July 5, 2021/United Capital Report

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Macro overview

The Senate has passed the Petroleum Industry Bill (PIB) through its third reading amidst severe opposition to some of its provisions. Noteworthy extracts from the bill include the Senates decision to reverse its decision to repeal the Petroleum Equalization Fund Act (PEF) in the latest draft version. The primary function is to ensure price uniformity of petroleum products via the reimbursement of marketers for losses they incur in trucking products from depots to their filling stations anywhere in Nigeria. Other noteworthy takes include the move that will see the NNPC transfer 30% of its profits to the Frontier Exploration Fund escrow account dedicated to developing frontier acreages only.

Also, in the past week, the NBS released domestic debt data for Q1-2021. The report showed that Nigerian States and Federal Debt Stock data as of 31st March 2021 reflected that Nigeria’s total public debt portfolio stood at N33.1trn. Further disaggregation of Nigeria’s total public debt showed that N12.47trn or 37.67% of the debt was external while N20.64trn or 62.33% was domestic.

Lastly, the Nigerian Exchange Limited (NGX)  disclosed that it has the Securities and Exchange Commission (SEC) approval for seven derivative contracts. The approved contracts are Access Bank Plc Stock Futures, Dangote Cement Plc Stock Futures, Guaranty Trust Bank Plc Stock Futures, MTN Nigeria Communications Plc Stock Futures, Zenith Bank Plc Stock Futures, NGX 30 Index Futures, and NGX Pension Index Futures. The NGX is inching closer to launch West Africa’s first Exchange Traded Derivatives supported by NG Clearing in the risk management process with these approvals.

We expect the macroeconomic space to remain quiet during the week.  

Global Market: Global markets mixed as Covid-19 fears re-emerge

Global markets were mixed last week. In the US, positive economic data spurred bullish sentiments. The US Labor Department recorded an addition of 850,000 nonfarm jobs. Also, weekly jobless claims fell to 364,000, the lowest since the onset of the pandemic. For the week, the Dow Jones, S&P 500 and NASDAQ climbed 1.0% w/w, 1.6% w/w and 1.9% w/w, respectively.

European stocks recorded dips during the week, mainly due to fears emanating from the increasing spread of the highly infectious “Delta” variant of Covid-19. The number of new cases in Europe saw a surge for the first time in 10 weeks. The Pan-European STOXX 600 index and the UK’s FTSE 100 index each fell 0.2% w/w.

In China, equities slumped on the back of liquidity management activities by the People’s Bank of China. The Shanghai Composite Index lost 2.5% w/w. In the oil market, crude oil posted another weekly gain (sixth-consecutive) as the OPEC+ meeting to deliberate supply stalled due to opposition by the UAE. Brent crude gained 1.5% to $76.17/bbl.

Looking ahead, the markets will be closely watching the response to rising cases of the highly infectious “Delta” variant. However, the high vaccination rate in advanced economies continues to support our bullish outlook for global markets. 

Domestic Equities: Local bourse rebounds; ASI up +1.5% w/w

The local bourse rebounded this week, posting a weekly gain of 1.5%. The All Share Index closed at 38,212.01 points as YTD loss eased to 5.1%, and market capitalisation settled at N19.9tn. In terms of activity, average volume and value traded increased by 0.2% and 36.8%, respectively, to 209.2m shares and N2.0bn.

Assessing the performance by sectors, 4 of 5 indices we cover closed in the green. Leading the gainers was the Consumer Goods Index (+5.1% w/w), driven by gains in NESTLE (+10.0% w/w) and NASCON (+9.8% w/w). The Industrial Goods (+2.1% w/w), Insurance (+2.0% w/w) and Banking (+1.3%) indices also posted gains, led by DANGCEM (+4.0% w/w), LINKASSURE (+30.8% w/w) and WEMABANK (+23.3% w/w). The Oil and Gas index (-1.0%) was the sole laggard, owing to selloffs in CONOIL (-4.3% w/w).

Investor sentiment, as measured by the ratio of advancers to decliners, strengthened this week to 1.8x 43 equities appreciated, and 26 equities depreciated.

This week, we expect some profit-taking on stocks that rallied in the week. However, we believe half-year earnings will dictate investor sentiments on the bourse.  

Money market review: Rates reversal trend sustained  

System liquidity in the past week loosened in the absence of any CBN mop-up activity. Also, in the last week, the CBN held an NTB auction rolling over N81.7bn across three tenors. System liquidity closed lower, as OBB and O/N rates fell to 12.0% and 12.5%, from 18.8% to 19.2%, a 6.8% and 6.3% decline from the previous week.

At the NTB auction, the Central Bank of Nigeria offered N81.7bn worth of treasury bills to the market. Investor appetite for government paper remained tilted towards the longer end of the curve as the 364-day paper closed was oversubscribed by 2.8X.  The 91-day and 182-day bills posted subscription rates of 0.8x and 0.2x. Stop rates for the 91-day, and 182-day bills remained unchanged at 2.5%, 3.5%, respectively. However, rates on the longer tenor paper dipped further by 25bps to close at 9.15%.

In the secondary NTB market, the average yield on NTB closed flat at 6.6%, In the OMO market. The average yield closed also remained flat at 9.9%.

In the coming week, we expect the money markets to trade in a tight range, however considering the absence of any maturities, we expect to see some investor interest in money market instruments.   

Bond market review- Buying interest across the yield curve

Investor sentiment in the bonds market was tilted towards the bulls, as the average yield across the curve fell by 25bps to close at 11.6%. In the sovereign Eurobond market, market proceedings were tight as the average yield on Sovereign Eurobonds rose by 2bps to close at 5.8% w/w. We noticed strong buy interest in the corporate Eurobond market as yields fell by 90bps to close at 3.2%. We reiterate that the Eurobond market will remain supported by firm oil prices and recent news of declining yields in the US market. We expect the bonds market to continue to trade in a tight in the coming week.

We expect the bonds market to continue to trade in a tight range as investors anticipate the direction yields will move, following increasing evidence of upward yield reversal plateauing. For Eurobonds, we expect yields to remain stable if oil prices do not falter, and US yields retain a downward bias. However, the risk of policy normalisation in developed markets is a concerning factor to watch out for in the mid to long term. 

Currency Market: Naira depreciates at I&E window

This week, At the I&E window, the Naira closed relatively flat at N411.5/$1, losing N0.25/$1 from last week’s close. Lastly, external reserves declined by 0.9% w/w to close at $33.3bn in the previous week. We expect improved dollar supply by the CBN will remain positive for the naira in the short to medium term at the parallel market.

We expect the naira to continue to trade in a stable range in the parallel market and I&E window until expected positive factors (Eurobond issuance & Multilateral borrowings inflow) crystalise.

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