The earning reporting season kicked off effectively on the NGX Exchange last Friday and is expected to extend to four or five weeks as the market reacts to surprises and disappointments that come with every earnings season. Over the next weeks, most major companies will provide the market with updates on profits that offer an outlook for the rest of the year.
At the conference calls for the period, CEOs will comment on the state of their operations, and what is of particular interest to traders- the general economic environment.
Stock trading and investing depends on the underlying economic situation, even as company performances remain the main drivers of fund flows between different stocks as they buy for future earnings and payout. The persistent forex market problem is affecting investments and repatriation of profits especially by foreign investors.
The responses by the government and the central bank to economic conditions faced by businesses and investors, which also impact their investment decisions at any time. It is time for the monetary and fiscal authorities to shake hands and address this issue and save the economy from a looming recession.
Many companies on the NGX Exchange have notified the market of their board meetings and closed period. But the continued rate hike by CBN and the rise in inflation rates to a 17-year high is currently threatening investors and the general economy. Today, foreign exchange market is one of the factors driving stock prices on the NGX lower. Among the reasons cited are “currency headwinds”. That is, the Nigerian naira has been weakened over the years and months, and profits generated offshore are worth more in naira terms.
The CBN policy of pushing rates higher to fight inflation has affected the purchasing power of the people, making it difficult for some company’s products to leave the shelf, on the other hand, are seeing increased profits thanks to essential goods and backward integration. As long as the economic uncertainty persists, this is likely to affect the company’s performance. But, with the devaluation pressure that is building on the naira that could be released at any moment soon when the CBN’s policy starts to reset interest rates.
Traditionally, companies compare current earnings to the same period in the prior year. This helps avoid seasonality effects. However, last year was the middle of the Delta COVID wave, which would likely distort the “comparable” earnings. “Sequential” earnings are the difference between the current quarter and the previous one, which could take priority. Given the unusual situation, companies can be reporting knock-out comparable earnings, but disappointing sequential ones. Particularly travel and leisure stocks, given the shutdown of air travel last year.
Businesses in Nigeria are facing an increasingly challenging environment because of the spike in energy prices, which peaked at record highs over the last six months. However, since then, energy prices have cratered, but still well above pre- Ukraine war and pre-pandemic levels, but slightly lower from its peak. Therefore, the reports for manufacturing companies could be negative or mixed, to represent the current (or future) situation. This could lead to further “paradoxical” behaviour in the market, as traders’ price in the effects of energy prices into earnings.
With monetary policy focusing on inflation, consumers and investors behaviour are likely to have the biggest impact on company’s earnings performance. Big consumer goods like Unilever with the numbers release for Q3 should give some critical insights into consumer behavior. Companies that are able to pass on the higher operating costs to consumers implies inflation can continue. With companies starting to see margin compression and consumers refuse higher prices, it could mean that inflation is near its peak due to demand destruction.
Speaking of demand destruction, contraction concerns can be read into earnings reports, particularly with regard to the item of inventories. If companies are seeing their stock build up, they will be less likely to buy replacements. That in turn means inventory building up in other companies, who will buy less raw materials. In general, it implies slowing economic activity, and could be the precursor to layoffs. Company comments on inventories could be market moving this season.
Nigerian Headline CPI
The National Bureau of Statistics (NBS), last week released the Consumer Price Index (CPI) which measures inflation rate in the Country for the month of September 2022. According to the CPI data, the Nigerian Headline Inflation witnessed an upward pressure in September as it rose by 20.77% year-on-year (y/y), representing 25bps higher than 20.52% reported in August. Markedly, this is the seventh consecutive months of upward pressure on the headline inflation number. On a month-on-month (m/m) basis, the inflation index moderated by 1.36% in the period under review, representing 41bps lower than 1.77% reported in August. Notably, over the past two months there has been downward pressure on the m/m headline inflation which is attributable to the reduced pressure in the food index due to ongoing harvest season.
Further analysis of the CPI by its classifications showed that Food sub-index recorded modest upward pressure as it moved to 23.34%y/y, adding 22bps against August’s figure. According to the NBS, the upward pressure on the y/y food index in the period fed from sustained pressures on the prices of bread & cereals; meat & fish; oil and fat; potatoes, yam, & other tubers. However, on a m/m basis, the food inflation rate was lower by 1.43% compared to 1.98% in the prior month. For the Core sub-index, upward pressure increased further by 40bps to 17.60%, compared with previous month’s record. However, on m/m basis, price pressure remained unchanged by 1.59%, same reported in August. Markedly, the key drivers of the core inflation rate here were pressures in the prices of gas & liquid fuels, passengers transport by air, passenger travel by road, and solid fuel. Primarily, the core inflation index has continued to be driven by persistent exchange rate pressures, higher energy costs, and supply chain bottlenecks.
Inflation Outlook for October 2022
Notwithstanding the ongoing harvest season, which appeared to have lessened the steep upward pressure in the y/y inflation reading, we expect this trend to become steeper in months ahead given the expected impact of the ongoing flooding across states (including states within the middle belt – that is, food basket region) as well as FX depreciation in the parallel market which impacts prices of imported products and select items within the core measure. As such, we anticipate a much higher headline inflation rate for October 2022.