July 4, 2022/United Capital Research
Macro Highlights and Outlook
According to industry data from the Nigerian Electricity Regulatory Commission (NERC), electricity distribution companies’ (DisCos) payment to generation companies (GenCos) for electricity generation has dropped by 50.0% y/y. The statistics showed that DisCos were unable to pay GenCos full payment for the quantity of power generated in Jan-2022 as the generation companies recorded a 50.0% revenue shortfall.
The Federal Accounts Allocation Committee (FAAC) disbursed N680.8bn to Federal, State, and Local governments. This represents a 29.9% decline from Jul-2021 where N970.6bn was disbursed. The decline is a result of fiscal challenges facing Nigeria as crude oil revenue continues to plunge.
According to the 2021 Subscriber/Network Data Annual Report published by the Nigerian Communications Commission (NCC), broadband penetration and teledensity declined in 2021. The NCC report noted that teledensity in Nigeria decreased from 107.2% in 2020 to 102.4% in 2021. For broadband penetration, there was a decrease from 45.0% in 2020 to 40.9% in 2021. Surging operations costs and vandalism of telecoms infrastructure were the primary reasons for the slowdown.
According to figures released by the Nigerian National Petroleum Company Limited (NNPC), the amount spent as subsidy on Premium Motor Spirit (PMS), popularly called petrol, and on refinery rehabilitation between January and May this year amounts to N1.3tn. Interestingly, only N27.3bn has been spent on refinery rehabilitation, with the balance going on PMS subsidy payments. NNPC disclosed this in its latest presentation to the Federation Account Allocation Committee meeting for Jun-2022.
In the coming week, we expect the National Bureau of Statistics to release the Nigerian Domestic and Foreign Debt Statistics Report for Q4-2021. We will also monitor the developments regarding the pump price of diesel and its implications on economic activity and exchange rates.
Global Markets: Global recession woes weigh down global stocks
Last week, sentiments in the global market remained gloomy as the war in Ukraine showed no sign of abating amid lingering concerns about rising inflation and economic slowdown. The Bureau of Economic Analysis (BEA) released May’s personal consumption expenditure (PCE) data, which indicated that consumers were also pulling back. Adjusted for inflation, purchases fell 0.4% in May, the first decline in 2022, driven by a 1.6% drop in goods purchases, as purchases of services climbed 0.3%. The PCE data pushed for further downward revision of the Atlanta Fed’s GDP Now model estimate of annualised growth in Q2-2022 to -1.0%. That said, trading sessions last week saw all US equities return to the bear territory, with major US equity indices losing value w/w. For context, the NASDAQ Composite, S&P 500, and DJIA shed -4.1% w/w, -2.2% w/w, and -1.3% w/w, reversing the previous week’s gains.
The European markets closed mixed on Friday after suffering their worst quarter since the onset of the Covid-19 pandemic, as inflation and interest rate hikes continue to weigh on investor sentiments. In economic data, Eurostat released June CPI data, with CPI printing 8.6% y/y, 50 bps higher than its previous print, and 20bps higher than expectation. Similarly, June’s Manufacturing PMI readings came in 19bps higher than expectations to print at 52.1 and 4.6% lower than May’s 54.6 print. Overall, the broad-based pan-European STOXX 600 shed 1.4% w/w, with all other stock performance across the individual countries sustaining a similar stance in momentum as the French CAC 40, the German XETRA DAX and the UK FTSE 100 declined by 2.3% w/w, 2.3% w/w and 0.6% w/w, respectively.
In the Asian markets, the sentiment was mixed, as negative sentiments persisted around Japan’s large manufacturers and a bigger-than-expected drop in industrial production weighed on investor’s risk appetite, as the escalating risk of a global recession prompted by major central banks aggressively raising interest rates to combat inflation continued to pose a significant headwind. On the other hand, sentiments in China were bolstered as the country halved the quarantine times for inbound travellers. Under the new policy, travellers must spend seven (7) days in a quarantine facility and then monitor their health at home for three (3) days, down from 14 days under hotel quarantine in many parts of the country and as many as 21 days of isolation in the past. Chinese President Xi Jinping further iterated that the current strategy was correct and effective and must be upheld unwaveringly. Overall, trading sessions saw a significant rebound in major stocks across the Asian market, with China’s Shanghai Composite (+1.1% w/w) recording the highest gain and Indian SENSEX (+0.3% w/w) trailed right behind. However, Japan’s NIKKEI 225 (-2.1% w/w) closed in the red, reversing the previous week’s gains.
Last week, volatile trading sessions saw oil prices to a downward close, recording their 4th consecutive weekly decline . From a w/w perspective, trade sessions saw oil prices to a lower close w/w, with Brent Crude shedding 1.3% w/w to print at $111.6/bbl, extending the previous week’s loss.
Looking ahead, we expect sustained bearish sentiment in the global equities space. Our view borders around intensifying global inflationary pressure, with major central banks in advanced and emerging market economies indicating further monetary policy tightening as a vital tool in the fight against rising inflation.
Domestic Equities: Local bourse reverses northward- ASI up by 24bps w/w
Last week, the domestic equities market closed the week higher on the back of increased bargain hunting in blue-chip companies, with FBNH (+14.9% w/w), BUAFOODS (+4.0% w/w), OKOMUOIL (+12.1% w/w), ETI (+9.3% w/w) and INTBREW (+10.5% w/w) topping the chart. The benchmark NGX-All Share Index (NGX-ASI) climbed 24bps w/w to print at 51,829.7 points. Consequently, YTD return rose to 21.7%, with market capitalisation printing at N28.0tn, thus bagging a total of N66.9bn last week. Similarly, activity level improved as average volume and value traded climbed by 48.4% w/w and 81.5% w/w to print at 268.2m units and N4.9bn, respectively. Investor sentiment from last week’s trading session witnessed improvement, strengthening to 0.9x from 0.7x as 34 tickers appreciated while 29 depreciated, as measured by market breadth.
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 (-0.4% w/w) sector led the laggards owing to increased profit taking in NB (-5.9% w/w), PZ (-21.5% w/w), HONYFLOU (-8.0% w/w), and DANGSUG (-0.9% w/w) among others. Trailing behind were the Oil & Gas (-0.2% w/w) and Industrial (-0.1% w/w) sectors on the back of share price depreciation in OANDO (-7.0% w/w), ARDOVA (-5.1% w/w), WAPCO (-1.9% w/w), and TRIPPLEG (-8.4% w/w). On the other side of the coin, the Insurance (+3.6% w/w) and Banking (+1.1% w/w) sectors closed green owing to buy pressure in CORNEST (+21.0% w/w), NEM (+4.4% w/w), CHIPLC (+6.0% w/w), LINKASSU (+5.6% w/w), ETI (+9.3% w/w), ZENITHBA (+1.2% w/w), UBN (+2.5% w/w), OANDO (+1.8% w/w), and ARDOVA (+1.9% w/w).
This week, we expect continued bargain hunting as investors look forward to the H1-2022 earnings season and will seek to take high-yield positions. Still, we maintain that the broader equities market will remain on a bearish trajectory pending the release of H1-2022 results.
Money Market Review: NTB auction Stop rates 91-day paper declined by 9bps to print at 2.4%
Last week, the financial system liquidity opened in the red, opening the week with liquidity levels of – N5.0bn. The financial system, post-NTB auction, plunged deeper into deficit, congealed by an absence of maturities. Liquidity averaged at -N193.7bn within the week. As a result, like in previous weeks, 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 at N329.7bn in deficit. Overall, the relatively illiquid market saw interbank rates settling at their ceiling for most of the week. The average Open Repo Rate (OPR) remained unchanged to print at 13.9%, and the average Overnight Rate (OVN) also remained flat at 14.0%.
Last week, The Central Bank of Nigeria conducted the last NT-bills Primary Auction for H1-2022, a N174.1bn rollover. There was strong investor demand, with subscriptions amounting to N328.45bn. In the usual fashion, the auction was oversold with an allotment of N197.7bn worth of papers. The stop rates of the 91-day paper declined by 9bps to print at 2.4%, while the 182-day and 364-day papers maintained their stop rates at 3.79% and 6.07%, respectively.
In the secondary NT-bills market, we observed significant bearish sentiments as several banks resorted to selling off some of their short-term bills to raise some liquidity amidst the tight financial system. As a result, the average yield on NT-bills rose by 59bps w/w to close at 5.4%.
Looking ahead, N20bn worth of OMO maturities are scheduled to hit the financial system this week. We still expect money market yields to print higher and funding rates to maintain at their ceiling as system liquidity remains tight.
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 and mid-end of the curve, with the 2042s appearing very alluring to investors. Investors continued to show apathy towards longer tenor papers. Overall, the average yield across sovereign bonds remained flat w/w, closing at 11.2%. However, corporate bonds traded on a bearish note, albeit with steeper movements in the yield curve as the average yield on corporate bonds rose 85bps w/w to 12.1%.
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. The sentiments were largely bearish for Nigerian Eurobonds as average yields rose by 36bps w/w to close at 12.9%.
Looking ahead, we expect market players to trade cautiously, cherry-picking attractive instruments in view of rising inflation. Improving liquidity in the coming weeks could spur demand for fixed-income products in the short term.
Currency Market: Naira depreciates at the I&E window
Last week, the Naira depreciated at the Investors & Exporters (I&E) window, up 1.2% w/w to close at N425.0/$. We continue to find quotes in the N605.0 – N615.0/$ region at the parallel market. In the I&E window, average FX turnover climbed 16.2% w/w to $137.0mn, indicating increased activity in the currency market under the review period.
However, Nigeria’s external reserves climbed $230.0mn to close at $39.2bn, continuing its steady rise since 06-June.
We expect the I&E window to continue trading around current levels this week. Moreover, global macroeconomic policies such as the hike in US interest rates and events as an apparent impending global slowdown will possibly see foreign dollars exit the market and decrease FX activity, particularly from FPIs at the official window.
