July 18, 2022/United Capital Research
Macro Highlight and Outlook
The National Bureau of Statistics (NBS) released inflation data for the month of Jun-2022. In line with our expectation, headline inflation printed at 18.6% y/y, 88bps higher than 17.8% in May-2022. On a monthly basis, prices of goods as measured by the inflation basket rose by 1.8%. Food inflation, the major component of the basket, rose by 2.1% m/m, higher than the 2.0% m/m increase recorded in May-2022 due to unabating pressures on food prices and supply-side constraints. On the other hand, pressure on the core sub-index subsided as the sub-index rose 1.6% m/m from 1.9% m/m in May-2022.
The Federal Government disclosed ongoing engagement with oil marketers on issues bordering on the cost of Premium Motor (PMS), fuel queues, and bridging claims payment, among others in the downstream oil sector. Excerpt from the meeting suggest that there might be upward adjustment of the pump price of petrol, as oil marketers have repeatedly blamed the persistent fuel queues in various parts of Nigeria on the unsustainable cost of PMS.
According to the Federal Government (FG), an additional capacity of 3,863MW of electricity will be made available to boost the power supply to customers across the country in the next 24 months.
The Federal Government has approved the disbursement of N400.0bn under the National Poverty Reduction and Growth Strategy (NPRGS). It covers welfare schemes including the Government Enterprise and Empowerment Programme (GEEP), Conditional Cash Transfer, Farmer Money, and Market Money.
This week represents a crucial week for monetary policy as the Monetary Policy Committee (MPC) would be meeting on 18th and 19th of July to decide its next course of action amidst multi-year high inflation numbers. On the data front, we expect the Nigerian Bureau of Statistics (NBS) to release the Internally Generated Revenue at state level for FY-2021. Also, we the NBS to release the Nigerian Domestic and Foreign debt for Q4-2021 report.
Global Markets: Fears of a global economic slowdown
Last week, bearish sentiments gripped the US equity market as investors sentiments turned sour on the back of myriad of negative developments. Top of the headline pile was the June inflation report released by the Bureau of Labour Statistics showing that headline inflation printed at a 41-year high of 9.1%, outpacing consensus estimate of 8.8%. The hotter than expected inflation numbers stoked fears of a steeper hike in the Fed Funds Target Rate. Worsening the performance was a disappointing start to the corporate earnings season as banking giants, JPMorgan Chase and Morgan Stanley delivered underwhelming numbers. However, by the end of the week, US equities pared some of its earlier recorded losses as the US Index of Consumer Sentiment (ICS) by the University of Michigan rose in June-22 to 51.1 points, from 50.0 points in May-22, albeit significantly below peak levels of 81.2 points in Jul-21, displaying pessimism in consumer confidence with the expectation that the economy is heading for great uncertainty. As a result, US equities finished the week broadly lower as the tech-heavy NASDAQ lost 1.6% w/w with the S&P 500 (down 0.9% w/w) and DJIA (down 0.2% w/w) following suit.
In Europe, equity market performance was broadly bearish as mounting uncertainties around the European economy continued to weigh on investor sentiment. First, the UK’s FTSE 100 index was down 0.5% w/w despite gaining momentum towards the end of the week to recover some losses recorded at the start. Domestically, unabating inflationary pressures, flight delays, and an ongoing political battle for the office of the Prime Minister affected market sentiment. Similarly, Germany’s DAX index closed lower by 1.2% w/w after major economists stated they believe the German economy was moving into a recession. On the flipside, the French CAC 30 managed to eke out a 5bps gain for the week. Meanwhile, worsening European equities’ performance was news that many European countries may have to ration gas as the winter season draws near. Overall, the pan-European equity benchmark, STOXX 600 lost 0.8% for the week.
In Asian markets, China’s Shanghai Composite fell 3.8% w/w as Q2-2022 GDP growth printed at an underwhelming 0.4% (compared to 4.8% y/y growth in Q1-2022) as analysts were able to properly evaluate the impacts of the renewed Covid-19 outbreak and associated lockdown measures on economic activities. News that the 14-day average fresh Covid-19 infections rose 292.0% further worsened the market’s performance. Similarly, equity market performance in India was underwhelming as the SENSEX lost 1.3% w/w. The Japanese NIKKEI 225 emerged the lone gainer, rising by 1.0% w/w.
Crude oil prices plummeted at the start of the week as the WTI, and Brent crude benchmarks reflected the weakened economic growth expectations that have put oil demand prospects in question. For context, Brent futures contracts fell 7.3% by Tuesday. Other relevant news was that OPEC released its first 2023 forecast which projected demand to grow by 2.7 mb/d y/y. Also, the American Petroleum Institute (API) reported a 4.8mn barrel build in crude oil stocks for the week ending 8-Jul, above the 1.9mn barrels prediction. However, prices rebounded on a 3-day bullish run as supply fundamentals provided some support. Nevertheless, Brent futures still close lower for the week, down 5.6% w/w to print at $100.99/bbl.
Heading into the new week, the global market is filled with uncertainty and predictions are up in the air. In the US, corporate earnings season is expected to kick into full drive while the build up to the Fed’s next week meeting is expected to continue. In Europe, the ripple effect of an impending train worker’s strike in the UK following an unresolved pay dispute will be felt in its financial markets. Eurostat expects the Euro area annual inflation to be 8.6% in Jun-22, up from 8.1% in May. As a result, the ECB is predicted to raise interest rates which could potentially weaken equity investment appetite. In Asia, slowing economic growth and fear of rising Covid-19 caseloads will continue to stifle market sentiments.
Domestic Equities: Local bourse regains momentum… ASI up by 1.3% w/w
In anticipation of the soon to be released earnings result of equities listed on the Nigerian Exchange (NGX), sentiments reversed, as investors looked to take positions in stocks with expectation of corporate earnings outperformance and possibility of interim dividend payment. Worthy of note is the fact that significant buy-interest in large-cap stocks like AIRTELAFRI (+10.0% w/w), BUAFOODS (+4.7% w/w), GTCO (+2.7% w/w), FBNH (+2.8% w/w), INTBREW (+7.4% w/w) and ZENITHBA (+0.9% w/w) drove the positive performance of the bourse last week. That said, the benchmark NGX-All Share Index (NGX-ASI) regained momentum, climbing 1.3% w/w to print at 52,215.1 points. As a result, YTD return strengthened to 22.2%, while market capitalization gained N354.3bn to print at N28.2tn. Activity level improved last week, as average value and volume traded climbed by 21.2% w/w and 4.9% w/w to print at N2.5bn and 167.1m units, respectively. Despite the bullish outcome for the equities market, investor sentiment remained subdued, declining to 0.6x (from 1.2x last week), as 20 tickers appreciated while 32 depreciated.
On a sectoral level, overall w/w performance was bearish as four (4) out of the five (5) sectors we cover closed in the red, with the remaining one (1) closing flat. The Industrial goods (-3.4% w/w) sector led the laggards owing to increased profit taking in DANGCEM (-3.6% w/w), WAPCO (-0.6% w/w), and CUTIX (-6.3% w/w) among others. Trailing behind were the Insurance (-1.9% w/w), Banking (-0.5% w/w) and Consumer (-0.3% w/w) sectors on the back of share price depreciation in CORNEST (-10.9% w/w), LINKASSU (-8.6% w/w), MANSARD (-1.5% w/w), ACCESSCO (-3.2% w/w), UBA (-2.0% w/w), UBN (-1.8% w/w), STERLNBA (-1.9% w/w), HONYFLOU (-7.4% w/w), CHAMPION (-1.0% w/w), and NNFM (-10.0% w/w). On the other side of the coin, the Oil & Gas (+0.02% w/w) sector alone closed flat, as portfolio managers inclined more toward a HOLD strategy on the sector’s equities.
This week, we expect continued bargain hunting as investors continue to look forward to the H1-2022 earnings season, cherry-picking stocks with potential for strong earnings performance as well as interim dividend payment. However, we note that a strong hike in MPR at this week’s MPC meeting could spell bad news for the equities market.
Money Market Review: Stop rates surge higher across all tenors at PMA
Last week, returning from the extended break, the financial system opened with a mild liquidity balance of N18.4bn. However, post-NTB auction, system liquidity plunged deeper into deficit, aided by an absence of substantial maturities 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 approximately N276.9bn in deficit. As a result, the relative illiquid market saw interbank rates settling at their ceiling for most of the week, with the average Open Repo Rate (OPR) declining 7bps to print at 13.8% while the average Overnight Rate (OVN) remained flat at 14.0%.
In the primary market, the Central Bank of Nigeria (CBN) conducted an NT-bills Primary Market Auction (PMA) within the week, offering to rollover maturing bills worth N143.3bn. There was decent investor demand with subscriptions amounting to N145.5bn, however with most bids at higher bid levels as investors pushed harder for better rates at the auction due to tight system liquidity. In a move to manage the rate of increase in the stop rate, the apex bank allotted only N103.6bn worth of papers and chose to supplement the outstanding offer of N39.7bn with a bridge finance. Accordingly, stop rates increased across all tenors, rising by 35bps, 21bps and 93bps respectively for the 91-day, 182-day and 364-day papers to print at 2.75%, 4.00% and 7.00%.
The secondary NT-bills market was relatively calm, amidst marginal investor interest on the newly issued one-year paper while banks continued to offer their NT-bills to raise liquidity amidst the tight financial system. As a result, the average yield on NT-bills rose by 9bps w/w to close at 6.9%.
Looking ahead, N10.0bn worth of OMO maturities are scheduled to hit the financial system this week. We consider this sum inadequate to solve the liquidity challenges of the money market and thus expect money market yields to print higher while funding rates maintain at their ceiling.
Bond Market: Sovereign Eurobonds & Bonds market close bearish
Last week, pre-auction posturing by market participants bolstered activity in the FGN bond auxiliary market. Investors sought to take short positions on the auction papers, especially the 2042s in preparation for the July FGN Bond auction holding today. Overall, the bearish sentiments made the average yield across sovereign bonds jump 19bps w/w, to close at 11.5%. In tandem, corporate bonds traded on a bearish note, albeit with steeper movements in the yield curve as the average yield on corporate bonds rose 36bps w/w to 12.2%.
In the Sub-Saharan Africa sovereign Eurobond markets, sentiments were broadly bearish as the market reacted to the U.S recently released inflation number (printing at 9.1%) beating market expectations. Meanwhile, investors still await the conclusion of the talks between the Ghanaian government and the International Monetary Fund (IMF). For Nigerian Eurobonds, the market sentiments were still extremely bearish as average yields rose by 1.8ppt w/w to close at 14.9%.
Looking ahead, we expect a further hike in marginal rates on the auction papers as market players demand more for their naira, as the financial system remains broadly tight. Activities in the secondary markets within the week would be pivoted towards investors rebalancing their portfolios post auction.
Currency Market: Naira extends loss at I&E window
Last week, the Naira extended loss at the Investors & Exporters (I&E) window, down 99bps w/w to close at N430.3/$. At the parallel market, we continue to find offer quotes in the N615.0 – N620.0/$ region. In the I&E window, average FX turnover shrank by 36.3% w/w to $70.8m, indicating further reduction in activity level in the currency market in the period under review.
However, Nigeria’s external reserves climbed $75.0mn to close at $39.4bn, continuing its steady rise since 06-June, into its 6th consecutive week.
This week, we expect the exchange rate in the I&E window to remain under pressure while we continue to reiterate expectations of a wider margin between the I&E window rate and parallel market rate.
