September 27, 2021/United Capital Research
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Macro news and highlights
In the past week, according to media reports, President Muhammadu Buhari, wrote to the Senate, seeking to amend certain clauses in the newly passed PIA. The president fresh request pertained to the review of the administrative structure of the Upstream Regulatory Commission and the Nigerian Midstream and Downstream Petroleum Regulatory Authority. The President is seeking the senators’ approval to increase the numbers of the non-executive board members of each of the regulatory agencies from two to six, in order to capture the six geopolitical zone. The President also removed the Ministers of Finance and Petroleum Resources from the board of the two agencies.
The Senate has approved the 2022-2024 Medium Term Expenditure Framework and Fiscal Strategy Paper with an oil price benchmark set at $57.0/bbl. while a stable exchange rate of N410./$ has been projected. Over the period, crude production is expected to print at 1.88mbpd, 2.23mbpd, and 2.22mbpd through 2022, 2023 and 2024. Overall, the approval paves way for easier passage of the 2022 budget which the senate has already approved revenue and expenditure projection of N8.36tn and N13.98tn.
The Central Bank of Nigeria (CBN) disclosed that the e-naira which is set to be launched on October 1 is a legal tender equal to the value of the naira and thus must be accepted as a form of payment by all merchants and business outlets.
In the coming week, we expect the macroeconomics news environment to remain muted with regard to economic data releases.
Global Market: Markets remain upbeat despite Evergrande, tapering jitters
Last week, the major indices bounced back from an early sell-off to finish the week on a relatively positive note. Fears that a potential default by China’s second-largest property developer by sales, Evergrande, might trigger a global financial “contagion” akin to the one that followed the fall of Lehman Brothers in September 2008 weakened sentiments earlier in the week. Additionally, the Federal Reserve tilted further hawkish last week at the Federal Open Markets Committee (FOMC) meeting. Tapering is expected to end around mid-2022, although rate hikes may remain deferred until 2023. Inflation remains the sticking point and will determine the pace of rate hikes. The equities market reacted surprisingly bullish to the Fed meeting outcome. However, performance across the major US was relatively mild as the Dow Jones Industrial Average and the S&P 500 gained +0.6% w/w and +0.5% w/w, respectively, while the NASDAQ slid 2bps w/w.
Elsewhere, European stocks closed in the green after a choppy trading week. However, gains were muted by Evergrande concerns, as well as hawkish sentiments from central banks. Notably, Norway became the first advanced economy to tighten its monetary policy as the Norges Bank raised its key short-term lending rate by 25bps from nought. The Norges Bank also guided to another potential hike in November. The pan-European STOXX Europe 600 Index gained 0.31% w/w. Germany’s Xetra DAX Index and France’s CAC 40 Index also rose 27bps w/w and 1.04% w/w, respectively. Similarly, the UK’s FTSE 100 Index climbed 1.26% w/w.
In Asia, Chinese stocks closed positive in the holiday-shortened week, as the Shanghai Composite Index gained 16bps w/w. Notably, strong liquidity support by the People’s Bank of China (PBOC) during the week helped alleviate some concerns about the grossly indebted Evergrande. Meanwhile, the Bank of Japan (BoJ) held rates constant as expected. The Nikkei 225 Index closed modestly lower, losing 25bps w/w.
Elsewhere, Oil rallied for the 5th consecutive week, as traders remain positive on the oil market, supported by the global energy crunch. Brent crude appreciated by 3.7% w/w.
Looking forward, we expect continued positive sentiments for equities as the global economy continues its road to full recovery and positive economic growth.
Domestic Market: Equities record modest gains, NGXASI up 5bps
Last week, the main bourse built on the prior week’s gains as investor sentiment appeared to improve. Despite sustained bearish sentiments for banking names, the All-Share Index gained 5bps w/w to close at 38,962.3 points. As a consequence, YTD loss moderated to -3.2% and the total market capitalisation climbed N9.6bn w/w to N20.3tn. In terms of activity, the market was more upbeat as average volume and value traded rose 49.6% w/w and 29.5% w/w to 256.2m units and N2.8bn respectively.
Across sectors, w/w performance was a mixed bag as three indices closed positive and two closed in the red. The Insurance (+1.7% w/w) and Oil and Gas (+1.4% w/w) Indices recorded the strongest advances as buying interest in MBENEFIT (+3.4% w/w), AIICO (+1.1% w/w), CONOIL (+14.1% w/w), OANDO (+6.7% w/w) drove the indices northwards. The Industrial Goods index recorded a modest 0.2% w/w appreciation due to gains in WAPCO (+4.2% w/w). Conversely, the Banking and Consumer Goods indices shed 40bps w/w and 4bps w/w, respectively, as UBA (-1.3% w/w), ZENITH (-1.3% w/w), and UNILEVER (-2.2% w/w) underperformed the broader market due to sell pressures.
Investor sentiment as measured by market breadth (advance/decline ratio) strengthened to 1.2x, as 26 stocks gained against 21 laggards.
Looking ahead, we expect the market to remain in a lull, with occasional bargain hunting until 9M-2021 results are released.
Money Market Review: Quiet trading session at the primary market
System liquidity remained tight during the week despite the drop in interbank rates as they remained elevated in double digit terrain with the Open Buy Back (OBB) and Overnight (OVN) rates shedding 50bps w/w each to close at 16.00% and 17.25% respectively. This was amid debits for bond auction settlement conducted by the Debt Management Office (DMO).
In the NTB secondary market, performance was slightly bearish as average yield rose marginally by 4bps w/w to close at 5.61% from 5.57% at the close of last week. Similarly, we saw marginal bearish sentiments in the secondary OMO market as the average yield closed higher at 6.43%, 9bps w/w above last week’s close.
Looking ahead, we expect to see system liquidity ease and inter-bank rates trend lower from the net inflows from FAAC and N105.0bn worth of OMO maturities. The Central Bank of Nigeria (CBN) is expected to conduct an NTB auction rolling over a total of N111.9bn worth of bills on Wednesday. At the auction this week, we do not expect the apex bank to hike stop rates as it did in the previous auction.
Bonds Market Review: Oversubscription at the Eurobond auction
Last week, the Debt Management Office (DMO) conducted a bond auction selling a total of N277.1bn worth of bonds as against N150.0bn on offer. Investors’ appetite across the offerings was strong as the 2028s, 2036s and 2050s recorded subscription rates of 1.0x, 2.5x and 3.1x respectively. Overall, the auction was subscribed by 2.2x receiving a total bid of N334.3bn. The marginal rates on 2028s and 2036s remained unchanged from the previous auction at 11.60% and 12.75%, respectively. Interestingly, the marginal rate in the 2050s rose by 20bps to 13.00%.
In the secondary bonds market, performance was reflective of the outcome in the auction (where marginal rate on the 2050s reversed to 13.00%) as we saw sell pressures on the long end of the bonds market while we saw buying interest at the end of the short and mid-term of the curve. Overall, this reversed the sustained bearish sentiment from the previous week as the average yield on sovereign bonds declined by 8bps w/w to 11.23% from 11.31%, across the curve. In the same vein, the corporate segment closed on a bullish sentiment as the average yield fell by 16bps w/w to 11.72% from 11.88%.
In the Eurobond market, the DMO confirmed the successful issuance of fresh Eurobonds with the offering attracting bids worth $12.2bn, implying a bid-to-cover ratio of 4.1x considering an initial offering of $3.0bn. Overall, the DMO took advantage of the strong interest to sell $4.0bn worth of Eurobonds ($1.0bn higher than initially planned) with the allotment across tenors printing at 7-year ($1.25bn at 6.125%), 12-year ($1.50bn at 7.375%) and 30-year ($1.25bn at 8.250%).
Consequently, proceedings from the secondary market were bearish average yield climbed by 28bps to close at 6.07%. On the other hand, we saw the average yield declined by 12bps at the corporate Eurobond market to close at 2.60%.
In the coming week, we expect to see slight see demand-led activities at the Eurobond market as investors seek to fulfil unmet demands from the auction.
Currency market: I&E window closes lower in the past week
Last week, the naira closed shed 0.5% to close at the I&E window, at N414.9/$1, whilst in the parallel market, we continued to find quotes in the region of N570-N580/$1 as dollar-naira levels remained elevated.
Regarding activity levels at the I&E window, the average turnover at the window was down by 16.4% w/w to print at $180.4.m, compared to $215.8m in the prior week. Lastly, external reserves rose by 1.9% w/w to close at $36.1bn.
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 we hold our position that the CBN may need to further devalue the Naira in the official window to see increased activity in that window.
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