Focus for the week: 2025 Macroeconomic Outlook – Little room for surprises

Amid easing supply chains, commodity prices are expected to fall in 2025, providing tailwinds of growth in developing economies. Inflation could moderate, tailing pre-pandemic levels, barring shocks that could arise from renewed trade wars and geopolitical tensions. On the back of this, central banks in advanced economies could continue to cut policy interest rates,

supporting the labour market and consumption in their respective economies. This could trickle down to frontier and emerging markets as renewed foreign portfolio interests, as investors hunt for yields. While we acknowledge upside risks to US treasury yields in response to a Trump presidency, recent evidence suggests that trade wars are deflationary for global inflation.

African sovereigns could hang their monetary policy tools as inflation decelerates. Looser global financing conditions could allow external fundraising exercises as the continent approaches a wall of debt maturities. Kenya and Nigeria could refinance in 2024, many more could tap the international debt market in 2025.

Our macro-outlook on Nigeria remains mixed. The industrial sector is poised to grow at its fastest pace in 11 years, driven by the resurgence of the oil sector and the pick-up in domestic crude refining. The Services sector could continue to contribute significantly to output growth while the performance of the agricultural sector could determine inflation outturns. We opine that a lack of self-sufficiency in food production could keep inflation and rates elevated. While our twin FX valuation methodologies confirm unanimously that the Naira traded at undervalued levels in 2024, a catalyst is required to keep the currency close to its fair value in 2025. Thus, the apex bank could keep its tight noose on rates until macro fundamentals permit a pivot.

What shaped the past week? 

Equities: The local market continued its Santa rally this week, adding another 99bps to the ASI, as most indexes closed up w/w. The ASI closed at 102,133.30 points (+99bps w/w), and the NGX 30 closed at 3777.42 points (+1.36% w/w).  At the close of the week, the Insurance sector jumped 7.87% w/w, while other gainers were: Consumer Goods (+3.13% w/w), Banking (+1.97% w/w), and Industrial Goods (+9bps w/w) sectors. On the flip side, only the Oil & Gas sector closed down (-12bps w/w). On the stock gainers’ charts, Insurance stocks dominated, although it was topped by IKEJAHOTEL with 32.79% w/w, then followed by MULTIVERSE (+32.61% w/w), PZ (+26.09% w/w), UNIVINSURE (+25.00% w/w), and ROYALEX (+24.66% w/w). On the decliners’ chart,  low-cap counters featured mostly except for ARADEL (-9.64% w/w) which dragged down the oil & gas sector. Other names were THOMASWY (-10.00% w/w), AUSTINLAZ (-9.29% w/w), DAARCOMM (-6.45% w/w), and NEIMETH (-5.00% w/w).

Fixed Income:

This week, system liquidity opened positive at ₦124 billion and went higher on Friday to ₦736 billion, on the back of FAAC inflows and maturing bills. As a result, the OPR closed the week at 26.50% (-529bps w/w), converging with the rate at the SLF window. The secondary market traded on a mixed note this week, with bullish sentiments seen on the shorter end of the market, while bearish sentiments were along the rest of the curve. For specifics, yields were as follows: 91-Day (-50bps w/w), 182-Day (-48bps w/w), 364-Day (-51bps w/w), 2-year (+70bps w/w), 5-year (+9bps w/w), 10-year (+4pbs w/w), and 20-year (+2bps w/w).

Currency: At the end of the week, the Naira appreciated by ₦7.64 w/w to close at ₦1,534.00 per dollar.

Domestic Economy: In 2024, Nigeria recorded a net foreign portfolio inflow of $3.1 billion (2023: $0.5 billion), lured by the carry trade appeal of local currency fixed-income assets. With yields on Open Market Operations (OMO) instruments averaging 30% since the end of Q3 ’24, we have observed increased foreign portfolio inflows, taking advantage of these high yields. Should the apex bank continue to offer juicy yields, Nigeria could see more foreign portfolio activity, especially as global central banks cut interest rates. Consequently, the Naira is likely to close the year within the N1,500 – N1,600 range at the foreign exchange market.

Global: Tech and growth stocks dragged Wall Street’s main indexes lower on Friday, at the end of an upbeat holiday-shortened week that was driven by expectations around a traditionally strong period for markets. Early Friday morning, the Dow Jones Industrial Average fell 0.76% to 42,996.30 points, the S&P 500 lost 1.16%, to 5,967.60 points and the Nasdaq Composite dropped 1.77%, to 19,665.01 points. However, all three indexes were still set for weekly gains, having regained the losses of last week. Over in Europe, the STOXX 600 index clocked its first weekly advance in three on Friday, boosted by advancing healthcare and financial shares, capping off a holiday-shortened week. It gained 0.7% on Friday and gained about 1% in a week to close at 507.18 points. In the UK, the blue-chip FTSE 100 was up 0.2% on Friday, for a 0.7% weekly gain, to close at 8,149.78 points. Finally, in Asia, it was mostly bullish on Friday, with the Nikkei 225 gaining 1.80% to 40,281.16 points, the Hang Seng Index declining 0.04% to 20,090.46 points, and the Shanghai Composite jumped 2.07% to 3,400.14 points.

What will shape markets in the coming week?

Equity market: In the final week of the year, we expect mildly bullish sentiments across sectors, as investors take positions ahead of the new year. We also expect another week of lower trade volumes due to the New Year’s holiday.

Fixed Income: Going into the final week of the year, we expect the current market sentiments, that is, preference for shorter term, higher yielding instruments to persist, even as traders close their books for the year.