June 27, 2022/United Capital Research

Macro Highlights and Outlook

The Federal Government and the Nigerian Export-Import Bank (NEXIM) have signed a $40.0mn intervention fund for women in the Oil and Gas sector to increase women’s participation. This fund is made available through the NCDMB-NEXIM bank collaboration and the $300.0mn Nigerian Content Initiative Fund. The Bank of Industry will manage the fund. 

According to media reports, petrol scarcity worsened in key Nigerian states, mainly Lagos and Abuja, with long queues remaining unabating in the past week, as distributors express concerns over the cost burden. For context, petrol price per litre in the black market is around N300/litre, compared to the official pump price of N165/litre.

The Federal Government has consummated a tripartite agreement with the World Bank and the French Development Agency (AFD) to commit $557.0mn to construct rural roads across 13 states. A total of 53,730km of rural roads would be constructed before the project, effective March 2021, is terminated in 2026.

At a press briefing, the International Air Transport Association (IATA) expressed concern over the Federal government’s decision to block foreign airlines from repatriating $450.0mn of revenue from ticket sales to their respective countries.

The FGN Power Company’s recently published report revealed the funding requirement for the first phase of the Presidential Power Initiative is c.N992.0bn. Phase one is set to raise power generation to 7,000MW.

In the coming week, we expect the National Bureau of Statistics to release the Nigerian Port Authority statistics for 2021. We will also continue to monitor the developments regarding the pump price of diesel as well as the recent petrol scarcity. Also, we would continue to monitor developments in the political space as presidential candidates unveil their manifestoes.

Global Markets: Global stocks regain momentum…reverse losses

Last week, global equities regained momentum reversing some of the previous week’s losses. Amidst broadly negative news headlines, it was clear the rebound in stocks was mainly driven by investors who attempted to buy the dip of the market after the prior week’s performance plunged the S&P 500 into bear market territory. Interestingly, at the semiannual monetary policy testimony of Jerome Powell to the Senate Banking Committee, he acknowledged that achieving a soft landing (relating to recession fears) would be a challenging endeavour as the US Fed aims to sustain an aggressive rate-hike approach. Economic data released in the US contributed largely to the positive sentiment in the market as New Home Sales beat May expectations. On the flipside, the final reading of the University of Michigan Consumer Sentiment survey for June dipped to a fresh record low, but also showed that five-year inflation expectations decreased to 3.1% from 3.3%. That said, the NASDAQ Composite, S&P 500, and DJIA surged higher by 7.5% w/w, 6.4% w/w, and 5.4% w/w, reversing previous week’s losses.

Similar to developments in the US equity market, European markets snapped three weeks of losses as signs that the economy is slowing cast doubt on whether central banks would seek to increase interest rates aggressively. European Central Bank (ECB) policymaker Kazimir maintained the ECB’s commitment to hike by 25bps in July, followed by a 50bps hike in September, also adding that the ECB’s key rate could be between 1.5% and 2.0% in a year. Also, Germany moved to the second “alarm stage” of its emergency plans to reduce gas consumption and increase storage inventories of thermal fuel after Russia sharply reduced pipeline flow. Overall, the broad-based pan-European STOXX 600 gained 2.4% w/w, with all other stock performance across the individual countries sustaining similar stance in momentum as the, French CAC 40, and the UK FTSE 100 climbed by 3.2% w/w, and 2.7% w/w, respectively. However, the German XETRA DAX (-0.1% w/w) closed the week in the red.

Across Asian markets, stocks maintained bullish momentum, as investor sentiment remained strong. In Japan, sentiments were bolstered by continued expectations that the Bank of Japan (BoJ) will keep monetary policy ultra-loose, despite trending consumer prices and with the Yen hitting fresh lows. Also, June PMI data showed a strong expansion in business activity in the service sector, thus providing added boost to investors’ sentiments in Japan. Similarly, Chinese stocks advanced on stimulus hopes after President Xi Jinping pledged to roll out more measures to support the economy and minimize the impact of Covid-19. However, fears that aggressive monetary policy tightening by the US Fed could lead to a global recession kept risk appetite in check. Overall, trading sessions saw significant rebound in major stocks across the Asian market, with the Indian SENSEX (+2.7% w/w) recording the highest gain while Japan’s NIKKEI 225 (+2.0% w/w) and China’s Shanghai Composite (+1.0% w/w) trailed.

Last week, despite volatile trading sessions, the global brent crude oil benchmark closed the week unchanged at $113.1/bbl. as traders continued to examine the combination of tighter supply possibilities and possible declining demand as recession fears continued to grow.

Looking ahead, we expect a reversal from the recent bullish close to last week. We expect investors to resume selling into strength as the main drivers of the negative sentiments are expected to remain. Intensifying inflationary pressures, aggressive policy normalization, and recession fears are all factors poised to keep bullish sentiments in check.

Domestic Equities: Local bourse continues southward… ASI down 14bps w/w

Last week, the domestic equities market closed the week on a bearish note on the back of sustained sell pressure in blue chip companies. At the start of the week, selloffs in DANGCEM, WAPCO, GTCO and FBNH combined push the benchmark NGX-All Share Index (NGX-ASI) lower by 197bps before a four-day rally helped to trim losses for the week. That said, the NGX-ASI decreased by 14bps w/w to print at 51,705.6 points. Consequently, YTD return moderated to 21.0%, as market capitalisation printed at N28.2tn, shedding a total of N253.6bn last week. Activity level was broadly weak as average volume and value traded closed lower by 59.8% w/w and 43.8% w/w to print at 224.1m units and N2.7bn, respectively. Investor sentiment remained broadly unchanged as most investors remained in sell mode as market breadth (gainers-to-losers ratio) remained at 0.3x.

On a sectoral level, overall w/w performance was bearish as three (3) out of the five (5) sectors we cover closed in the red, and the remaining two (2) closing positive. The Consumer goods (-2.0% w/w) sector led the laggards owing to sustained profit-taking in NB (-5.5% w/w), FMN (-7.1% w/w), and INTBREW (-4.0% w/w), among others. Trailing behind were the Industrial (-1.9% w/w) and Insurance (-1.4% w/w) sectors on the back of share price depreciation in BUACEMENT (-3.2% w/w), DANGCEM (-0.7% w/w), WAPCO (-3.2% w/w, LINKASSU (-5.4% w/w), AIICO (-1.5% w/w), NEM (-1.6% w/w), and MANSARD (-1.5% w/w). On the flipside, the Banking (+0.3% w/w) and Oil and Gas (+0.3% w/w) sectors closed in the green owing to bargain hunting in ZENITH (+1.2% w/w), JAIZBANK (+2.1% w/w), FIDELITY (+0.6% w/w), OANDO (+1.8% w/w), and ARDOVA (+1.9% w/w).

This week, we expect the bargain hunting that trailed the market rebound from last week Tuesday to be extended into this week as investors look forward to the H1-2022 earnings season.

Money Market Review: Tight system liquidity keeps funding rates elevated

Last week, the financial system opened buoyant, starting the week with liquidity levels of N52.6bn. However, following the bond auction settlement on Tuesday, system liquidity entered deficit region as banks struggled to fund their obligations amid absence of maturities. During the week, we saw the banks heavily dependent on the repo and CBN Standing Lending Facility (SLF) window to fund short term obligations. Financial system liquidity closed the week in the deficit region, printing at -N425.4bn. Overall, the illiquid market saw funding rates continue to stay at their CBN-imposed ceiling through the week. The average Open Repo Rate (OPR) increased by 1.0ppt w/w to print at 13.9% and the average Overnight Rate (OVN) increased by 1.5ppt w/w to print at 14.0%.

In the secondary NT-bills market, activities were broadly quiet amidst spurts of sell pressure as traders looked to free up some liquidity to fund obligations. As a result, the NT-bills market closed on a bearish note as the average yield on NT-bills rose by 15bps w/w to close at 4.8%.

Looking ahead, no OMO maturities are scheduled to hit the financial system this week. In addition, the CBN will be rolling over N264.3bn worth of NT-bills during the week. We expect money market yields to print higher and funding rates to maintain at their ceiling as system liquidity continues to tighten until FAAC inflows hit the market.

Bond Market: Marginal rates trend higher at June bond auction

Last week, the Debt Management Office (DMO) conducted Its June FGN bond Auction the last auction for Q2-2022), with N75.0bn on offer for each of the following instruments: MAR 2025 (three-year bond), APR 2032 (10-year bond) and JAN 2042 (20-year bond). At the auction, investor demand was relatively healthy as the 2025, 2032, and 2042 instruments were oversubscribed with bid-to-cover ratios of 1.8x, 1.1x and 4.5x, respectively. However, due to sparse financial system liquidity and absence of coupon inflows, bids were relatively lower than in the previous auction, with bids declining 4.0%, 34.5% and 0.1% for the 2025s, 2032s and 2042s respectively. In line with our expectations, the marginal rates inched northwards for all the auction papers, crawling upwards by 10bps, 5bps, and 15bps to print at 10.10%, 12.50% and 13.15% for the 2025s, 2032s and 2042s respectively.

In the secondary market, we observed buy interests at the short end of the curve which has become the norm with investors unwilling to take high duration risk. Overall, the average yield across sovereign bonds fell by 6bps w/w, closing at 11.1%.

In the SSA sovereign Eurobond markets increased investor interest was seen on the short end of the curve, albeit bearish sentiments dominated auxiliary markets due to continued inflationary pressures, crystallization of policy normalization risks and recessionary fears.  However, sentiments reversed slightly on Friday after Bullard’s commentary stating that fears of US recession were overblown. For Nigerian Eurobonds, the sentiments were broadly bearish as average yields climbed by 22bps w/w to close at 12.7%

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 post auction. For the sovereign Eurobonds market, maturities and coupon payments worth $308.0mn are expected to be paid on Monday which are likely to trigger improved buying interest.

Currency Market: Naira appreciates marginally at I&E window

Last week, the Naira appreciated at the Investors & Exporters (I&E) window, up 29bps w/w to close at N420.13/$. At the parallel market, offer quotes rose to the N611.0/$ – 614.0/$ region, from N607/$ – N610.0/$ range. In the I&E window, average FX turnover fell 8.7% w/w to $107.0m.  

However, Nigeria’s external reserves climbed $189.0m to close at $38.9bn, continuing its steady rise since 06-June.

This week, the CBN is expected to fund the FG’s Eurobond maturity and coupon repayments to the tune of $308.0mn which we expect to drag on external reserves by the end of the week. Overall, we expect the I&E window to continue trading around current levels while sustained pressure will remain in the parallel market on account of limited FX liquidity.