July 25, 2022/United Capital Research

Macro Highlight and Outlook
The Monetary Policy Committee (MPC) concluded its 286th meeting with the chairman announcing the unanimous decision of the committee to continue combatting inflation. The MPC decided to further increase the Monetary Policy Rate (MPR) by 100bps, bringing it to 14.0% while maintaining Cash Reserve Ratio (CRR) at 27.5%, the Asymmetric corridor at +100/-700 basis point around the MPR, and the Liquidity ratio was retained at 30.0%.

The CBN communique of the MPC meeting stated that Nigeria’s manufacturing Purchasing Managers’ Index (PMI) rose to 51.1 index points in Jun-22 (previously 48.9 in May-22), surpassing the 50-index point benchmark. It reflects improved economic activity and sector expansion. This is likely to ease any recession concerns for Nigeria.
President Buhari unveiled the formerly state-owned Nigerian National Petroleum Company (NNPC) as a limited liability company (NNPC Ltd.). The NNPC disclosed that it would discontinue its monthly remittances to the Federation Accounts Allocation Committee (FAAC).

The Federal government has continued to remain mute on the recent increase in the price of PMS. A document in circulation shows the rise in petrol prices across Lagos, Abuja and all the geo-political zones. The new price of PMS ranges from N169/litre to N189/litre in the new document. The new prices have been adopted based on our survey.

This week, we expect to see the market reaction to MPC’s decision; a surge in money market and bond yields as more investors demand higher returns on fixed-income instruments and reduced equity holdings. On the data front, we expect the Nigerian Bureau of Statistics (NBS) to publish its Q1-2022 Daily Energy Generated and sent out and its Demographics Statistics Bulletin 2021.
 
Global Markets: Global stocks continue resilient momentum
Last week, global equities carried over momentum from late the previous week, as investors continue to welcome signs of slowing inflationary pressures amid possible hawkish monetary policy stance by the US Fed in subsequent meetings. A significant portion of gains in the US stocks is attributed partly to a suspicion on Wall Street that negative sentiments had reached extreme and unsustainable levels. The Bank of America released its Monthly Fund Manager Survey, which showed that funds’ cash holdings had reached their highest levels since 9/11, while their equity exposure was at the lowest since the recession and global financial crisis of 2007-09. The survey seemed to have sparked a wave of short covering, as investors who had been betting that stocks would go down closed out positions. Also, Q2-22 corporate earnings absorbed by investors last week majorly indicated some greater resilience in corporate profits and outlooks than many had expected. Small-cap shares and the technology-heavy Nasdaq Composite outperformed. Consumer discretionary shares performed best within the S&P 500 Index, helped by rebounds in Amazon.com and Tesla. Overall, US equities continued momentum as major indices closed the week green. For context, the NASDAQ Composite surged 3.3% w/w, the S&P 500 gained 2.6% w/w, while the Dow Jones (DJIA) rose 2.0% w/w.

European shares rose as market sentiment remained strong despite discouraging economic data releases and the European Central Bank’s (ECB) decision to raise interest rates for the first time in over a decade, up by 50bps, to curb rising inflation. The larger-than-expected adjustment was combined with the announcement of a new bond-buying tool called the Transmission Protection Instrument, which was introduced as a measure against the surge in borrowing costs. According to numbers released by the Office of National Statistics (ONS), UK’s consumer price inflation index recorded a new 40-year high of 9.4% y/y in June, up 30bps from 9.1% y/y in May, with increased fuel and energy costs and food prices acting as primary drivers of the inflation recorded. The eurozone economy slowed, as output and new orders declined for the first time since the start of Covid-19 lockdowns in 2020. Manufacturing PMI fell to 49.6 in June, from 52.1 in May. The services sector PMI fell to 50.6 from 53. This likely reflects diminished consumer confidence as the cost of living increased. Also, Russia restarted Nord Stream gas flows to Europe following its closure for a 10-day maintenance period. That said, the broad-based pan-European STOXX 600 climbed 2.9% 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 3.0% w/w, 3.0% w/w and 1.6% w/w, respectively.

In the Asian markets, stocks closed the week on a mixed note, extending w/w gains. Despite Japan’s core CPI increasing at its fastest pace since March 2015 in the June reading, the Bank of Japan (BoJ) maintained its ultra-loose monetary policy at its July meeting, with its short-term policy interest rate remaining at -0.1%, while also maintaining its long-term yield target and asset purchase program, to support the country’s fragile economic recovery, continuing to diverge from other central banks’ tightening policies. As a result, Japanese stocks rose over the week, with the Nikkei 225 gaining 4.2% w/w. On the other hand, Chinese stocks posted mixed returns after Premier Li Keqiang tempered expectations of excessive stimulus and indicated flexibility on China’s annual growth target. That said, the broad capitalisation-weighted Shanghai Composite Index climbed 1.3% w/w. Also, the India SENSEX sustained similar upward momentum rising 4.3% w/w.

Crude oil prices closed the week higher despite the volatile trading week. Brent prices climbed 2.2% w/w, despite concerns of weakening global demand. At the same time,
supply tightness was lessened by Russia’s decision to return gas to Europe and the resumption of some Libyan output.

Looking ahead, Also, we maintain that the hawkish monetary stance across major central banks, with the ECB hiking for the first time in a decade, will pose a significant headwind to the global equities market amid fading inflation pressures. However, fund managers will continue to cherry-pick stocks with great fundamentals.
 
Domestic Equities: Local bourse falls… ASI down by 0.5% w/w
The equity market’s bullish run from the previous week halted and reversed as actors began to react to the MPC’s decision to hike the benchmark interest rate by 100bps. The downward pull of the bourse was driven by sell-offs in large-cap stocks like NB (-10.9% w/w), ZENITHBA (-6.5% w/w), WAPCO (-6.8% w/w), MTNN (-0.6 w/w), INTBREW (-6.9% w/w) and OANDO (-6.6 w/w). Hence, the benchmark NGX-All Share Index (NGX-ASI) declined, falling 0.5% w/w to print at 51,979.92 points. As a result, YTD return fell to 21.7%, while market capitalisation lost N90.0bn to print at N28.1tn. Activity level improved last week as average turnover and value traded climbed by 81.9% w/w and 96.9% w/w to 917.2mn shares worth N14.8bn, respectively. This increase in activity is largely due to no trading activity on 11- and 12-July due to the holiday. Thus, investor sentiment remained subdued, declining to 0.5x (from 0.6x last week), as 19 tickers appreciated while 36 depreciated.

On a sectoral level, overall w/w performance was bearish as three (3) of the five (5) sectors we cover closed in the red. The Banking sector (-4.1% w/w) sector led the laggards owing to losses in ZENITHBA (-6.5%), UBA (-1.4%), GTCO (-1.0%) and ACCESSCORP (-1.1%). Trailing behind were the Consumer Goods (-2.0%) and the Industrial Goods (-0.49%) sectors. This was resultant of share price depreciation in HONYFLOU (-14.5% w/w), INTBREW (-6.9% w/w), FLOURMIL (-0.6% w/w), UNILEVER (3.2% w/w). On the other hand, the Oil & Gas (3.8% w/w) and Insurance (1.8% w/w) sectors grew following gains in SEPLAT (10.0% w/w), CORNERST (26.3% w/w) and LINKASSU (0.6% w/w).

This week, we expect the impact of the increased benchmark lending rate on equity markets to continue to take effect, namely a bear market. Nevertheless, investors are expected to continue stock-picking in anticipation of the H1-2022 earnings season.
 
Money Market Review: System liquidity remained tight amidst a hike in interest rate
Last week, the financial system liquidity remained tight as liquidity levels opened at a deficit of N276.9bn. Despite OMO inflows worth N10.0bn trickling into the system, banks relied on the repo and CBN lending facility windows to fund their short-term needs, as auctions conducted by the CBN further shrunk liquidity levels. In addition, the unanimous decision by the MPC to hike the benchmark interest rate by 100bps to 14.0% was another key player that set the tone for the ceiling of interbank lending rates. Consequently, the Open Repo Rate (OPR) and the Overnight Rate (OVN) rose by 100bps w/w to close the week at 14.8% and 15.0%, respectively.

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 40bps w/w to close at 7.3%, from 6.9% the previous week. Similarly, in the OMO bills market, the average yield on the bills climbed by 150bps w/w to 8.9%, from its previous close at 7.4%.

We expect the Central Bank to conduct an NTB auction this week, rolling over N264.3bn worth of bills. We expect stop rates to close higher as investors remain standoffish to fixed income securities amidst the hike in interest rates. Also, we expect liquidity to ease marginally as N40.0bn worth of OMO maturities hit the system.

Bond Market: Standoffish sentiment in the primary market auction
Last week the Debt Management Office (DMO) conducted a bond auction with N225.0bn worth of papers on offer. Investors’ demand was unattractive amidst standoffish sentiment and illiquidity pressures in the market. Hence, the 2025s and the 2032s were undersubscribed by 0.2x and 0.3x, respectively, while the 2042s were oversubscribed by 1.4x. Overall, the total subscription stood at N142.3bn (undersubscribed 0.6x), while the DMO undersold, selling only N123.8bn worth of paper. The marginal rates on the 2025, 2032 and 2042 rose by 90bps, 50bps and 60bps to 11.00%, 13.00% and 13.75% respectively (previously, 10.10%, 12.5% and 13.15%).

In the secondary market, performance mirrored activities in the auction and closed broadly bearish. Overall, we saw the average yield across sovereign bonds rise by 40 bps w/w to close at 11.9%, from 11.5%, while the average yield on corporate bonds closed at 12.6%.

In contrast to expected sell-offs following recent rate hikes in Europe by the ECB  by 50bps, yields on Nigerian Eurobond fell by 190bps w/w to close at 13.0% from 14.9%.

Looking ahead, we expect market players to remain standoffish with the fixed-income market, demanding higher rates for their funds. Activities in the secondary market would be pivoted towards post-auction portfolio rebalancing.
 
Currency Market: Naira closed flat at the I&E window
Last week, the Naira remained flat at the Investors & Exporters (I&E) window, closing at N430.00/$. Average FX turnover grew by 137.6% w/w to $168.1m. We continue to find offer quotes in the N618.0 – N622.0/$ region at the parallel market.

However, most recent external reserves figures from 15-Jul shows reserves climbed $75.0mn w/w to close at $39.4bn, continuing its steady rise since 06-June, into its 6th consecutive week. This is also as the CBN announced a $620.0mn inflow from non-oil sources in H1-2022.

This week, we expect the Naira to maintain its upward trajectory at the I&E window and parallel market.