Q3 2023: Macroeconomic and financial market review

NUPEMCO Q3 2023 NEWSLETTER

The third quarter ended with various activities happening in the fiscal and monetary space –confirmation of a new CBN Management Team comprising the Governor and four Deputy Governors, and confirmation of ministerial nominees. On the market side, the quarter witnessed the downgrade of Nigeria from ‘Frontier’ to ‘Unclassified’ market status by FTSE Russell, a subsidiary of London Stock Exchange Group, due to the nation’s foreign exchange crisis. Although this downgrade led to an immediate decline in the value of stocks, it did not last as the proportion of foreign investors in the market had reduced significantly building up to the effective downgrade date. The quarter also saw a further rise in the country’s persistently high inflation and continuous foreign exchange volatility.

DOMESTIC POLITICAL AND MACROECONOMIC REVIEW

Following the swearing-in of Bola Ahmed Tinubu as President in the preceding quarter, his administration exhausted the maximum 60-day window to send a list of ministerial nominees to the Nigerian Senate for screening and confirmation. Accordingly, 48 ministerial nominees were sent to the Senate who passed 45 of them, declining 3. The confirmed ministers have since been sworn in and have commenced duties.

In August, Nigeria’s inflation rate rose by 1.72% to a staggering 25.80% from 24.08% in July. This is the eighth consecutive monthly increase and the highest since 2005. A breakdown of the data showed that prices increased across board with food inflation rising to 29.34% and core inflation climbing to 21.15%. The usual suspects behind this August inflation surge include the naira depreciation, money supply growth, and higher energy costs (diesel price rose by 3.66% to N850/liter). In August, the naira touched a record low of N955/$, pushing imported food inflation to 20.46% from 19.79% in July. Meanwhile, m/m inflation, which reflects the current economic situation, climbed 0.4% to 3.29% in August from 2.89% in July. This suggests that inflation risks are high and will likely persist throughout the rest of the year.

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Shifting focus from Inflation, FTSE Russell announced the downgrading of Nigeria’s FTSE Equity Country Classification Status from a Frontier market status to an Unclassified market status. Nigerian index constituents will be removed from various FTSE Russell equity indices at zero value (NGN0.0001). The equity indices include (the FTSE Frontier Index Series, including the FTSE Frontier 50 Index, FTSE Ideal Ratings Islamic Index Series, FTSE/JSE All Africa Index Series, FTSE Middle East and Africa Extended Index Series, FTSE/MMV (Exchange Index).

This decision by FTSE Russell comes despite the introduction of the FX liberalization policy in Nigeria, which permits the free float of the exchange rate. However, FTSE Russell considered the existing low FX liquidity in the market, which hinders foreign investors' ability to repatriate their capital at a foreign exchange rate consistent with FTSE Russell equity indices. It is important to note that Nigeria will still be part of the FTSE ASE Pan African Index Series and will undergo monitoring on FTSE Russell's watch list. This monitoring period will precede Nigeria's potential readmission as an eligible FTSE Russell equity indices market.

On September 15th, the President of Nigeria nominated Dr. Olayemi Michael Cardoso to serve as Governor of the Central Bank of Nigeria(CBN), subject to the approval of the Nigerian Senate. Dr. Cardoso was MD at Citibank Nigeria and later became the Commissioner for Economic Planning and Budget for Lagos State.

Elsewhere, Nigeria's external reserves declined by 2.29% in Q3:2023 settling at USD33.24bn (the lowest level since July 2021), compared to USD34.02bn at the quarter's outset. This is primarily due to the ongoing challenges in the oil sector, insufficient foreign exchange revenue to bolster the reserve, and low capital inflows. For the first time on record, the Naira crossed NGN1000/USD1.00 in the parallel market in September as demand for the greenback surged amidst the crippling FX supply.

GLOBAL MACROECONOMIC REVIEW

According to the Bureau of Labor Statistics (BLS),consumer prices in the United States increased by 50bps to 3.7% y/y in August (July: 3.2% y/y). The increase was primarily due to the slower decline in gasoline prices and relatively unfavorable base effects from the prior year. Notably, the decline in energy prices (-3.6% y/y vs July: -12.5% y/y) was much lower than the previous month as fuel and gasoline prices declined at a smaller pace relative to the prior year. On a month-on-month basis, the headline inflation rose by 0.6% in August (July: 0.2% m/m), driven by the spike in gasoline (10.6%m/m vs July: 0.2% m/m) and fuel oil (9.1% m/m vs July: 3.0% m/m) costs. High oil prices pose upside risks to consumer price pressures in the short term.

Turning our attention to the Fed, the Federal Open Market Committee (FOMC) at the recently concluded September policy meeting voted to keep the target range for the federal funds rate steady at 5.25% -5.50%. Notably, the Committee stated that recent indicators suggest that economic activity has expanded steadily. At the same time, inflation remains elevated, job gains have slowed in recent months but remain strong, and the unemployment rate has remained low. However, the financial markets are still pricing a high chance that the Fed will keep interest rates unchanged over the rest of the year. Specifically, the US Fed's “dot plot” showed that the FOMC is still committed to one more rate hike either at the November or December policy meeting, followed by two rate cuts in 2024.

FINANCIALMARKET REVIEW

During the Quarter, various reforms around the domestic macro-economic landscape and developments from the monetary authority contributed to the positive market direction.

The Nigerian Stock Exchange (NGX) All-Share Index appreciated by 29.52% to close at 66,382.14 index points in the third quarter of 2023. This development pushed the market to its 15-year high on the back of strong positive sentiments. The recent rally is attributed to a number of the policy reforms of the new administration of President Bola Tinubu, including the harmonization of different exchange rates, and the floating of the naira.

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In Q3-2023, the Nigerian local bond market experienced a dynamic narrative marked by a blend of sentiments and changing yields. Initially, bears had control in July and August, leading to a downward trend following the MPC's choice to raise the monetary policy rate by 25 basis points to 18.75%. Yields moved in a northward direction during this period, impacting investors strategies. As the quarter drew to a close, a mild bullish under current emerged, a picture of resilience. Investors’ demand tilted toward shorter-term maturities, bringing a subtle shift in sentiments.

Q3-2023 INVESTMENTRETURNS AND ASSET ALLOCATION

Despite the activities seen in fixed income and the domestic equity markets during the third quarter of 2023, our RSA portfolios achieved favorable results throughout the period.

From the table below, Fund I recorded the highest return of 33.36% ytd followed by Fund VI at 26.26%. These returns compared favorably with peers in the industry. Both Funds I and VI are elective Funds. Members must first complete the transfer form to be moved into them. The performance of the Funds reflects the level of investment in variable income securities. Accordingly, Funds with high exposure to Equities took advantage of the recent rallies to appreciate significantly.