Economic Overview
Since the unanticipated Russian-Ukraine war kicked off early last year, prices of major commodities have mostly trended north following the massive sanctions that were heaped against Russia. Amid the price pressures, global economies have recorded record-high inflation, sparking a hawkish stance by the systemically important central banks in a bid to tame rising prices.
Locally, the Central Bank of Nigeria (CBN) has been forced to mirror the global hawkish stance, given FX scarcity and the persistent rise in domestic inflation numbers. In the first meeting of the year, the Monetary Policy Committee (MPC) of the CBN, voted to raise the benchmark policy rate to 17.5% – the highest rate ever recorded in the country. Regardless, the recently released inflation data for January 2023 rose to 21.82% y/y, up from the 21.34% y/y growth reported in December 2022.
Moving away from inflation, the apex bank is also tasked with the role of managing the FX supply and Foreign Reserves of the country. Despite oil prices jumping to a record high amid the sanctioning of Russia, oil revenues have continued to dip, reflecting oil theft, pipeline vandalism, and oil divestments. Given the large dependence on crude oil for FX, the result has been weaker Foreign Portfolio Investments (FPI) and Foreign Direct Investments (FDI). It is worthy of note that Nigeria’s FX position has remained fragile since the 2020 pandemic, and despite the recovery in 2021, investors are still maintaining a risk-off sentiment toward the economy due to the indirect impacts of Russia’s sanctioning.
Outlook
As prices remain elevated due to the Russian-Ukraine crises, we expect the global central banks to continue with hawkish monetary policies to tame inflation. The impact of this would be more reflected in Eurobonds, Domestic bonds, Treasury bills, fixed deposits, and other fixed-term instruments. Nonetheless, we opine that investors do not need to wait for the market to bottom out as opportunities abound across all financial asset classes.
Locally, we anticipate that in the wake of the risk-off sentiments stemming from the incoming elections of 2023, monetary policy tightening and the high-yield environment, more investors are expected to switch from Equities to the Fixed income market. However, this leaves major upside potential for value investors with a medium-long-term investment horizon to purchase equities at low and undervalued prices. Notwithstanding, the high yield in the fixed-income market is an opportunity for investors to lock in higher predictable returns into the future.
Also, the inability of the CBN to adequately intervene in the official FX window would further widen the gap between the official and the parallel exchange rate market. Therefore, investors with FX liquidity objectives are encouraged to invest in FX-denominated assets such as investment-grade Eurobonds or Fixed term deposits. Despite the increased apathy and risk-off sentiments permeating the Equities market, there are pockets of opportunities to buy stocks at very low prices with good dividend yield potentials. However, it is recommended that equity purchases should be in only fundamentally justifiable stocks.
#EMBA28
