We kickstart our analysis this week by sharing expectations for the July 2024 CPI data to be published by the NBS next week and its likely implication on the market. Recall that in June, the headline inflation rate nudged higher for the eighteenth consecutive month to 34.2% y/y as anticipated. Like most of the prior months, the increase in the headline rate was primarily driven by the spike in both the food (up 21bps to 40.9% y/y) and core (up 36bps to 27.4% y/y) inflation sub-baskets.
Based on our model projection, we estimate that the y/y headline rate would decline by 107bps to 33.12% in July. This expected decrease is largely attributable to the high base effect. More so, we opine that the recent moderation in the price of some farm outputs (e.g., yam, pepper, vegetables following early gains from green harvest) should support the projected moderation. As such, we forecast a decline in the y/y food inflation rate to 40.4% from 40.9% in the preceding month. However, major downside to our expectation is the PMS scarcity and FX volatility episodes (NAFEM rate lost 6.4%) in the month.
Beyond the positive inflation outlook for July, we are of the view that the timely implementation of recent policy initiatives aimed at combating rising food prices by the FG (re-opening of more land borders and planned 150-day duty-free window for food importation) could support an extended short-term relief from the elevated price pressure. Overall, barring any major shock to FX and energy goods prices, we hold that the y/y headline rate should be on the downtrend for most of H2 (beginning from July), thereby translating to modest relief on household’s purchasing power.
Regarding the impact of the anticipated inflation decline on the equities market, we expect the positive inflation outlook to re-ignite buy interest on domestic bourse. However, for the fixed-income market, we estimate that yields may have peaked given the heavy frontloading of papers by the FG in H1 (net amount raised: ₦10.1tn vs ₦9.2tn budgeted) and disinflation expectations. As such, we anticipate a slow but steady pick up in interest for equities instruments, especially in sectors with stronger growth outlooks than the broader economy.
Switching focus, in a move to enhance FX liquidity, address ongoing demand pressures and support price discovery, the CBN reintroduced the Retail Dutch Auction System (rDAS) which was previously suspended in 2015. For context, the rDAS is a direct sale of FX by the Central Bank through the banks to the end users. The price at which the FX is being sold is usually determined by the highest accepted bid in the auction. Central Banks employ this to control FX liquidity and stabilize the exchange rate market by allowing market forces to influence currency allocation.
According to the auction results, bids totalled $1.2bn from 32 Authorized Dealer Banks. Out of these, bids amounting to $876.3m from 26 banks qualified at an approved cut-off rate of ₦1,495.0/$ while bids valued at $313.7m from 6 banks were disqualified. In the days following the auction, the Naira appreciated 1.7% at the NAFEM window to end the week at ₦1,574.2/$. While we applaud the CBN’s efforts to stabilise the FX market, several challenges remain that questions the long-term sustainability of this approach and other stop-gap measures recently introduced by the CBN.
First, we are of the view that the apex bank does not possess the required financial war chest to meet the average FX demand for an extended period. Recall that Dr. Cardoso, during the last MPC meeting, stated that the country’s foreign reserves of $37.1bn could cover 11 months’ imports. This implies a monthly average import spend of $3.3bn. Meanwhile, the IMF in it’s 2024 article IV consultation note estimate Nigeria’s monthly import bill at $6.0bn, implying that the reserves could only cover 6 months imports. Regardless of the estimate considered, the FX reserves could run dry in 6 to 9 months should the magnitude of the bids at the auction ($1.2bn) be met weekly and accretion rate does not offset outflows. In addition, seasonality trends suggests that FX demand for manufacturing imports, educational commitments and summer travels peaks in Q3. Hence, we are of the view that the measure will only temper the demand pressure that is building up.
Second, the auction pricing closely reflects existing reality in the wholesales FX market – the NAFEM rate have swung between ₦1,450.0/$ and ₦1,600.0/$ in most of 2024. This highlights the fact that the FG’s goal of bringing the NGN/USD rate to ₦800.0/$ by year-end is unlikely. As such, we hold to our view that for the naira to regain lasting strength, there is a need for the implementation of strategic fiscal policies to boost economic productivity. Without an increase in oil production (to at least 1.80mbpd), higher remittances flow through official channels (to at least $20.0bn per annum), and improved inflows of patient longer term capital (FDI of at least $10.0bn per annum), the naira would remain in the shadow of the FG’s dream target.
Domestic Equities Market: Bullish outing on the Local Bourse… ASI up 0.9%
This week, the bulls dominated on three of the five trading sessions, resulting in a 90bps rise in the NGX-ASI to 98,605.71 points. Market capitalisation rose 0.9% w/w to ₦56.0tn, while YTD return increased to 31.9% (previously 30.7%). Meanwhile, activity level worsened as both average volume and value traded declined 21.0% and 6.3% w/w to 535.8m units and ₦9.8bn respectively. ACCESSCORP (278.4m units), GTCO (193.7m units), and UBA (183.0m units) led the chart in terms of volume traded while GTCO (₦8.8bn), ACCESSCORP (₦5.2bn), and ZENITHBANK (₦4.5bn) led in terms of value.
Across our coverage sector, performance was positive as five indices gained while one lost. The Industrial goods index shed 3.7% w/w following losses in BUACEMENT (-10.0%) and BERGER (-3.7%). On the flipside, the Banking index led the gainers, up 5.1% w/w spurred by gains in UBA (+14.7%), FBNH (+9.8%), and ZENITHBANK (+7.9%). Following, the Consumer goods and Insurance indices rose 2.3% and 1.8% w/w respectively, due to price appreciation in NB (+19.2%), UNILEVER (+15.1%), VERITASK (+24.2%), and SOVRENIN (+8.0%). Similarly, buy interest in OMATEK (+6.6%), MTNN (+5.2%), OANDO (+60.5%), and JAPAULGO (+35.8%) pulled the AFR-ICT and Oil & Gas indices up by 1.7% and 1.0% w/w sequentially.
Investor sentiment, as measured by market breadth, moderated at 0.1x (previously 0.0x) as 44 stocks gained, 38 lost, and 68 closed flat. OANDO (+60.5%), RTBRISCO (+51.2%), and JAPAULGO (+35.8%) were the top performing stocks for the week, while CHAMPION (-15.0%), BUACEMENT (-10.0%), and UPL (-9.9%) led the laggards. Next week, we expect an extended positive performance as investors take strategic position ahead of H1 earnings releases.
Afrinvest
