Emmanuel Ochayi
Nigeria’s inflation rate is projected to surge by 83 basis points year-on-year to reach 27.54% in October, marking a 1.9% increase when compared to the previous month’s figure of 26.72%.
Analysts from Cordros Capital Research shed light on the factors contributing to this economic turmoil and the implications for the nation’s financial stability.
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Cordros Capital Research’s Perspective
According to Cordros Capital Research, October might see some moderation in food prices thanks to the harvest season, but they cautioned that the risks limiting food supplies are far from over.
The research firm attributed the previous month’s high prices to a combination of lingering currency pressures, removal of the PMS subsidy, and increased gas and diesel prices.
Non-food inflation remains under pressure, with a 56 basis points increase to 22.1% year-on-year. Cordros Capital Research expects an overall 1.9% month-on-month increase in headline inflation in October.
Naira Depreciation and Foreign Exchange Markets
Simultaneously, the Nigerian naira depreciated by 5.4% against the US dollar at the Nigerian Autonomous Foreign Exchange Market (NAFEM). The total turnover in the market decreased by 50.6% week to date, highlighting the increased economic uncertainty.
Experts noted that FX supply remains minimal at the official market, leading importers to seek foreign exchange in the parallel market.
“Consequently, barring any significant FX inflows or convincing action by policymakers to turn the tide, we expect the exchange rate pressures to linger in the short term,” Cordros Capital Research predicted.
Foreign Exchange Market Activity
FMDQ Foreign Exchange (FX) Spot and Derivatives turnover for the week ending October 20, 2023, dropped significantly, with a 37.1% decrease in total turnover.
The FX Derivatives market showed promise with a 1,221.9% increase in turnover, driven by FX forwards. However, there was no activity in the Exchange-Traded FX Futures and Cleared Naira-Settled Non-Deliverable Forwards markets.
Stock Market Fluctuations
On the Nigerian Exchange Limited (NGX), the equities sector experienced mixed performance. While the banking index saw a 3.5% gain, other sectors, including insurance, consumer goods, and industrial goods, witnessed losses.
Heavy trading in the shares of United Bank for Africa Plc, Fidelity Bank Plc, and Access Holdings Plc contributed to a total turnover of 1.5 billion shares worth N24.3 billion.
Investor Perspective
Analysts recommend that investors consider real estate-backed stocks, such as Julius Berger and UPDC Reits, as these stocks are expected to perform well following the Central Bank of Nigeria’s decision to grant access to previously banned items in the official FX window. The ongoing geopolitical tension and Q3 earnings season are expected to shape market performance in the coming days.
In light of these developments, experts suggest that investors and traders factor in the prevailing uncertainty when making trading and investment decisions, reiterating the need to focus on fundamentally justified stocks.
