September 20, 2021/United Capital Research

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Macro Overview 

In the past week, the Central bank of Nigeria held the 5th Monetary policy meeting of the year. At the meeting, which came amid concerns regarding FX scarcity, rebound in GDP and continued disinflation the committee voted to hold benchmark rates constant at 11.5%. Other parameters, Cash Reserve Ratio (CRR) and Liquidity ratio were held at 27.5% and 30.0%, respectively. 
 
Also in the past week, the National Bureau of Statistics (NBS) released inflation data for the month of August. According to the report, headline inflation rate rose to 17.01% y/y, printing lower than our forecast of 17.10%, and 37bps lower than Jul-2021 inflation (17.38%), implying that the rate of change in price levels continued to subside in Aug-2021. On a m/m basis, the broad CPI increased by 1.02% m/m, faster than the 0.93% m/m increase in Jul-2021. Also, the inflation report confirmed an observation of price increase across all components of the index with the highest increases expectedly recorded in food price.
 
Lastly, according to the Debt Management Office (DMO), Nigeria’s total public debt stock rose to N35.47tn as of June-2021 from N33.1tn as of Mar-2021. The total external debt stock rose by 9.9% to N13.7tn from N12.5tn while the total domestic debt stock rose by 5.4% to N21.8tn from N20.6tn. Notably, at the end of Q2-2021, external debt stock made up 38.7% while domestic debt stock made up 61.3% of the total public debt stock.
 
In the coming week, the NBS is expected to release GDP data calculated through the income and expenditure approach. On the macroeconomic front, we expect a lot of focus to be on government’s borrowing activities as it plans a Eurobond issuance in three weeks’ time while the FG is seeking approval for further borrowings from the National Assembly.  
           
Global review: Weak sentiments and mixed economic data drives global equities lower  
Last week, the US equity market was choppy despite some positive economic signals. The US Consumer Price Inflation (CPI) reading for Aug-2021 came in at 5.3% y/y, a smaller rise than the 5.4% y/y rise recorded in Jul-2021. In addition, the Commerce Department reported that retail sales in Aug-2021 (ex-auto sales) increased by 1.8% m/m, faster than anticipated. The US economy is still facing significant price pressures, as energy prices and food prices jumped 25.0% y/y and 3.7% y/y, respectively. However, the decline in the y/y pace of inflation against Jul-2021 calmed fears of persistent inflation and lent credence to the Federal Reserve’s position of transitory inflation.
 
Elsewhere, US House Democrats outlined a series of proposed tax increases in an attempt to gather enough votes for a spending package central to US President Biden’s economic agenda. Notably, the proposal would increase the top corporate tax rate to 26.5% (from the current 21.0%), and the top individual rate to 39.6% (from 37.0%). The total tax take would be 28.8%. The major US Indices, the Dow Jones Industrial Average, S&P 500 and NASDAQ slid 0.1%, 0.6% and 0.5% w/w, respectively.
 
Elsewhere, European markets also saw weak sentiments despite positive performances from travel stocks, which rose on reports that British authorities were considering easing travel restrictions. The broader indices were weighed down by growth worries and Chinese government’s regulatory actions. The pan-European STOXX 600 Index closed 1.0% lower w/w, as Germany’s XETRA DAX Index and France’s CAC 40 Index lost 0.8% w/w and 1.4% w/w, respectively. Meanwhile, UK inflation surged to 3.2% in August, its highest level in over nine years, according to the Office of National Statistics (ONS). The UK’s FTSE 100 Index slid 0.9% w/w.
 
Chinese regulators intensified the crackdown on the country’s tech companies last week, reportedly seeking to break up Alibaba’s Alipay. Elsewhere, China’s manufacturing and retail sectors slumped in Aug-2021, unsurprising given Covid-19 related restrictions. These factors weakened sentiments as the Shanghai Composite Index closed 2.4% lower w/w. 
 
In the oil market, Brent recorded a 3.3% weekly gain to close at $75.34/b, as constrained US crude production supported sentiments for crude. In addition, US recorded further declines in stockpiles. Notable to highlight, oil declined on Friday as Russia announced plans to boost oil exports by 3.0% in Q4-2021.
 
This week, we expect global equities to remain choppy and vulnerable to macroeconomic data releases and Covid-19 realities. However, we expect sustained economic growth, accommodative monetary policy, and strong earnings growth to remain supportive of the bull market in the long term.  
 
Domestic Equities: MTNN pulls NGXASI higher, up 10bps
The Nigerian equity market recorded a modest gain last week, after a string of negative weekly closes. The main index closed 0.1% northwards to settle at 38,943.9 index points, driven largely by a 1.4% w/w appreciation in large-cap telco MTNN as well as some bargain hunting activity. The market YTD loss eased to 3.3%, as the total market capitalisation closed at N20.3tn. In terms of activity, average volume and value traded retreated 40.0% and 17.8% w/w to 171.2m units and N2.2bn, respectively.
Across sectors we cover, w/w performance was broadly negative. The Oil & Gas sector index suffered the biggest losses, as it shed 3.4% w/w on the back of selloffs in SEPLAT (-6.5% w/w) and ETERNA (-9.4% w/w). The Banking (-0.8% w/w) and Insurance (-0.6% w/w) Indexes trailed on account of pullbacks in ZENITH (-0.8% w/w), ACCESS (-2.2% w/w) & MBENEFIT (-6.5% w/w). The Consumer Goods and Industrial Goods indexes both recorded a weekly loss of 0.2% as GUINNESS (-3.2% w/w) and WAPCO (-4.0% w/w) retreated.
Access Bank Plc announced the successful launch of its $500.0m senior unsecured Eurobond, which was significantly oversubscribed by 3.0x and issued with a 6.125% coupon.
Investor sentiment weakened w/w as market breadth (advance/decline) moderated to 0.6x from 0.8x as 20 stocks gained and 36 lost.

In the coming week, we expect investor sentiment to remain weak amid a dearth of positive triggers.  

Money Market Review: Bearish sentiments in NT-bills market
System liquidity remained tight, as the Open Buy Back (OBB) and Overnight (OVN) rates rose by 350bps w/w and 430bps w/w to close at 16.50% and 17.75% respectively. The tighter system liquidity came as a result of CRR debits by the apex bank. Also, while there was OMO maturity worth N38.0bn, the Central Bank of Nigeria (CBN) mopped N20.0bn via a new OMO auction. Lastly, the NT-bills maturity was inadequate to reflate financial system liquidity as the CBN rolled over the sum via a new auction, leaving a net zero impact on system liquidity.
 
Last week, the CBN conducted an NT-bill auction, notably selling exactly N155.9bn worth of bills on offer out of a total of N244.6bn that was subscribed. This bucked the trend of CBN’s prolonged period of overselling at the NT-bills auction. As expected, investors’ demand was healthy as the 91-day and 364-day bills recorded subscription rates of 1.2x and 1.6x respectively. On the other hand, the 182-day bill did not generate as much interest as it recorded subscription rate of 0.7x. Contrary to expectations, the stop rate on the 91-day, 182-day and 364-day bills remained unchanged from the previous close at 2.50%, 3.50% and 7.20% respectively.
 
Also, the Central bank conducted an OMO auction, selling a total of only N20.0bn worth of bills (the exact amount on offer), as against N82.5bn subscribed. Typical for recent OMO auctions, investors’ appetite was strong as the 96-day, 187-day and 334-day bills were oversubscribed by 1.7x, 3.3x and 5.7x respectively. Notably, the stop rate across the primary OMO market curve remained unchanged at 7.00%, 8.50% and 10.10% from the previous auction.
 
In the NTB secondary market, following the auction conducted two weeks earlier (where stop rates reversed higher to 7.20%), investors had begun to price in a sustained reversal in short term rates. Thus, we saw selloffs at the long-end of the NT-bills curve at the start of last week before the auction results on Wednesday drove a reversal of the tide. Nevertheless, it was inadequate to reverse the initial bearish impact as average yield rose by 66bps w/w to close at 5.57% from 4.91% at the close of last week. Similarly, we saw marginal bearish sentiments in the secondary OMO market as the average yield closed higher at 6.34%, 12bps w/w above last week’s close.
 
Looking ahead, we expect this week to be a quiet one for the NT-bills market as investors turn their attention to the bonds market. In addition, the absence of maturities at the short end of the curve further reinforces expectations of a quiet week.
 
Bonds Market Review: Bearish performance extended
In the secondary bonds market, performance remained bearish, as average yield on sovereign bonds was up by 22bps w/w to 11.31% from 11.09%, across the curve. In the same vein, the corporate segment closed on a bearish sentiment as the average yield climbed up by 8bps w/w to 11.88% from 11.80%. The bearish sentiments were driven by perceived pressure on short term rates which encouraged short-sellers to actively short-sell bonds in expectation of higher yields. However, the NT-bills result on last week Wednesday drove a reversal in sentiments as short-sellers looked to quickly close their positions.
 
In the Eurobond market, proceedings was bearish as average yield climbed marginally by 4bps to close at 5.79%. On the other hand, we saw average yield declined by 115bps at the corporate Eurobond market to close at 2.72%.

In the coming week, the Debt Management Office (DMO) is scheduled to conduct the Sep-2021 auction with N150.0bn worth of FGN Bonds for offer on Wednesday. The outcome of the bond auction will be critical for the outlook of the yield environment. We note that while the Federal government may be cash-strapped, the cost of borrowing continues to remain a huge concern, thus, we anticipate a bias towards sustained decline in marginal rates at the auction. This could potentially spark renewed bullish sentiments in the secondary bonds market.

Currency Market: Parallel market continues downward spiral
Last week, the naira closed flat at the I&E window, at N412.0/$1, whilst in the parallel market, the naira sustained its downward trend, shedding a further 4.4% w/w to close at N570.0/$1, as the naira hit record low levels.
 
Regarding activity levels at the I&E window, average turnover at the window spiked by 53.0% w/w to print at $215.5m, compared to $140.9m in the prior week. Lastly, external reserves rose by 1.7% w/w to close at $35.3bn.
 
The recent pressures observed at the parallel market continue to be driven by FX supply scarcity as BDCs become more competitive for dollar flows. In the absence of any CBN intervention, our short-term overview for the parallel market remains dim. However, our outlook for the naira remains bright for the official window although it remains dependent on the success of the Eurobond issuance, expected withdrawal from the International Monetary Fund’s SDR allocation, as well as the continued stability of higher crude prices.   

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