July 13, 2022/United Capital Research

Macro Highlight and Outlook
The Federal Government (FG) has announced the takeover of three non-performing electricity distribution companies, Kano Disco, Kaduna Disco and Benin Disco, by Fidelity Bank Plc, due to the poor financial performances of the company.

The Bureau of Public Enterprises (BPE) has obtained approval from the Nigerian Electricity Regulatory Commission (NERC) to appoint an interim managing director for the distressed power firm Ibadan Disco amidst take-over actions by the Asset Management Corporation of Nigeria (AMCON).

The Federal Government has approved the strategy work plan to fast-track the concession process of the 700 megawatts (MGW) Zungeru Hydroelectric Power Plant in Niger State. The key objective of the plan’s concession is to leverage the private sector’s access to finance and reduce reliance on government budgetary allocation.

The Nigerian Content Development and Monitoring Board announced that it had grown the country’s content in the oil and gas sector to 42.0% from 5.0% local content before the enactment of the Nigerian Oil and Gas Industry Content Development (NOGICD) Act in 2010. The board noted that Nigerians and some local firms are reversing the dominance of foreign companies.

Looking forward, we expect the Nigerian Bureau of Statistics (NBS) to release the inflation data for Jun-22. We project inflation to print at c.18.6% due to persistent inflationary pressures arising from increases in food prices and the cost of energy prices.
 
Global Markets: Positive labour market report spurs gains in global stocks
Last week, global equities rebounded from the previous week’s losses. In the US, there has been a robust labour market recovery. The monthly Labor Department report revealed employers added 372k jobs in June, continuing a sequence of solid job additions that averaged 470k per month from Jan- to May-22. Average hourly earnings in June rose 5.1% y/y (previously 5.2% in May-22). The unemployment rate has remained unchanged at 3.6% since Mar-22. Economists and officials have interpreted these figures as a sign that inflation pressure is easing. This is as US Fed governors Christopher Waller and James Bullard last week supported the need for restrictive monetary policy. Consequently, the S&P 500 gained 1.9% w/w, the Dow Jones (DJIA) rose 0.8% w/w, while the NASDAQ Composite rose 4.6% w/w.

Similar to developments in the US equities markets, European markets grew following consecutive weeks of decline. Despite Tuesday’s 2.9% slump, the UK’s FTSE 100 index closed the week on a bullish note, gaining 0.4% w/w. Germany’s DAX index was up by 1.6% w/w even as the country posted its first trade deficit since 1991, and the French CAC 40 index was up by 1.7% w/w. Overall, the European STOXX 600 index was up 2.5% w/w.

In Asian markets, there was a general outperformance last week, mirroring US equities as recession fears ease. The Nikkei 225 was up 1.4% w/w propelled by lower oil prices and a weak Yen (¥), down 15.4% YTD to the USD ($). The Bank of Japan (BoJ) remained committed to its dovish monetary policy. The Shanghai composite, however, was down 0.9% w/w as China still carried out another round of mass Covid-19 testing and other pandemic measures due to its zero-Covid policy. In regional markets, Australia’s ASX 200 rose 1.0% w/w following its trade surplus print, and India’s SENSEX rose 3.0% w/w.

In the crude oil market, prices rose at the beginning of the week as supply concerns due to lower OPEC output, unrest in Libya and sanctions against Russia outweighed demand. Overall, the fears of an economic recession and a stronger dollar continue to pressure prices lower. Nonetheless, prices reversed course from the weekly low of $95.10/bbl., closing at $107.0/bbl. as signs of limited supply led to a near-term rebound in the price.

In the week ahead, Labor market gains could increase pressure on the US Fed to continue its rate hikes. The US Fed is poised to hike rates by 0.5 – 0.75% this month. U.S. Bureau of Statistics will release May-22 inflation data on July 13. Investors will also take positions for US quarterly earnings season. The European market will react to concerns of an energy shortage as Russia is set to reduce gas exports to Europe following a scheduled 10-day Nord Stream pipeline maintenance period. China’s reimposition of Covid restrictions is also set to dampen the outlook. The volatility in the oil market is expected to last over the week as investors weigh tight global supply concerns against recession fears.
 
Domestic Equities: Local bourse retreats southward- ASI down by 50bps w/w
Last week, the domestic equities market was overrun by bearish sentiments, as sell pressure across blue-chip stocks weighed down the index with BUAFOODS (-5.5% w/w), FBNH (-8.6% w/w), INTBREW (-14.3% w/w), and NB (-5.0% w/w) topping the chart of laggards. The benchmark NGX-All Share Index (NGX-ASI) retreated 50bps w/w to print at 51,557.4 points. Consequently, YTD return dropped to 20.7%, with market capitalisation printing at N27.8tn, thus shedding a total of N138.7bn last week. Similarly, activity level declined as average volume and value traded fell by 4.5% w/w and 8.3% w/w to print at 164.5m units and N2.1bn, respectively. Investor sentiment from last week’s trading session regressed, moderating to 0.8x from 0.9x as 31 tickers appreciated while 26 depreciated, as measured by market breadth.

On a sectoral level, overall w/w performance was mainly bearish as all the five (5) sectors we cover closed in the red. The Insurance (-2.5% w/w) sector led the laggards owing to increased profit taking in NEM (-9.2% w/w) and CORNEST (-8.0% w/w). Trailing behind were the Consumer goods (-1.4% w/w), Oil & Gas (-0.4% w/w) and Banking (-0.3% w/w) sectors on the back of share price depreciation in INTBREW (-14.3% w/w), NB (-5.0% w/w), OANDO (-3.2% w/w), CONOIL (-9.9% w/w), FBNH (-8.6% w/w), UNION (-9.8% w/w) and FIDELITY (-6.7% w/w). Lastly, the Industrial goods sector lost 0.2% w/w due to sell-offs in WAPCO (-1.5% w/w).

This week, we expect continued bargain hunting as investors look forward to the H1-2022 earnings season and will look 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 Secondary Market continues bearish run  
Last week, the financial system liquidity opened in the green, opening the week with liquidity levels of N1.9bn. However, the financial system soon fell into deficit within the week. 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 N158.8.bn 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%.

In the secondary NT-bills market, we observed continued 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 further rose by 1.4ppt w/w to close at 6.8%.

Looking ahead, no OMO maturities are scheduled to hit the financial system this week. In addition, the CBN will be rolling over N143.3bn worth of NT-bills during the 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 Debt Management Office (DMO) released the Q3-2022 auction calendar. The 2025s, 2032s and 2042s remain on offer. The secondary market saw a marginal increase in trading activity compared to previous weeks, buying interests on the short and mid-end of the curve, with the 2026s and 2042s having the most allure for investors. Investors continued to show apathy towards longer tenor papers. Overall, the average yield across sovereign bonds rose by 11bps w/w to close at 11.3%.

In the SSA sovereign Eurobond markets, sentiments were broadly bearish with sell pressure predominantly on the mid and long tenor papers 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 17bps w/w to close at 13.0%.

We expect market players to trade cautiously, cherry-picking attractive instruments given rising inflation. Improving liquidity in the coming weeks could spur demand for fixed-income products in the short term.

Currency Market: Naira extends loss at I&E window
Last week, the Naira extended loss at the Investors & Exporters (I&E) window, up 27bps w/w to close at N426.1/$. We continue to find quotes in the N605.0 – 615.0/$ region at the parallel market. In the I&E window, average FX turnover shrank by 11.5% w/w to $111.1mn, depicting reduced activity levels in the currency market in the period under review.

However, Nigeria’s external reserves climbed $171.0mn to close at $39.4bn, continuing its steady rise since 06-June.

This week, we expect the I&E window to continue trading around current levels. More so, global macroeconomic policies such as the hike in US interest rates and event as an apparent impending global slowdown will possibly see foreign dollars exit the market and we may see decreased FX activity, particularly from FPIs at the official window.