The year 2023 has been heralded by significant events that have influenced global economic and capital market activities. Notably, efforts to combat persistent inflation by major central banks in the world led to aggressive monetary policy hikes. This negatively impacted some major banks, such as Silicon Valley Bank, Signature Bank, First Republic Bank, and Credit Suisse Bank, which faced collapses. Furthermore, the economic growth slowdown in China, coupled with a deep crisis in the property sector, and recessionary concerns in major economies, particularly in Europe, shaped the global economic landscape.
At the Mid to the tail end of the year, disinflationary trends spread across the global economy as spending declined and output remained subdued due to the unfolding impacts of previous aggressive interest rate policies. These events manifested in a yield downtrend, mixed sentiments in the global capital market, and another round of volatility in the oil sector. Albeit, we have seen improved performance in the global equities market as shown in the trend analysis of the major MSCI Indices in the chart below.
Source: Bloomberg, Zedcrest Wealth
To provide context, there is a prevailing sentiment that the battle against robust inflation is approaching its conclusion, as major economies experience a consistent decline in inflationary pressures. Factors contributing to this decline include reduced government spending, tight monetary policies, and a slowdown in economic growth, particularly in China, the world’s largest importer. Additionally, the general decline in energy prices suggests that the world is adjusting to the impacts of the ongoing Russia-Ukraine conflict.
Also, the decline in Yields in the Fixed Income market bodes well for improved economic growth and a positive drive for the equities market performance. We analyzed the trend and trajectory of select US Treasury yields as they serve as a benchmark for other yields in the market. The direction of yields further affirms our position and justifies our forecast.
While OPEC and its allies remain committed to maintaining relatively high oil prices through production cuts, there has been a moderation in oil prices compared to the levels observed in the previous year.
Despite these challenges, opportunities emerged amid the uncertainties, akin to diamonds in murky terrains. Certain companies and investors demonstrated resilience, capitalizing on opportunities during these volatile periods. The equities markets have exhibited a satisfactory performance this year, with key indices in various countries concluding on a positive note in comparison to the previous year.
Looking forward, we anticipate an improved performance in 2024 as the decrease in yields is likely to divert investor attention towards the equities market in pursuit of appealing returns on investment. Furthermore, we believe that the pause in interest rate hikes will offer relief for economic growth, although it is important to note that the impact of the prior aggressive monetary policy rate hike may unfold with a delay, potentially affecting this prognosis.
Domestic Economy
A Quick Glance
The Nigerian economy has experienced a series of significant events throughout the year. The convergence of factors, including electioneering activities, an aggressive interest rate hike, and a cash crunch, has played a pivotal role. Additionally, the unification of operations in the FX market, resulting in the devaluation of the Naira, coupled with the removal of subsidies, has introduced various instabilities in the market. These collective occurrences have profoundly influenced the landscape of economic activities in Nigeria, impacting key macroeconomic indicators as illustrated in the table below.
Nevertheless, amidst these events, we have observed that opportunities persist for investors despite the challenges.
The Nigerian Equities Market- Upbeat Bullish Activity in the Equities Market
Particularly noteworthy is the impressive performance of the Nigerian equities market this year, with the year-to-date returns of the all-share index reaching 45.90% (its best return since 2020 – 50.03% YTD). In comparison to stock markets in other countries, the Nigerian market has outperformed major indices, showcasing remarkable resilience. Domestic investors have been at the forefront, contributing significantly with over 88.78% participation as of November 2023.
We conducted a brief analysis of the tickers responsible for the positive performance this year and observed that a significant number of these are penny stocks, characterized by their low market capitalization.
Going forward, we anticipate a sustained rally in the equities market, with several factors contributing to the continuation of the bullish trend on the local bourse:
1. New Listings: We predict the inclusion of companies such as Dangote Petroleum Refinery, Nigerian National Petroleum Company Limited (NNPCL), and other government-owned and private enterprises.
2. Bank Recapitalization: While the Central Bank of Nigeria (CBN) has issued a circular reassuring the public of the stability of certain banks and dispelling rumors of potential takeovers, we believe there is a likelihood of mergers and acquisitions in 2024. This is expected to stimulate buying interest in banking tickers.
3. Direction of Yields in 2024FY: Anticipating a further decline in yields in the fixed-income market, we attribute this to robust liquidity in the first half of the year, driven by maturities and coupon payments.
4. A New Awakening: Building on the positive performance of the equities market in 2023, we anticipate increased investor interest in the Nigerian space.
5. Earnings Results: Despite varying impacts of FX volatility on different sectors of the bourse, we project better earnings results in 2024 compared to 2023. This expectation is based on the economy adjusting to current market realities stemming from policies implemented by the current administration.
Fixed Income Market – Ups and Downs
The Fixed Income market experienced fluctuations throughout 2023FY. The Equities market’s allure left investors in a conundrum, navigating between both spaces for capital gains and attractive returns. Despite the new administration’s efforts to enhance yield performance and attract investors, market fundamentals continued to dominate, reflecting the prevailing market realities.
Source: NBS, Zedcrest Wealth
Throughout the year, yields in the fixed-income market, encompassing both the primary and secondary markets for Treasury Bills and Bonds, have consistently remained below the inflation rate. This circumstance presents a challenge for investors seeking to surpass inflation and achieve positive real returns on their investments.
Source: NBS, CBN, FMDQ, Zedcrest Wealth
Going forward, we anticipate a decline in yields in the fixed-income market. Our projection is grounded in the historical trend of yields during the first half of the year, driven by increased maturities, larger coupon payments, and expectations for a higher FAAC allocation following the removal of subsidies.
Capital Importation Q3:2023 – A Path into the Abyss
During the week, the National Bureau of Statistics released the Capital Importation data for Q3:2023. Total Capital imported into the economy declined 26.86% YoY to USD654.65mn (vs USD1.03bn in Q2:2023). We saw declines in Foreign Portfolio Investment (contracted by 80.30% YoY to USD87.11mn) and Foreign Direct Investment (dipped -26.86% YoY to USD59.77mn). Similarly, Other Investment declined 20.15% YoY to settle at USD507.77mn.
We hold the view that persistent structural challenges, including unfavorable monetary and fiscal policies by the Central Bank of Nigeria (CBN), frequent policy alterations by the new administration, security uncertainties, difficult business conditions, and constraints in FX liquidity, collectively contribute to unfavorable sentiments among foreign investors concerning the Nigerian market.
Looking into the upcoming quarter, we project that Capital Importation Figures will likely fall short of their potential. We anticipate that the mentioned challenges will endure, continuing to negatively impact capital inflows into the economy.
Nigerian Debt – Same Old Story
According to the Nigerian Foreign and Domestic Debt report released by the NBS, total public debt stock which includes external and domestic debt stood at NGN87.91trn (USD114.35bn) in Q3:2023 from NGN87.38trn (USD113.42bn) in Q2:2023, indicating a growth rate of 0.61% on a quarter-on-quarter basis.
Total external debt stood at NGN31.98trn (USD41.59bn) in Q3:2023, while total domestic debt was NGN55.93 trillion (USD72.76bn). The share of external debt (in naira value) to total public debt was 36.38% in Q3 2023, while the share of domestic debt (in naira value) to total public debt was 63.62%.
