Market | Global Market

The Markets in Review: The UK and Ghana Versus the Markets – Coronation Research

Oct 25, 2022   •   by Coronation Research   •   Source: Coronation   •   eye-icon 302 views

As the UK demonstrated last week, 2022 is not a good year to launch unorthodox tax policies. Ghana is facing its moment of truth, too. Doubtless there will be excellent investment opportunities as the dust settles: but for the now the lesson is to tread carefully in the bond markets


Tread Carefully in the Bond Markets

There is nothing like a global crisis to underline the links between politics and the markets. The global crisis began in earnest with the rise in US inflation, tensions between China and Taiwan and with Russia's invasion of Ukraine. The resultant effect of monetary policy tightening across central banks, particularly in advanced economies, has been a spike in the yields of African sovereign Eurobonds. This is evident in FGN Eurobond yields. The FGN 2027 Eurobond yield is currently 15.67% vs 6.52% at the beginning of the year.




Given its fiscal landscape, this is a challenging period for Ghana. Ghana has been a popular issuer in the Eurobond market, making successful issues in early 2020. However, this year, a combination of a significant government budget deficit and a high level of domestic government debt prompted a visit from the International Monetary Fund (IMF) and a proposal to restructure government obligations, quite possibly including Ghana's sovereign Eurobonds. The yield on Ghana's March 2027 Eurobond is currently 44.33% compared with 10.94% recorded at the beginning of the year. Its currency, the Cedi, has depreciated from C6.18/US$1 to C12.93/US$1 overthe same period. 


Yet one does not have to trade African markets to get a taste of downside risk. The United Kingdom is providing plenty of it. With UK inflation at a 40-year high, the Chancellor of the Exchequer thought that September would be a good time to announce GBP54 billion of unfunded tax cuts, the biggest tax cuts in 50 years. The yield on UK government 10-year bonds rose from 3.50% on the day of his announcement, 23 September, to 4.14% on 29 September, prompting the Bank of England (BOE) to intervene and support the market. Meanwhile, the BOE had only recently announced its intention to stop buying government bonds, so this was a complete policy reversal. 


The Chancellor, Kwasi Kwarteng, was then sacked by the Prime Minister, Liz Truss, who herself resigned last Thursday, 20 October, after just 44 days in office, the post's shortest-ever tenure. By the time of her departure a new Chancellor, Jeremy Hunt, had taken office and reversed almost all his predecessor's tax changes. Now the United Kingdom's 10-year sovereign bond yield, at 3.74%, is 140 basis points higher than that of Germany. 


One lesson is that 2022 is not a year for policy experiments: but that much is obvious. The deeper lesson is that governments and policy makers need to be nimble, and to stay close to multilateral institutions like the IMF, as well as be responsive to markets. As a predecessor of Liz Truss once remarked, "You can't buck the market."



Last week, the exchange rate at the Investors and Exporters Window (I&E Window) lost 0.07% w/w to close at N441.67/US$1. Elsewhere, the foreign exchange (FX) reserves of the Central Bank of Nigeria (CBN) decreased by 0.53% to US$37.68bn, a five-week low, as the CBN continues interventions across the different FX windows. The FX reserve position remains close to its historic high and we believe that the current I&E Window rate, or something very close to it, can be maintained for at least several months


Bonds & T-bills

Last week, trading in the Federal Government of Nigeria (FGN) bond secondary market was bearish as the average benchmark yield for bonds rose 40bps to close at 14.15%. Across the curve, the yields on the 3-year (+36bps to 14.11%), 7-year (+44bps to 14.26%) and the 10-year (20bps to 14.31%) bonds expanded. At the FGN bond auction, the Debt Management Office (DMO) allotted a total of N107.88bn (US$244.25m), the lowest since December 2021. Demand was weak, as reflected by a total subscription of N119.18bn, the weakest since August 2019, and a bid-to-offer ratio of 0.53x (previously 1.10x). Consequently, yields across the April 2032 (+115bps to 15.00%) and April 2037 (+150bps to 16.00%) bonds expanded while the yield on the April 2029 bond settled at 14.50%. Our view remains that the combination of thin system liquidity and elevated Federal Government domestic borrowing will continue to drive yields upwards over the coming months. 


Activity in the Treasury Bill (T-Bill) secondary market was bearish across the curve as the average yield for T-bills rose by 298bps to 10.28%. Notably, the yield on the 328-day T-bill expanded by 642bps to close at 15.42%. At the T-bill primary auction, the Debt Management Office is expected to offer N240.26bn worth of maturing bills. Elsewhere, the average yield for secondary market OMO bills fell by 2bps to 10.25%, while the yield on the 193-day OMO bill fell by 3bps to 11.03%.



Last week, the price of Brent rebounded, gaining 2.04% to settle at US$93.50/bbl. As a result, Brent is up 20.21% year-to-date and has traded at an average of US$101.84/bbl, 43.66% higherthan the average of US$70.89/bbl in 2021. 


Oil prices ended the week positive as news of easing COVID-19 restrictive measures in China offset US President Biden’s announcement of a 15-million-barrel release from the US’s strategic reserves. In addition, the month-on-month decline in the Organization of the Petroleum Exporting Countries and its allies (OPEC+) crude flows for October highlighted tight supply.


 Our view is that prospects of further OPEC+ production cuts and a price cap on Russian crude pose upside risks for oil prices for the rest of the year. Hence, we maintain that prices are likely to remain well above the US$73.00/bbl set in Nigeria’s government budget



Last week, the NGX All-Share Index lost 6.67% to settle at 44,396.73 points. Consequently, its year-to-date return fell to 3.93%. Airtel Africa (-27.10%), MRS (-9.76%) and Nigerian Breweries (-9.58%) closed negative while Fidelity Bank (+10.14%), BUA Cement (+9.73%) and PZ Cussons (+9.52%) closed positive. Performances across the NGX sub-indices were broadly negative as the NGX-30 (-5.68%) led the decline, followed by NGX Insurance (-3.72%), NGX Oil and Gas (-1.45%) and NGX Consumer Goods (- 0.88%) while the NGX Industrial Goods (+3.22%), NGX Banking (+1.15%), and NGX Pension (+0.58%) closed higher.


Model Equity Portfolio

Last week the Model Equity Portfolio fell by 5.74% compared with a fall in the NGX All-Share Index of 6.67%, outperforming it by 93ps. It has gained 8.99% year-to-date compared with a gain in the NGX-ASI of 3.93%, outperforming it by 505bps. 


It was quite a week. Airtel Africa fell by 27.1% and, as it accounted for roughly one quarter of the NGX All-Share Index by weight, took the index with it. We had spent the previous six weeks painstakingly reducing our notional position in it to three percentage points beneath its index weight (as we forewarned in several editions of the Nigeria Weekly Update) but, really, we wish we had made a zero position out of it. Note, however, that it has contributed 747bps year-to-date, so we could not have avoided it all year.



Last week, and as advised earlier, we made small notional sales in Dangote Cement in order to bring the notional position in it to three percentage points below its index weight. 


As we have observed many times over the past few months, rising Naira market interest rates have set the stage for investors to rotate out of equities and into fixed income securities, and therefore point to a correction in the equity market. We thought the correction would come, and we raised the notional cash position in the Model Equity Portfolio from 7.9% at the end of August to 26.7% currently. 


The correction has come, later than we thought but more violently than we thought. We will reassess our portfolio in the light of index weights (which have changed a lot due to Airtel Africa's correction). We plan no changes to the Model Equity Portfolio this week and will report back next week.


Related items.

Get the App

apple-store  play-store

Connect with us

Proshare is a professional practice focused on delivering research and information services to bridge the gap between investors and markets; by delivery on credible, reliable, and timely engagements through the following areas — Impact Research, Market Intelligence, Strategic Advisory, Stakeholder Relations & Digital Media.