August 2, 2021/United Capital Report

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Macro Overview 

The Monetary Policy Committee (MPC) held its fourth meeting of the year in the prior week. The committee unanimously agreed to hold all policy parameters constant, keeping the Monetary Policy Rate (MPR) at 11.5%, the asymmetric corridor at +100bps/-700bps, the Cash Reserve Ratio (CRR) at 27.5%, and the Liquidity Ratio (LR) at 30.0%.

At the meeting, the Central Bank of Nigeria (CBN) Governor announced that the apex bank will discontinue the sale of foreign exchange (FX) to Bureau De Change (BDCs) operators in the country and stop issuance of BDC licenses. According to his press statement, the decision was taken due to BDC operators breaching the terms of their establishment as well as causing instability in the FX market.

The National Bureau of Statistics (NBS) released the capital importation data for Q2-2021. According to the report, the total value of capital importation into Nigeria declined to $875.6m in Q2-2021 from $1.9bn in Q1-2021. This represented a decrease of 54.1% q/q compared to Q1-2021 and 32.4% y/y decrease compared to Q2-2020.

The U.S. government announced that it will ship 4.0 million doses of the Moderna Covid-19 vaccines to Nigeria to battle the third wave of infections. This comes amid growing concerns about vaccination rates in Africa, which lag far behind those of advanced economies.

The Federal Government announced that it has distributed 300,000 hybrid cocoa seedlings to farmers in the four geo-political zone where cocoa is produced through the Ministry for Agriculture and Rural Development. Other agricultural inputs were distributed to the farmers in a bid to develop the agricultural sector, increase production and encourage farming.
 
We expect the macroeconomic space to remain quiet during the week in the face of sparse expected macroeconomic data or policy statements.
           
Global Economy: Slower than expected growth, Delta variant, weigh on investor sentiment 
Over the past week, signs emerged that global growth may have peaked. According to data from the Bureau of Economic Analysis (BEA), US real gross domestic product (real GDP) increased by 12.2% y/y in Q2-2021, which represents an annualised growth rate of 6.5%. Notably, the report disappointed market participants, as growth during the quarter was slower than the consensus annualised expectation of 8.4%. Nevertheless, the figure reflects continued economic recovery, improved business activity, and sustained progress against the Covid-19 pandemic. However, surging cases and the delta variant complicates the outlook. 

Also, earnings from big-tech companies trickled in during the week. Amazon, Apple, Microsoft and Facebook all recorded strong growth for the quarter. However, missed estimates, as well as weaker guidance for Q3-2021 earnings led to selloffs on the technology names as it further fueled the narrative of slowing growth. Additionally, the Federal Reserve concluded its two-day policy meeting, maintaining status-quo and reiterating that tightening is still a long way ahead. All in, the US market closed the week bearish as the DJIA and S&P 500 both shed 0.4% w/w, while the NASDAQ composite declined by 1.1% w/w.

The Euro-area economy rebounded in Q2-2021, rising 13.7% y/y (2.0% q/q), with the strongest recoveries recorded in Italy and Spain, while Germany underperformed, according to Eurostat. Inflation numbers from Eurostat also showed that euro-zone inflation rose by 2.2% y/y in Jul-2021 (against 1.9% y/y in Jun-2021). Elsewhere, China recorded Q2-2021 GDP growth of 7.9% y/y, substantially slower than the 18.3% recorded in Q1-2021. Meanwhile, the Chinese government intensified its regulatory crackdown on businesses in China, sparking steep selloffs on Chinese equities. Concurrently, while the Pan-European STOXX 600 closed the week flat, the Shanghai Composite index crashed 4.3% w/w.

In the oil market, Brent crude rallied back to above-$75.00/b levels, closing the week at $76.33/b, as the American Petroleum Institute (API) reported that crude stockpiles declined 6.2m barrels last week, indicating resilient demand.
 
Looking forward, we expect positive sentiment for equities to persist, but softer than in H1-2021, as tailwinds such as accommodative policies and economic growth diminish in potency, particularly given risks to rapid recovery such as repeated Covid-19 waves. We remain optimistic about recovery in advanced economies and their capacity to keep the virus at bay.
 
Domestic Equities: Local bourse turns bearish…ASI down by 0.3% w/w
This week, a mixture of profit-taking and reaction to earnings scorecard released this week shaped market activities. All in, the local bourse ended the week on a bearish note, as the ASI lost 0.3% w/w reversing gains from the previous week. The ASI closed at 38,547.1 points as YTD loss worsened to 4.3%, and market capitalisation fell by 31bps w/w to settle at N20.1tn. Activity level was mixed as average volume traded fell by 6.9% w/w to 274.8m units and average value traded increased by 36.3% to N2.4bn.

In line with broad market performance, sectorial performance was mainly bearish as three of the five core sectors we cover closed in red. The Industrial Goods index (-1.3% w/w) led the laggards, as selloffs in BUACEMENT (-4.2% w/w) and CUTIX (-0.4% w/w) weighed on the index. Similarly, the Insurance (-1.1% w/w) and Banking indices (0.9% w/w) trailed due to losses in LINKASSURE (-14.3% w/w), REGALINS (-12.5% w/w), GTCO (-3.7% w/w) and UBA (-2.6% w/w). On other hand, the Oil and Gas sector led the gainers (+3.8% w/w) on the back of buying interest in OANDO (+23.2% w/w) and ARDOVA (+2.5% w/w). Lastly, the Consumer Goods index (+0.1% w/w) gained due to price appreciation in CHAMPION (+9.8% w/w) and DANGSUGAR (+4.8% w/w).

Investor sentiment, as measured by the ratio of advancers to decliners, weakened this week to 1.1x, from 2.7x the prior week, as 37 stocks appreciated, and 35 stocks depreciated.

This week, we expect investors to react to the late flurry of results that came into the market last week. That said, we expect to see a tight trading week as investors continue to take profits of the table while others consider decent entry prices into large cap banking stocks yet to publish their H2-2021 scorecards.

Money market review: Bullish week for NT-bills
The money market opened the week with increased liquidity on the back of matured OMO bills and bond coupon payments, even as trading activities in NT-bills remained muted in anticipation of the week’s primary market auction. Additional FAAC inflows worth c.N51.0bn also arrived towards the close of the week, improving system liquidity position. Consequently, interbank rates slumped as Open Buy Back (OBB) and Overnight (OVN) rates closed lower by 20.00% and 21.00%, respectively, to 7.50% and 7.75%. 

The CBN stuck to its guns during the NTB auction, as it sold N265.8bn, N49.6bn more than the volume on offer (N216.2bn). The 91-day and 182-day bills remained steady for the sixth consecutive auction, with stop rates at 2.50% and 3.50%, respectively. The sole change was on the 364-day, which dropped 47bps from the previous auction, printing at 8.20%.

At the secondary market, while the market opened on a muted note, activity level ramped up towards the end of the week as unlucky bidders at the PMA sought to fill unmet. Consequently, the higher demand drove average yield on NT-bills lower by 100bps w/w to 5.90% from 6.90% at the close of the previous week.
 
This week, we expect sustained interest in the secondary market in the absence of primary market auctions. That said, we expect pressure on system liquidity due to absence of significant maturities in August, this could drive interbank rates higher, creating possibility for higher fixed deposit rates.
 
Bond Market update- Mixed performance at the bond market
Last week, the secondary bonds market remained quiet as the average yield on sovereign bonds declined marginally by 2bps to 12.1%. However, at the corporate bonds segment, decent bullish sentiments dominated the market as the average yield fell 24bps w/w to close at 12.8%.

In the Sovereign Eurobond market, sentiment was fairly flat with a bearish bias as average yield closed higher by 4bps w/w to 5.7%. Similarly, average yield closed marginally higher at the Corporate Eurobond market, up 6bps w/w to close at 3.3%.   

In the coming week, we expect proceedings in the bond market to remain tight. Although we expect to see some buy interest in the market following declining marginal rates at recent PMAs. For Eurobonds, we expect yields to remain stable if oil prices do not falter, and US yields retain a downward bias.
 
Currency Market: Naira appreciates at the I&E window
Last week, the naira appreciated at the I&E window, up by 1bp w/w to close at N411.44/$1, as against last week’s close of N411.50/$1. On the other hand, at the parallel market, naira depreciated to N517/$1, as against N504/$1 recorded the previous week. The depreciation in the naira at the parallel market was largely a knee-jerk reaction to the decision of the Central Bank to stop sale of FX to BDC operators. However, we note it is important to highlight that at the parallel market, panic trailing the CBN’s decision has simmered as exchange rate trended lower to N517.0/$, from a peak of N525.0/$.

In terms of activity level at the I&E window, average turnover at the window grew 7.8% w/w to print at $158.6m, compared to $147.1m in the prior week. Lastly, external reserves gained by 46bps w/w to close at $33.4bn in the previous week.
 
In the coming, we expect the kneejerk reactions that trailed the CBN’s decision to continue to simmer as FX buyers take to the reality of improved FX liquidity via official channels.

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