August 1, 2022/United Capital Research

Macro Overview 

Earlier this week, the International Monetary Fund (IMF) released its World Economic Outlook report. In the report, the IMF retained its 3.4% growth projection for Nigeria in 2022 but raised its growth projections for 2023 by 0.1ppt to 3.2%. 

The Federal Government announced through the Minister of Agriculture and Rural Development, Abubakar Mahmood, that it has approved a ban on the direct purchase of agricultural produce from local farmers by foreign merchants. The ban was implemented to protect the interests of local farmers. 

Recent Data from the Nigerian Manufacturers Association of Nigeria revealed that the worth of goods manufactured declined 21.6% between 2017 and 2021 as N9.4tn worth of goods were manufactured in 2017 but plunged to N7.4tn by the end of 2021. 

The Premium Breadmakers Association of Nigeria (PBAN) suspended its 4-day strike last week. It resolved to increase its bread price by 10.0% and master bakers increased their price by 20.0%. The strike followed the Federal Government’s (FG)15.0% wheat development levy, NAFDAC’s N154,000 penalty charge on late renewal of certificates and the inability of its members to access the CBN’s grants and soft loans. 

According to a statement from the office of the Senate President, the Senate has set out a plan to summon the Governor of the CBN, Godwin Emefiele, to explain the rapid depreciation of the naira last week. 

The Lagos Commodities and Futures Exchange, just recently licensed by the Securities and Exchange Commission (SEC) to trade gold with the specification of the London Bullion Market Association’s 99.99% purity, targeting globally acceptable pricing and quality, started trading in gold ahead of its official launch. 

In the coming week, we expect the National Bureau of Statistics to release its Oil and Gas Production Report (2021). For the most part, we expect the macro/socio-economic discussion to be dominated by updates on the economy’s sliding currency and a resolution to the ongoing Academic Staff strike. 

Global Markets: Global stocks sustain upward momentum

Last week, global equities rebounded to end the month on a positive note, its best since 2020. The week was stuffed with various events for investors to consider in their investment decisions. Several companies released their Q2-2022 numbers with tech giants and energy companies (driven by higher oil prices) leading a decent earnings season compared to consensus expectations. However, the sticking point of the week was the Federal Open Market Committee (FOMC) policy decision. Following conclusion of the meeting, Fed Chair, Jerome Powell announced a 75bps increase in the Fed fund target rate to 2.25% – 2.50%, in line with market expectations. However, the positive for the equities market was the statement by the Fed chair that it would now focus on data to guide its policy decisions in the future after it has frontloaded its rate hikes in the first half of the year. He also clarified that the Fed believes they are at an economy-neutral policy rate level where monetary policy does not interfere with economic growth or other macro variables. The market interpreted this as a dovish fed and rice this into the yield curve with two-year and 10-year yields contracting for the week. Weak macroeconomic data such as another GDP contraction, weak home sales data and a third consecutive decline in consumer confidence index further corroborated expectations of a dovish fed (or less hawkish fed) going forward. These events fed a stellar final week for US equities as the NASDAQ Composite surged 4.7% w/w, the S&P 500 gained 4.3% w/w, while the Dow Jones (DJIA) rose 3.0% w/w. 

Similarly, the European stock markets had a positive run in the past week. The UK’S FTSE 100 gained 2.0% w/w, driven primarily by the released Eurozone GDP numbers also revealed a growth rate of 0.7% y/y (a 20bps increase from the previous quarter) in the 19-member bloc, which beat market expectations. Investors were also hopeful that the numbers would favour a more dovish ECB going forward even as recessionary fears loom in the backdrop due to continued energy inflation. Germany’s DAX index gained 1.7% w/w despite the country’s GDP remaining stagnated q/q. Also, the French CAC 40 index was up by 3.7% w/w. Overall, the European STOXX 600 index gained 3.0% w/w.

The Asian markets closed mixed although barraged with bearish sentiments this past week as US recessionary fears took hold while a renewed surge of foreign investor outflow from EM equities gained more foothold. China’s Shanghai Composite Index declined 0.5% w/w, taking its drop for the month to about 4.0% and ending a two-month rally that was divergent to the global equities slump. The renewed government crackdown on the tech sector, challenges in the real estate sector and a resurgence in Covid-19 cases fueled investors’ fears. In Japan, a firmer yen contributed to reduced demand, the Nikkei 225 declined marginally by 4bps w/w. In regional markets, Australia’s ASX 200 gained 2.5% w/w, and India’s SENSEX gained 2.7% w/w.  

Last week, oil prices strolled northwards despite the poor US Q2-2022 GDP numbers. Brent futures gained 5.3% w/w, closing at $110.01/bbl. At the same time, WTI futures gained 2.0% w/w to close at $98.62/bbl. The increase in prices was caused by the continued elevated global demand and below-average supply. The Eurozone GDP numbers beat market expectations indicating continued strong oil demand. In addition, a marginally weaker dollar also boosted petroleum demand.

Looking ahead, global equities are expected to remain soft as the harsh reality of a global recession on the horizon dawns. In addition, there is further suspicion that investors are overly optimistic to expect a slowdown in rate hikes amidst unabating inflation. In the crude oil market, investors await the results of the Organization of the Petroleum Exporting Countries and allies (OPEC+) meeting that will be held within the week. The decision from that meeting would indicate the oil supply for the coming months. We expect it would be difficult for OPEC+ to boost supply as most members are already facing difficulty meeting current production quotas. 

Domestic Equities: Sell pressures weigh on local bourse

The domestic equity market maintained its bearish momentum closing in the red on four out of five trading sessions of the week. We saw selloffs dominate the market as investors shift their focus from the equity space to the fixed income space, amidst rising rates due to the hike in the monetary policy rate and tight system liquidity. The local bourse was particularly dragged down by selloffs in large-cap stock, MTNN, which shed 12.6% w/w. As a result, the benchmark NGX-All Share Index (NGX-ASI) declined 3.1% w/w to print at 50,370.3 points. Hence, YTD return weakened to 17.9%, while market capitalization lost N868.0bn to print at N27.2tn. Last week, activity level improved as average value and volume traded climbed by 10.0% w/w and 68.5% w/w to N3.3bn and 309.1mn respectively. In line with the bearish trend for the weak, investor sentiment weakened to 0.2x from 0.5x, as 11 tickers appreciated while 53 depreciated.

On a sectoral level, overall w/w performance was bearish as all the five (5) sectors we cover closed in the red. The Insurance sector (-5.0% w/w) sector led the laggards due to price depreciation in AIICO (-10.9% w/w) and MANSARD (-10.9% w/w). Trailing behind were the Consumer Goods (-4.6% w/w) and the Oil and Gas (-1.0% w/w) sectors following selloffs in NESTLE (-9.8% w/w), NB (-4.1% w/w), ARDOVA (-8.1% w/w) and OANDO (-2.7% w/w). Lastly, the Banking (-0.4% w/w) and Industrial Goods (-0.2% w/w) sectors dipped as a result of losses in ZENITHBA (-0.2% w/w), ACCESSCO (-1.1% w/w), WAPCO (-2.9% w/w) and CUTIX (-8.4% w/w).

On corporate actions, we saw influx of positive and impressive performance as several companies released their H1-2022 results. In the banking sector, FCMB, FBN Holdings and Wema Bank recorded 80.9%, 48.6% and 42.0% increases in their Profit After Tax (PAT), which printed at N13.7bn, N56.6bn and N5.3bn respectively. Similarly, in the Industrial sector, BUA Cement, Lafarge (WAPCO) and Julius Berger increased their PAT by 32.1%, 41.4% and 26.1% to N61.4bn, N37.4bn and N6.0bn respectively. Lastly, the Consumer goods sector presented a whopping performance as Cadbury and Guinness Nigeria had 353.7% and 1146.8% increases in their PAT in H1-2022 and FY-2021/22 respectively. Guinness Nigeria, MTN Nigeria, Okomu Oil and SEPLAT all announced dividend payments of N7.14/s, N5.60/s, N7.0/s and $0.025/s, respectively.

This week, we expect the market to see a rebound as bargain hunting activities resume due to the low valuations in the market at the moment. That said, we advise investors to continue to exercise caution as we expect to see more volatility in the medium to long term as long as interest rates remain high.

Money Market Review: Stop-rates across the short and mid tenor climb higher at PMA

Last week, financial system liquidity remained tight as liquidity levels opened at N94.9bn positive. Despite OMO inflows worth N30.0bn 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. Furthermore, the MPC’s decision to hike the benchmark interest rate by 100bps to 14.0% continued to impact the fixed income yield environment, thus maintaining ceiling of interbank lending rates in the double-digit region between 14.0% and 15.0%. For context, the Open Repo Rate (OPR) declined 8bps w/w to settle at 14.8% with the Overnight Rate (OVN) recording no w/w change to close the week at 15.0%.

Last week, the Central Bank of Nigeria (CBN) conducted an NT-bills auction to rollover N264.3bn worth of maturing bills. In line with sentiments from the last auction, demand from investors was weak as total subscription printed at N320.5bn, implying a bid-to-cover ratio of 1.2x. Overall, considering the aggressive rate positioning, the CBN sold only the amount on offer. Stop rates in the 91-day and 182-day bills printed higher by 5bps and 10bps to 2.8% and 4.1% respectively. The 364-day bill closed flat at 7.0%.

In the secondary NT-bills market, we observed extended bearish sentiments from investors especially toward the short to mid end of the curve, with sentiments from the PMA trickling into the secondary market As a result, the average yield on NT-bills rose by 48bps w/w to close at 7.7%, from 7.3% the previous week. Similarly, in the OMO bills market, the average yield on the bills climbed by 69bps w/w to 9.6%, from its previous close at 8.9%.

Looking ahead, we expect the financial system to remain tight owing to no expected maturities this week, with the OPR and OVN rates maintaining current double-digit level. As a result, we expect that the secondary market for NT-Bills will continue in bearish momentum, and money market rates will remain elevated.

Bond Market: Average yields climb higher in secondary bonds market

Last week, the secondary bonds market witnessed mild sell-pressure and investors sentiment remained bearish amid tight financial system liquidity and hawkish monetary policy. Overall, we saw the average yield across sovereign bonds climb higher by 9 bps w/w to close at 12.0%, from 11.9%, while the average yield on corporate bonds climbed 11bps to close at 12.7%.

However, the Nigerian Eurobonds space witnessed positive investor appetite, as local investors resorted to taking positions for yields in dollar, amid significant depreciation of the Nigerian Naira (NGN) against the USD and other significant pairs in the period under review. In addition, inflow of coupon payments has further supported the recent rally. Thus, average yields on Nigerian Sovereign Eurobonds declined by 29bps w/w to close at 12.8% from 13.0% in the prior week.

Looking ahead, we expect investors to remain standoffish in the fixed income market, demanding higher rates for their funds given evidence of strained financial system liquidity. In the Eurobonds market, we expect to see sustained interest in Nigerian Eurobonds as Nigerian investors search for USD outlets while coupon inflows towards the end of August could sustain appetite for these papers.

Currency Market: The Naira records historic dip in the parallel market

Last week, the Naira appreciated at the Investors & Exporters (I&E) window to close at ₦429.00/$, gaining 31bps w/w, from ₦430.33/$. At the parallel market, we find offer quotes in the region of ₦705/$- ₦715.0/$ as the Naira crossed to a historic ₦700.0/$ mark on 28-July. In the I&E window, average FX turnover fell 44.9% w/w to $92.6m. Similarly, Nigeria’s external reserves fell marginally by 51bps w/w to close at $39.2bn. 

This week, we expect to witness continued downward pressure on the Naira across all market segments.