Stephen Osho is a Co-Managing Partner at Comercio Partners Limited, an investment banking firm. As a member of the company’s executive management team, Osho oversees the Advisory and Investment Banking arm of the Comercio Partners group
In this interview with Babajide Komolafe, Economy Editor at Vanguard Newspaper, Osho highlights major developments in the global and local economy in the first half of the year, with projections for the second half of the year, with the caveat of the likely consequences of the intended reclassification of the MSCI Nigeria Indexes and the implications dangers of the excessive election campaign for the economy, while advising investors to keep cash or play on the short end of the curve. Excerpts:
Rising inflation and increased government borrowing were prominent features in H1’22. How did these two factors influence the fixed income and equity markets?
High inflation and elevated government borrowing are twin forces that typically nudge both local equities and fixed income markets into a bearish region.
This year, inflation has climbed to a 5-year high in June, while the government has set out to fund its revised budget deficit of N7.35 trillion. However, the equity market was able to shrug off these negative drivers in the first half of 2022, on the back of impressive Full year 2021 and Q1 2022 financial results and interesting corporate actions. Hence, the local bourse posted a gain of 21.31% in the first half of the year, relying on the performance of underlying sectors like Oil and Gas (58.06% uptick in H1 2022), Industrial (7.17% uptick in H1 2022), and Consumer Goods (5.89% uptick in H1 2022).
For the local fixed income market, the impact of elevated inflation and high government borrowing has been hushed this year. The government has become increasingly reliant on the CBN Ways and Means Advances, with the borrowings from the CBN totalling N19.01 trillion in June 2022 from N17.46 trillion in December 2021. Hence, local bond sales for the first half of 2022 stood at N1.84 trillion, reflecting a growth of 29.58% when compared to the sales in the corresponding period of 2021, but relatively low when compared to the hefty budget deficit. Also, the Pension Fund Administrators (PFAs) have bolstered demand at the bond auctions, as the total asset under management (AUM) rose to a record N14.19 trillion in May 2022, with investments in government securities accounting for 62.10%.
This implies that the growing AUM of the PFAs has slightly improved the liquidity in the fixed income market this year. Also, the selling pressure that typically succeeds a hike in the benchmark interest rate has been limited, as the PFAs, which hold roughly 63.00% of the bond market value, have about 60.00% categorized as “Hold to Maturity” (HTM).
Conclusively, inflation and increased government borrowing have not had a significant impact on both local equities and fixed income markets this year, as several other drivers have partly insulated the financial market from such local headwinds.
Citing low liquidity in the Nigerian foreign exchange market, the MSCI recently indicated its intention to reclassify the MSCI Nigeria Indexes from Frontier Markets to Standalone Markets status. What does it portend for the economy and for investors?
The contemplated reclassification of MSCI Nigeria Indexes is a warning alarm to foreign investors, as the situation in the FX market has deteriorated to the point where foreign investment appetite should understandably weaken. Due to Nigeria’s abysmal oil production level and slowing foreign inflows, the supply of foreign exchange has been tight this year, with the World Bank estimating the FX backlog at US$1.7 billion, while the Investors and Exporters’ net flows stood at just $273 million from January 2022 to June 2022.
Should the MSCI go ahead in downgrading Nigeria’s frontier status on or before the set deadline of August 31, 2022, the impact on the local bourse would likely be limited, as foreign investors have been the net sellers for over a year, hence, have a limited presence in the equity market. The last NGX Domestic and Foreign Portfolio Investment Report for May 2022 revealed that foreign transactions accounted for just 7.46% of total transactions in the review month, and the foreign quotient used to be well above 60.00% in 2019. However, there are long-term consequences of the MSCI reclassification, as the absence of a near to mid-term solution to Nigeria’s FX problems could translate to a sustained apathy of foreign capital.
As an investment banking group, what were the major challenges for Comercio Partners in H1’22 and how did you navigate these challenges to deliver value for your stakeholders?
As with many other investment organizations, the turbulent market posed a key challenge, particularly, with dollar-based assets like Eurobond and U.S. equities plummeting significantly. However, local equities were low-hanging fruits in the first half of the year, as the local bourse remained in the top five best-performing markets globally for a significant part of the review period.
Particularly, names in the telecommunication, industrial and agricultural sectors offered decent returns. Also, the aggressive selloffs in the Eurobond market created attractive long-term entry opportunities for the business, as yields on specific Eurobond sovereigns offered dollar returns that match and exceed the yields on corresponding maturities in the local bond market.
Basically, we maintained a nimble approach this year, leveraging in-depth research to garner unfolding insights into the economy and market, which has in turn informed our strategy and kept us ahead of the curve, irrespective of the headwinds and uncertainties.
We have also kept to the catchphrase of “following the money and making cash kings.” In a time of extreme volatility, it is preferable and smart to keep cash and play a lot on the short end of the curve.
What is your outlook for the economy, financial markets in H2’22 and your advice to investors in terms of opportunities and challenges in H2’22?
In the global space, there is a growing probability of a recession over the next two years, as drastic policy efforts to tame inflation could significantly squeeze the economy. Also, the unabating conflict in Eastern Europe remains a major caveat for the global economy in H2 2022, as the sustained progression or escalation of the war could further dampen global growth prospects for the rest of the year. Meanwhile, policymakers should continue to prioritize efforts aimed at lowering inflation, leaving the global financial market susceptible to a prolonged bearish dominance.
Back at home, we maintain a positive outlook for GDP growth, as Service-related sectors like Information and Communication, and Finance and Insurance should continue to buoy overall growth, However, we recognize the limiting impact of the spiralling inflation trend, as this could increase the cost margins of businesses at large. For the oil space, there appear to be no major tailwinds, as sectoral ills pertaining to security concerns and debilitated infrastructure remain unaddressed. Hence, Nigeria’s low crude oil output would limit the expected positive impact of soaring prices in the international oil market.
In addition, the upside risks to the trend of inflation in the coming months remain predominant, as tensions in Eastern Europe continue to run amok, while the local economy stays structurally susceptible to such headwinds. Regarding the foreign exchange market, the impact of the Russian-Ukraine conflict on energy and agricultural commodities should mount pressure on the import bill, while the hawkish policy posture of developed nations, ravaging insecurity, and election fears should act as deterrents to foreign capital inflows. Also, Nigeria’s low oil output level significantly undermines the economy’s ability to leverage the elevated price of crude oil to improve FX earnings. Putting all these together, the local currency is likely to weaken further this year, with the possibility of the parallel market exchange rate falling past N650/$ by year-end.
For the financial market, a progression of the contractionary policy efforts by the monetary authorities could force yields to trend upwards, albeit aggressive, as PFAs’ long-term investment approach denies the market adequate liquidity to sell significantly.
Elsewhere, local equities are expected to be largely steered to earnings releases and corporate actions, as investors shrug off the worries concerning Nigeria’s deteriorating macroeconomic framework to focus on stocks with impressive fundamentals and positive catalysts. However, elevated fixed income yields could partly stifle the stock market performance, as activities on the local bourse are largely dominated by institutions that would typically turn to fixed income instruments when presented with attractive yields.
On a broader stage, the electioneering campaign activities towards the next year’s general elections will go into full swing in the second half of this year and could play a huge impact on the currency and inflation that have already been battered. It is no less fact that the Nigerian economy is in a precarious state and cannot afford the ‘typical’ excessive electioneering campaign that would lead to serious economic shock which could suppress the last gasp of breath the nation needs for survival out of stagflation.
