has applied heavy economic sanctions to bring Russia to its knees, the backlash from these sanctions has been seen and felt around the world.
The impact of the war on many economies – including Africa – is far-reaching: from high energy prices to expensive food imports, weaker currencies, difficult financing conditions and slower economic growth. From the second quarter of 2022, the base effects of the pandemic-induced recovery may fade as central banks open the hawkish taps to contain inflation. With elections on the horizon, tax authorities in Kenya, Nigeria and Angola could block reforms.
In Nigeria, the countdown to the 2023 general election has begun, with tax authorities now in welfarist mode. From postponing the removal of subsidies to reopening borders, there are increased commitments to tackling inflation from a fiscal perspective. The monetary authority finally resumed its inflation-fighting tools, bracing for demand-driven inflationary threats from Nigeria’s longest campaign cycle. The naira could remain under the wind as volatility in oil production, postponement of key reforms and risky sentiments dampen external flows.
Inflation: Cloudy outlook of uncertainties
History provides us with evidence that inflation has slowed in every pre-election year since 1999 (with the exception of 2010). Several factors could alter this trend in 2022, including the sustained rise in energy prices, the resurgence of fuel shortages and the high demand for foreign exchange (due to the long election campaign cycle in Nigeria). In addition, incidents of crude theft could escalate into further oil revenue losses and weaker exchange rates. These combined risks create a lot of uncertainty in H2’22.
In the first half of 22, we saw several policy choices aimed at controlling inflation, including postponing the removal of subsidies. However, the importation of off-spec Premium Motor Spirit (PMS) has upended consumer prices as the ensuing fuel shortage drove the price of PMS to a 50-month high of ₦185/litre in March 2022 While the price of PMS moderated thereafter, prices for deregulated energy products like diesel have since risen. We understand that the recent incidences of fuel shortages in some northern states are caused by the high cost of refueling oil tankers (which run on diesel). High operational costs led to the deployment of fewer tankers. Media reports suggest the president has approved higher freight rates for carriers, while keeping the PMS pump price constant.
Although reasonable care has been taken in the preparation of this document to ensure the accuracy of the facts stated herein and that the ratings, forecasts, estimates and opinions also contained in this document are objective, reasonable and fair, no liability is not accepted by Vetiva Capital Management Limited or any of its employees for any errors of fact or opinion expressed herein.