May 30, 2022/United Capital Research

Macro Summary

Last week, the Monetary Policy Committee (MPC), for the first time in two and a half years, raised the Monetary Policy Rate (MPR), hiking the benchmark rate by 150bps to 13.0%. The MPC also maintained the Cash Reserve Ratio (CRR) at 27.5%. The MPR retained the asymmetric corridor at +100/-700 basis point around the MPR, while the Liquidity ratio was kept at 30.0%.

The National Bureau of Statistics (NBS) published Nigeria’s Q1-2022 GDP estimates. According to the report, real GDP grew by 3.1% y/y in Q1-2022 from 0.5% y/y in Q1-2021 and 4.0% in Q4-2021, showing upbeat improvement in economic performance with sustained positive growth for six consecutive quarters since the recession witnessed in 2020. According to the report, the oil sector contributed 6.6% to the real GDP while the non-oil sector contributed 93.4% in the period under review.

Furthermore, on the GDP report, the economic growth was driven mainly by the non-oil sector, expanding by 6.1% y/y in Q1-2022. On the other hand, the oil sector contracted significantly, losing 26.0% y/y reflecting the alarming decline in Nigeria’s crude oil production over the past five months.

Looking forward into coming week, we expect the National Bureau of Statistics to release the country’s Q1-2022 Capital Importation data. Also, we expect investors to continue to digest all the recent macroeconomic news to aid there positioning in the equities and fixed income market.

Global Markets: Global stocks rally after Fed rate flexibility hint

Last week, global equities rebounded from its recent slump which has been the longest weekly losing streak since 2001 (seven consecutive weekly losses), as the global equity markets logged strong gains. Selling exhaustion, positive retail earning reports, and hints of Fed flexibility towards monetary policy tightening going forward, significantly influenced the positive outcome from last week global stocks rally, amid the lingering geopolitical tensions. Overall, buy interest in US equities recovered significantly as investors sought to exploit cheap valuations, thus leading to significant buy pressure across all US equity categories. For context, the NASDAQ Composite, S&P 500, and DJIA gained 6.8% w/w, 6.6% w/w, and 6.2% w/w, reversing previous week’s losses.

 The European markets continued its bullish tilt, extending gains from previous week, despite the World Economic Forum (WEF) on Thursday, where business leaders, finances, and politicians offered some ominous predictions for the European economy. Also, according to Russia’s news agency, Interfax, the country’s Defence Ministry claimed overnight that it will allow foreign ships to leave ports on the Black Sea of Azov, amid mounting concerns about rising global food prices. In addition, the Central Bank of Russia opted for a dovish stance, cutting down its key interest rate from 14.0% to 11.0%, citing a calm in the country’s inflation and the recovery of the Ruble. Also, European markets appeared to benefit from the positive sentiments in the US markets following the somewhat calming monetary policy standpoint. That said, the broad-based pan-European STOXX 600 gained 2.5% w/w, with all other stock performance across the individual countries sustaining similar stance in momentum as the French CAC 40, German XETRA DAX, and the UK FTSE 100 gained 3.1% w/w, 2.8% w/w, and 2.8% w/w, respectively.

 Also, last week, Asian markets ended the week on a higher note, after Japan’s Prime Minister Kishida disclosed that steps are in motion to limit capital outflows from Japan through promotion of renewable energy and reopening of borders to international tourists. That said, last week’s trading[AA1]  sessions saw major stocks across the Asian market close northwards, with the Indian SENSEX (+1.0% w/w) recording the highest gain, followed by Japan’s NIKKEI 225 (+0.2% w/w). However, China’s Shanghai Composite closed the week flattish.

Last week, the crude oil market extended gains, recording its fifth weekly gain, as investors weighed up a further tightening in supplies just as demand is set for a major boost as the Memorial Day holiday weekend kicks off the start of the U.S. driving season when Americans take to the road for vacation. As a result, we saw oil prices close higher w/w, with Brent Crude climbing by 2.7% w/w to print at $115.6/bbl, extending previous week’s gain.

Looking forward, we recommend investors interested in taking position in US equities adopt a gradual portfolio buildup to take advantage of dips and lower valuations in the market. We express caution as we remain concerned by the direction of monetary policy in the US.

Domestic Equities: AIRTELAF pulls local bourse higher…ASI up 209bps w/w

Last week, the domestic equity market returned to green despite bearish sentiments seen across board, following the Monetary Policy Committee (MPC) decision to raise the benchmark policy rate by 150bps to 13.0%. The contrary bullish close was largely due to buy interests in AIRTELAF (+20.2% w/w), with the benchmark NGX-All Share Index (NGX-ASI) gaining 2.1% w/w to settle at 54,085.30 points. As a result, the YTD return grew to 26.6%, as market capitalisation settled at N29.2tn. Last week, activity levels in the market saw a decline, with average volume and value traded declining 39.1% w/w and 14.2% w/w to settle at 368.1 million units and N5.5bn, respectively. However, as measured by market breadth, investors’ sentiment weakened from 0.9x to 0.3x, with 19 equities gaining while 53 declined, reflecting the broad-based bearish sentiments that gripped markets last week.

The sectorial performance further affirmed the prevalence of bearish sentiments in the market as all five sectors we track closed the week in red. Leading the decliners last week was the Insurance sector (-6.3% w/w) owing to sell pressures in NEM (-13.0% w/w), SOVRENINS (-10.7% w/w) and MANSARD (-10.2% w/w). Following this was the Consumer Goods Index (-3.9% w/w) led by selloffs in NB (-10.0% w/w), GUINNESS (-6.0% w/w) and HONYFLOUR (-1.4% w/w) followed by the Oil & Gas Index (-0.9% w/w) with OANDO (-8.6% w/w) and ETERNA (-4.7% w/w) feeding the decline.  The Banking Index (-0.8% w/w) followed closely with JAIZBANK (-8.8% w/w), UNITYBNK (-4.0%) and UNION (-3.9% w/w) leading the losers. Lastly, the Industrial Goods Index (-0.7% w/w) was moved by selloffs in DANGCEM (-1.1% w/w), WAPCO (-2.3%) and CUTIX (-1.7%).

Going into the week, we expect sentiments to remain soft and could support further profit taking, particularly if fixed income yields continue to surge in light of the MPR rate hike. Nevertheless, we advise investors not to panic and rather take advantage of the dip to increase positions in attractively priced fundamental stocks.

Money Market Review: MPR hike drives average funding rates higher

Last week, the financial system opened the week with an opening balance of N47.6bn but as of Friday, closed at N19.7bn following debits by the CBN for NT-bills and OMO auction. Interestingly, the 150bps hike in MPR resulted in the ceiling for funding rates shifting higher (from 12.5% to 14.0%). As a result, the average Open Repo Rate (OPR) and Overnight Rate (OVN) increased 1.8ppts w/w and 1.9ppts w/w to print at 13.0% and 13.2% respectively. Notably to highlight, funding rates hit the 14.0% ceiling during the week, reflecting the tightness of the market.

Last week, the Central Bank of Nigeria (CBN) conducted an NT-bills auction to rollover N153.0bn worth of [AA2] maturing bills. The auction was met with decent interest, albeit weaker than what we have observed in previous auctions, as investors submitted bids totaling N237.0bn, implying a bid-to-cover ratio of 1.6x. In the usual manner, the CBN over-allotted the auction selling N173.5bn worth of bills. However, in line with expectations following the MPC decision, the stop rates surged higher across all the tenors with the 91-day climbing to 2.5% (from 1.74%), 182-day climbing to 3.89% (from 3.0%) and 364-day bill climbed to 6.49% (from 4.6%).  Following the NT-bills auction close, the average yield on NT-bills rose by 14bps w/w to close at 3.8%.

Also, last week N30.0bn worth of OMO maturities hit the financial system with the CBN deciding to mop up the liquidity by conducting an OMO auction, offering a total of N20.0bn across the 110-day, 187-day and 355-day maturities. Interestingly, stop rates were maintained at 7.00%, 8.50% and 10.10% respectively, across the tenors. The auction was oversubscribed by N48.6bn (with total bids of N78.6bn), skewed toward the long-term paper on offer. The CBN however sold the exact amount on offer.

Looking ahead into the week, N65.0bn worth of OMO maturities is scheduled to hit the financial system this week and could see the CBN announce an OMO auction to keep the market very tight, with the sole aim of preventing “FX speculations” and associated inflationary pressures. We expect money market yields and funding rates to remain elevated due to expected tightness in system liquidity.

Bond Market: Bond yields edge higher marginally

Last week in the FGN bond auxiliary market, yields inched northwards across the curve in tandem with the 150bps hike in MPR by CBN. However, the market slumped into a surprising inactive stance with very limited traction on the long end of the curve while minimal interest was seen at the short to mid tenor instruments. However, the week closed with buying interest across the curve on Friday, as some short position holders looked to cover their positions to lock-in profits for the month as well as investors taking advantage of the relatively attractive yields. Overall, average yield across sovereign bonds inched higher by 7bps for the week, closing at 11.2% in the auxiliary market.

In the Eurobonds market, mixed sentiments dominated the SSA sovereign Eurobond markets as we saw activities from investors cherry-picking attractive instruments. For Nigeria, the sentiments were broadly bullish as average yields decreased by 1.9ppts w/w to close at 10.7%.

This week, we expect coupon repayments of N5.6bn but will be inadequate enough to generate any significant activity. We expect the bonds market to remain broadly quiet until we approach the June bond auction. In addition, we expect traders to be unwilling to carry exposures at the end of the month which could see short sellers attempt to cover their positions.

Currency Market: Naira depreciates at I&E Window

Last week, the Naira depreciated at the Investors & Exporters (I&E) window losing 11bps w/w to settle at N419.5/$. At the parallel market, we found offer quotes in the N605.0/$ region while bid quotes were close to N609.0/$ – N610.0/$ level as of close of Friday. In the I&E window, average FX turnover declined 8.0% w/w to $157.5mn (from $170.6mn in the prior week).

Meanwhile, the economy’s FX reserves declined 54bps w/w to close at $38.6bn.

Looking forward, we expect to see continued pressure on exchange rate as factors influencing the dollar shortage pressures in the economy remain unabating.