What shaped the past week?
Global: Global markets traded in a largely bearish manner this week, as recessionary concerns continue to weigh on markets. Starting in Asia, investors continue to react positively to the latest COVID developments in China. Chinese officials have announced an easing of movement restrictions in key cities across the region, as rising civil unrest owing to the restrictions sparked protests in the country. China has relaxed COVID quarantine testing rules, as it responds to rising domestic tensions due to the pandemic. For the week, the Hang Seng again was the best performer rising 6.56% w/w, while the Shanghai Composite and the Nikkei 225 gained 1.61% and 0.44% respectively.
Meanwhile, moving to Europe where focus this week was on development around a proposed price cap on Russian oil, all key markets in the region closed in the red as investors expressed concerns about a potential energy crisis in the region. The German Dax lost 1.39% w/w, while the French CAC and London FTSE lost 1.30% w/w and 0.97% w/w respectively.
Finally, across the North American region, investors traded in an unnerved manner as concerns over the prospects of a recession due to the FED’s monetary policy tightening stance dragged positive sentiment. Expectations are that the FED will hike interest rates again on December 14, as investors pay special attention to key economic reports set to be released from Friday and into next week. For the week, the NASDAQ was the worst performer, down 2.97% w/w at time of writing, with the S&P 500 and Dow Jones down 2.15% and 1.49% w/w respectively.
Domestic Economy: According to the National Bureau of Statistics, Nigeria’s total trade fell by 10.7% q/q in Q3’22 to N11.6 trillion due to lower export receipts. Total exports fell by 19.9% q/q in Q3 because of a 21.2% q/q decline in crude oil exports. The decline in crude exports was driven by crude theft and shutdowns of key oil infrastructure for repairs. The moderation in exports and slight uptick in imports contributed to a lower balance of trade – ₦269 billion in Q3’22, an 86.3% q/q decrease from the trade balance in Q2’22. Spain, India, and France were the top three export partners, while China, the Netherlands, and India were the top three import partners. In Q4’22, we anticipate a higher trade balance as oil production increases due to gains from the pipeline surveillance project. On the other hand, limited foreign exchange supply might dampen imports.
Equities: It was another positive trading week for Nigerian equities, as investors remained buy-side driven across the market. The local NGX rose 1.51% w/w, to settle at 48.881.93pts. Looking at the sectors, The Industrial Goods space was the best performer this week, rising 8.53%, fueled by buy-side pressure in BUACEMENT; the cement maker saw its stock rise 19.09% w/w. Likewise, the Consumer Goods space saw a reversal in fortunes, after multiple weeks of red w/w closes. The sector rose 1.65% w/w, fueled by interest in GUINNESS, which rose 10.00% w/w. Finally, the Oil and Gas space, closed in the green w/w, up 0.29% due to interest in players in the oil marketing space. On the other hand, the Banking Space was the lone sector to close in the red, down 0.25% w/w, due to profit-taking in ZENITHBANK, which sank 2.86% w/w.
Fixed Income: This week, bullish sentiments persisted across all three market segments. In the bond market, mild buy-side activity resulted in a 11bps w/w decline in the average yield on benchmark bonds. Similarly, we saw strong buy-side activity in the NTB space as investors tried to fill lost bids at the NTB primary market auction, resulting in a 291bps w/w drop in average yield. Finally, minimal interest in the OMO market led to a 1 basis point w/w drop in the average yield.
Currency: The Naira appreciated N0.33 w/w at the I&E FX Window to N445.00.
What will shape markets in the coming week?
Equity market: We expect another round of mixed trading sessions next week, amid lukewarm activity.
Fixed Income: Next week, the bond market should trade on a muted note as investors await the outcome Monday’s auction. On the other hand, given the relatively decent liquidity figures, we expect bullish activity to dominate the NTB spectrum to open the week.
Oil theft and high production cost dampen growth
The domestic economy expanded by 2.25% y/y in Q3’22, falling short of Bloomberg consensus estimate (2.90% y/y) and Q2’22 outcome (3.54% y/y). The moderation was due to contractions in the industrial sector, specifically, the manufacturing and oil sectors. For the first time since the pandemic, the manufacturing sector contracted (-1.9 y/y). The downturn in the manufacturing sector, was mainly due to high energy costs, increased taxes, and rising cost of credit. The decline in the oil sector was entrenched by crude theft and pipeline shut-ins.
According to National Bureau of Statistics (NBS), of the three broad categories, services and agriculture continue to be the drivers of growth in Nigeria, while industry lags. Starting with services, the Information and communications (ICT), trade, finance, and transportation sectors contributed the most to the expansion in the services sector. Continued CBN interventions boosted the agricultural sector. Finally, industrial output fell behind for the third quarter in a row, owing primarily to low oil production levels.
Telecoms, trade and transport were leading contributors to growth
The ICT sector benefited from the relaxation of the restriction on new SIM registrations, which propelled growth to 10.5% y/y in Q3’22 (Q3’21: 9.7% y/y) Furthermore, increased digital adoption and broadband penetration spurred increased demand for telecom services. Data from the Nigerian Communications Commission (NCC) shows that in Q3’22, the number of internet subscribers increased by about 2.6% q/q, and the broadband penetration rate as of Sept’22 was at 45.09%, up 77bps from the July’22 (44.32%) penetration rate.
Oil output bleeds from theft and vandalism
The oil sector contracted at a steeper pace of -22.7% y/y in Q3’22 (Q2’22: -11.8% y/y. Oil production fell in Q3’22 to 1.2 million barrels per day, 16% lower on a quarter-quarter basis. The oil sector has been plagued with incidences of oil theft, shut-ins and closures of oil terminals due to frequent attacks on key infrastructure. Oil production at Trans-Forcados (the largest terminal in Nigeria) was halted in August due to repair work on a subsea hose. The repair continued into September, resulting in a 95% m/m production drop in August, followed by a 36% m/m decline in September.
Outlook: Brighter oil sector outlook could strengthen output in Q4
In Q4’22, the economy is expected to grow by 2.76% y/y due to a milder contraction in the oil sector which could moderate the contraction in the industrial sector. Growth in the manufacturing sector is expected to remain subdued due to high production costs and constrained consumer wallets. We note the significant improvements in oil production since the execution of the pipeline surveillance contract. In October, oil production grew by 76,000 bpd per day to 1.01 mb/d (Sept’22: 0.94 mb/d). We envisage further m/m recovery in the oil sector in the remaining months of the year, however, due to high base effects, the sector could remain in a recession. Growth in the agricultural sector is expected to be modest given recent incidences of flood. We expect slower growth in the services sector hinged on a high base in the trade sector, modest growth in the ICT sector and robust real estate activity. We expect growth in the financial services sector to slow on the back of a higher cash reserve ratio. Considering all these factors, we downgrade our FY’22 forecast for the economy to 2.84% y/y in 2022 (2021: 3.40%).