August 16, 2021/United Capital Research

Macro Overview

The Federation Account Allocation Committee (FAAC) has disclosed that it has shared the sum of N3.2tn to the three tiers of government in the first half of the year as against N3.5tn budgeted by the Medium-Term Expenditure Framework and Fiscal Strategy Paper. This resulted in an allocation shortfall of N329.6bn during the period. We suspect the underperformance in FAAC distributions was largely driven by shortfall in oil production as well as weak collection of independent revenues.
 
According to the National Bureau of Statistics (NBS), Company Income Tax (CIT) receipts totaled N864.7bn in H1-2021, a 23.9% y/y increase from H1-2020. Additionally, total Value-Added Tax receipts climbed above the N1.0trn mark in the first half of the year. This reflects increased tax collection amid revenue mobilisation challenges and high debt servicing costs. The higher CIT collection was supported by sustained recovery in business activities while increase in VAT collections was driven by a confluence of higher VAT rate and increased business transactions.
 
The Minister of Works and Housing announced plans to reintroduce toll collections on some selected dual carriageways across the country. The toll fees collected are expected to be used for maintenance as well as construction of new roads across the country. However, some stakeholders including the Manufacturers Association of Nigeria (MAN) and the Lagos Chamber of Commerce and Industry (LCCI) have warned against the misuse of the proposed funds to be generated from tolls on selected federal roads.
 
Heading into the new week, the National Bureau of Statistics (NBS) will be publishing inflation data for Jul-2021 as well as other associated commodity pricing data (food, transportation & energy). We expect the inflation data to show a sustained decline in inflation as we project headline inflation to print at 17.58%, representing a 17bps decline.
          
Global review: Mixed performance in the US markets as inflation rate rose on a yearly basis       
In the US, key events that dominated the macro scene includes the July inflation report as well as progress report on the Biden Infrastructure bill. On inflation numbers, pricing pressures continue to persist even as headline inflation steadied at 5.4% in Jul-2021, a 13-year high, while producer prices jumped by a record 7.8%.  On a positive note, inflation may be showing signs of decelerating as m/m inflation fell to o.5% in Jul-2021, from 0.9% in Jun-2021. In a similar vein, core inflation dropped by 667bps from 0.9% in Jun-2021 to 0.3% in Jul-2021. Also, the Senate approved the $1.2tn infrastructure bill with further authorization on additional $3.5tn budget spend.
 
Following the inflation numbers, investors’ sentiment was as expected tilted towards value stocks than growth stocks during the week. Consequently, the S&P 500 and Dow Jones Industrial Average (DJIA) closed at new record highs, gaining 0.7% w/w and 0.9% w/w, respectively. On the other hand, the NASDAQ, made up of tech-heavy growth stocks dropped 0.1% w/w.
 
In Europe, according to Eurostat, the Euro area recorded an international trade surplus of €18.1bn in Jun-2021, up by 24.6% y/y compared with Jun-2020. This sustained the flow of positive macroeconomic soundbites for the Euro area. As a result, the stock market closed the week on a positive note as the broad-based Euro Stoxx 600 gained 1.3% w/w. Similarly, the UK, French and German markets all closed the week higher, gaining 1.3%, 1.2% and 1.4% respectively.
 
Likewise, Asian stocks closed the week bullish despite concerning signs about the spread of Covid-19 delta variant causing partial lockdowns in countries like China. The Shanghai Composite and Nikkei closed in the green, gaining 1.7% w/w and 0.6% w/w respectively.
 
In the oil market, Brent crude futures dipped by 8bps w/w to close at $71.2/b, following comments from Biden asking OPEC+ to consider raising crude supply. On the bright side, the American Petroleum Institute (API) reported that crude stockpiles dropped by 0.5m barrels last week.
 
Looking forward, we expect continuous positive sentiments as the global economy continues its road to full recovery and positive economic growth. We remain optimistic about economic recovery in the advanced countries and their ability to keep the Covid-19 delta variant at bay, given the steady availability of vaccines in the country.
 
Domestic Equities: Bullish sentiment persists…ASI up 1.9% w/w
Last week, the domestic equities market benefitted from bargain hunting activities on Telecoms, Banking, and Oil & Gas stocks as investors continue to ride the momentum of positive H1-2021 numbers as well as declining fixed income yields. As a result, the local bourse ended the week on a bullish note, posting a weekly gain of 1.9%. The All-Share Index closed at 38,522.3 points while YTD loss moderated to -1.8%, and market capitalisation gained N370.8bn w/w to settle at N20.6tn. Activity level improved last week as average volume and value traded climbed 62.7% w/w and 53.8% w/w to 322.0m units and N2.5tn, respectively.
 
In the previous week, sectorial performance was mainly bullish as three core sectors we cover closed in the green while two closed southwards. The Oil and Gas sector (+1.1% w/w) led the pack due to price appreciation in CONOIL (+9.8% w/w) and OANDO (+3.3% w/w). Similarly, the Banking index (+0.5% w/w) followed, as gains in ETI (+5.6% w/w) and FIDELITY (+4.6% w/w) pushed the index northwards. The Consumer Goods sector (+0.3% w/w) followed closely, buoyed by investor interest HONYFLOUR (+28.1% w/w) and NNFM (+22.8% w/w). On the flipside, the Industrial sector (-1.4% w/w) dipped due to profit-taking activities in CUTIX (-11.5% w/w) and DANGCEM (-2.6% w/w). Lastly, Insurance sector (-2.4% w/w) was the biggest loser as selloffs in REGALINS (-12.5% w/w) and VERITASK (-8.3% w/w) dragged the index lower.
 
Investor sentiment, as measured by the ratio of advancers to decliners, strengthened to 1.0x, from 0.6x the prior week, as 29 stocks appreciated, and 29 stocks depreciated. This reflects a more broad-based bullish performance compared to last week’s telecoms-led gains.

In the coming week, we expect the market to rally on the back of incoming earning releases of large-cap banking names. In addition, sustained decline in fixed income yields could trigger favourable sentiment towards the equities market. 
 
Money market review: 364-day stop rate dips further by 85bps to 7.35%
Last week, the Central Bank of Nigeria (CBN) conducted an NTB auction, selling a total of N156.3bn, compared with the N51.7bn volume on offer across the three maturities. Demand was significant on the 364-day paper, as it was oversubscribed by 14.3x. As expected, the 364-day stop rate closed lower, printing at 7.35%, 85bps lower than the last auction’s close. The 91-day and 182-day notes remained unchanged for the 7th consecutive auction, at 2.50% and 3.50%, respectively.
 
System liquidity remained tight last week, as the Open Buyback (OBB) and Overnight (OVN) rates shed 325bps and 358bps, respectively, to 16.75% and 17.25%. This was amid debits from the auction, as well as inflows from OMO maturities during the week.
 
The NT-bills secondary market saw considerate activity last week, with interest at the long-end of the curve as investors looked to fill unmet bids. Across the curve, average yield trended lower by 97bps, closing at 4.7% (5.6% previously). Rates on the 364-day bill traded 41bps lower w/w as demand outstripped supply.
 
Looking ahead, we expect retain our downward bias for NTB yields as huge demand at the secondary market is expected to continue given sovereign debt managers continue to maintain a bias for pushing interest rates lower. 
 
Bond Market update- DMO to conduct FGN Bond auction this week
This week, the Debt Management Office (DMO) released the FGN Bond offer circular for Aug-2021, which indicated an offering of N150.0bn (N50.0bn each on the 2028s, 2036s and 2050s). The auction is scheduled for Wednesday, 18th August 2021.
 
In the secondary market, performance was reflective of the outcome of the NT-bills PMA, as average yield declined by 38bps to 11.6% from 11.9%, across the curve. In the corporate bonds segment, average yield simultaneously declined by 38bps w/w to 12.3% from 12.6%.
 
In the Eurobond market, Covid-19 realities and shaky oil prices had some impact on sentiments, as average yield rose by 7bps w/w to 5.9%, from 5.8% previously.  
 
Looking forward into the week, the DMO is scheduled to conduct the Aug-2021 auction on Wednesday. We anticipate a decline in marginal rates at the auction in line with the simmering yield environment. This is expected to spark a spell of bullish sentiments in the secondary bonds market.
  
Currency Market: Naira strengthens at I&E window
The Naira appreciated at the I&E window, up 0.2% w/w to close at N410.80/$1 as against N411.45/$1 from the prior week’s close. However, at the parallel market, the Naira depreciated against the dollar by 1.4% w/w to close at N515.0/$1. Lastly, external reserves climbed by 1.5% w/w to close at $33.6bn in the previous week.
 
In the absence of any intervention from Apex bank or any macroeconomic shock, we expect the naira to continue to trade in a stable range in the parallel market and I&E window.