June 20, 2022/United Capital Research

Macro Highlights and Outlook

Last week, the African Export-Import Bank (Afreximbank) under its Pandemic Trade Impact Mitigation Facility (PATIMFA), has disbursed $150.0mn to First Bank of Nigeria Ltd. The funds will be accessible to First Bank clients involved in the development and importation of supplies and equipment essential to battle Covid-19.

The World Bank in its latest Nigeria Development Update (NDU) released yesterday, stated that the country’s inflation is likely to increase further due to rising global fuel and food prices. It estimates that this will push one million Nigerians into poverty by the end of 2022 in addition to the six million already predicted to fall into poverty this year.

The World Bank also released a statement iterating the nation’s FX reserves would decline further because of the redemption of the $1.7bn worth of backlogs to foreigners and FX forward contracts.

On 15-June, the National Bureau of Statistics (NBS) published the Consumer Price Index (CPI) report for May-22. According to the report, headline inflation sustained its uptrend, rising 89bps to 17.7%, an 11-month high. Across the inflation components, food inflation jumped 2.0% m/m and 19.5% y/y while core inflation climbed 1.9% m/m and 14.9% y/y.

In addition, the Central Bank of Nigeria on the back of its development finance initiatives, disbursed N21.0bn to boost the production and export of cocoa and sesame seeds. The Apex bank’s Governor stated that eligible exporters received over N3.5bn worth of rebates in Q1-2022 after the implementation of the RT200 FX programme.

In the coming week, we expect the National Bureau of Statistics to release the Nigerian Port Authority statistics 2021. With a lot of attention on the 2023 election, we expect macroeconomic developments to be broadly far and few.  

Global Markets: Monetary policy & growth concerns continue to weigh on global stocks

Last week, the global equities market remained in active sell mood as fresh policy normalization concerns, market liquidity, signs of an economic recession and earnings growth concerns combined to weaken investors’ sentiment. First, in the US, the Federal Reserve announced a 75bps hike with the Fed Chair guiding markets to expect another 50bps or 75bps hike at its next meeting. On growth concerns, the Fed cut its GDP growth projection to 1.7% y/y, from 2.8% y/y previously while the Atlanta Fed’s GDPNow model estimates no growth in real DGP for Q2-2022, from a prior 0.9% projection. Also, the US Fed raised its Personal Consumption Expenditure (PCE) price inflation to 5.2%, from 4.3%. Lastly, it also raised median estimate for the Fed Funds Target Rate to 3.4%, from 1.9%. Overall, US equities market traded bearish as the NASDAQ Composite, S&P 500, and DJIA shed 4.8% w/w, 5.8% w/w, and 4.8% w/w.

Similar to developments in the US equities market, European markets sustained its downward trajectory from the prior week as hawkish policy decisions, and downward growth revisions weighed on broad-based sentiments. Last week, the ECB in an emergency meeting decided to create a new policy tool to remedy bond fragmentation issues afflicting confidence in the Eurozone’s outlook. Meanwhile, the ECB estimates it would implement up to three 50bps interest rate hike in H2-2022. In the same vein, the Swiss National Bank raised its policy rate for the first time in 15 years, joining the hawkish trend across other central banks. The bank opted for a 50bps hike to -0.25%, from -0.75% previously. Also, the Bank of England raised its benchmark policy rate by 25bps while downgrading Q2-2022 real GDP growth forecast to -0.3%. Following this load of negative news for equities, the broad-based pan-European STOXX 600 shed 4.6% w/w, with all other countries recording similar bearish tilt as the German XETRA DAX, French CAC 40, and the UK FTSE 100 declined by 4.6% w/w, 4.9% w/w, and 4.1% w/w, respectively.

In Asian markets however, stocks closed on a mixed note albeit with greater bearish undertone, as investors were overwhelmed by the hawkish environment in central banks within the Asia Pacific. The Bank of Japan reaffirmed its ultra-loose policy last week, divergent from the trendy tightening policy among other central banks within the region. Overall, trading sessions saw further decline in major stocks across the Asian market, with the Japan’s NIKKEI 225 (-6.7% w/w) recording the highest loss while Indian’s SENSEX (-5.4% w/w) trailed. However, China’s Shanghai Composite (+1.0% w/w), closed the week in the green.

In the crude oil market, oil benchmarks slumped in the final trading session for the week as widespread tighter monetary policy which traders estimate could hurt global economic growth and consequently global oil demand battered sentiments on Friday. As a result, the global Brent crude benchmark fell 2.9% w/w to $118.5/bbl.

Looking ahead, we expect to see sustained bearish sentiment in the global equities space as intensifying global inflationary pressure, resultant monetary policy tightening, and growth fears continue to weigh on sentiments. That said, we do not rule out the possibility of a dead-cat bounce in the coming week.  

Domestic Equities: Local bourse reverses prior bullish close … ASI down 2.7% w/w

Last week, the domestic equities market traded on a bearish note throughout the week as investors continued to book profits across their portfolios. In addition, losses in MTNN (-7.9% w/w) magnified the overall pullback in the index. As a result, the benchmark NGX-All Share Index (NGX-ASI) decreased 2.7% w/w to print at 51,778.1 points. Consequently, YTD return fell to 21.2%, and market capitalisation printed N28.2tn. Activity level was broadly bullish as average volume and value traded closed higher by 106.3% w/w and 0.4% w/w to print at 557.3mn units and N4.8bn, respectively. In line with the bearish trend, investor sentiment, as measured by market breadth weakened to 0.3x from 0.8x as 13 tickers appreciated while 51 stocks depreciated.

On a sectoral level, w/w performance was bearish as all five sectors we cover closed in the red. The Banking sector led the laggards (-5.2% w/w) following sell-off in FBNH (-8.1% w/w), ETI (-9.0% w/w) and ZENITHBA (-6.3% w/w). The Oil & Gas, Consumer goods and Insurance sector also lost 1.8% w/w, 1.2% w/w and 1.2% w/w respectively on the back of selloffs in OANDO (-6.7% w/w), INTBREW (-15.0% w/w), PRESTIGE (-5.0% w/w) and REGALINS (-3.6% w/w). Lastly, the Industrial goods index fell 8bps w/w following price depreciation in WAPCO (-0.4% w/w).

We anticipate return of buying interest in the equities market as investors build their positions ahead of the H1-2022 earnings and dividend season. We recommend clients follow suit by investing in our top recommended stocks as we expect bullish momentum will return to the equities market in July.

Money Market Review: NTB auction stop rates trend lower

Last week, the financial system liquidity opened on a decent note, opening the week with liquidity levels of N23.4bn. The financial system however fell into a deficit mid-week, due to absence of maturities. As a result, banks were forced to rely on the repo and CBN Standing Lending Facility (SLF) window to fund short term obligations. Overall, system liquidity closed the week approximately N78.4bn. Overall, the relative illiquid market saw the average Open Repo Rate (OPR) increase by 4.6ppt w/w to print at 12.9% and the average Overnight Rate (OVN) increase by 3.8ppt w/w to print at 12.5%.

Last week, the Central Bank of Nigeria (CBN) conducted an NT-bills auction offering N34.9bn worth of NT-bills, the auction was oversubscribed, although met with less interest than in the previous outing with investor’s interest mainly on the 364-day papers. Investors submitted bids totalling N178.5bn, implying a bid-to-cover ratio of 5.1x. The CBN however only sold the amount on offer. In line with the less aggressive posture of the CBN, the stop rates ebbed lower across all tenors with the 91-day declining by 1bp to 2.5%, 182-day declining to 3.79% (from 3.89%) and the 364-day bill declined to 6.07% (from 6.49%).

In the secondary NT-bills market, we observed significant bearish sentiments as several banks resorted to selling off some of their short-term bills in bid to raise some liquidity amidst the tight financial system. As a result, average yield on NT-bills rose by 51bps w/w to close at 4.6%.

Looking ahead, no OMO maturities are scheduled to hit the financial system this week. We expect money market yields to print higher and funding rates to hit their ceiling as system liquidity continues to tighten particularly as banks scramble to raise liquidity needed to participate at the upcoming bond auction.

Bond Market: Sovereign Eurobonds & Bonds market close bearish

Last week the FGN bond auxiliary market traded on a calm note with buy interests on the short end of the curve. Investors continued to show apathy towards taking any reasonable duration risks while activities appear to have been controlled primarily by PFAs and fixed income fund managers. Overall, average yield across sovereign bonds gained by 6bps w/w, closing at 11.2%. Similarly, corporate bonds traded on a bearish note, albeit with steeper movements in the yield curve as average yield on corporate bonds rose 25bps w/w to 11.2%.

In the SSA sovereign Eurobond markets, sentiments were broadly bearish as hawkish monetary policies from global monetary authorities and unabating inflation fueled the negative sentiments. However, we observed strong buy interest in Ghanaian Eurobonds, which was an exception to the broader market performance. For Nigerian Eurobonds, the sentiments were broadly bearish as average yields rose by 111bps w/w to close at 12.5%.

The Debt Management Office (DMO) would be conducting a Primary Market Auction (PMA) with the 2025s 2032s and 2042s on offer. We anticipate weaker demand at the auction and a consequent increase in the auction marginal rate, due to sparse liquidity at the long end of the curve. In the secondary market, with no upcoming coupon repayments, we expect the domestic bonds market to continue to trade on a quiet note with slight activity as investors rebalance portfolios in preparation for the auction.

Currency Market: Naira depreciates marginally at I&E window

Last week, the Naira depreciated marginally at the Investors & Exporters (I&E) window, down 4bps w/w to close at N421.33/$. At the parallel market, we continue to find quotes in the N607.0 – 610.0/$ region. In the I&E window, average FX turnover rose 13.7% w/w to $117.2mn.

However, Nigeria’s external reserves rose $119.0mn to close at $38.6bn, continuing its steady rise since 6-June.

This week, we expect the I&E window to continue to witness sustained pressure as FX outflows are expected to outweigh inflows in the next weeks/months. More so, hawkish monetary policies by developed and emerging markets as well as emerging possibilities of a global growth slowdown will possibly underpin sustained pressure from FPI exit.