August 8, 2022/United Capital Research

Macro Highlight and Outlook

According to the Nigerian National Petroleum Company (NNPC) Limited, a total of $2.7bn was remitted into its account with the Central Bank of Nigeria (CBN) in H1-2022. Of the $2.7bn remitted into the CBN account, $645mn was for dividend payments paid by the Nigerian Liquefied Natural Gas company Limited (NLNG). The remainder was derived by the balance of $1.8bn was gotten from the operational activities of the national oil company, which recently transited into a limited liability company.

According to data from the National Pension Commission (PenCom), assets under the Contributory Pension Scheme rose by 6.3% to N14.3tn in H1-2022. The data further showed that N9.0tn out of the total funds were invested in government securities (such as bonds and treasury bills). The balance was invested in domestic/foreign shares and corporate debt securities.

Following the recent increase in PMS price, the Minister of State for Petroleum Resources, Timipre Sylva, has stated the increase was not done by the FG but by fuel marketers. He reemphasised that the FG has not deregulated the downstream oil & gas sector. This indicates the upward adjustment was essentially a move to alleviate the concerns of the oil marketers to end the incessant fuel scarcity.

In the coming week, we expect the National Bureau of Statistics to release its Daily Energy Generated and Sent Out report in Q2-2022. We expect the macroeconomic space to be relatively quiet.

Global Markets: Global stocks perform well w/w  

Last week, the global equities market maintained its positive momentum despite worries of a reversal from the bullish sentiment that spurred the demand the previous week. Although we saw sell pressures at the start of the week as investors book profits from last week’s gains and fears of economic recession in the US loom, the equities market rebounded with the release of positive labour market data at the end of the week. The data showed an acceleration in job creation compared with Jun-2022, as the US economy added 528,000 jobs in Jul-2022. Hence, the US unemployment rate increased to 3.5% (from 3.6% in Jun-2022), returning to the lowest since the start of the Covid-19 pandemic in 2020. This eased concerns of a recession as the labour market rebounded even in the face of high inflation, tighter monetary policy and reduced fiscal support. In addition, we saw impressive performances from corporate releases towards the end of the week spark bullish sentiments in investors. The US equities closed in the green as the S&P 500 and NASDAQ gained 0.4% w/w and 2.2% w/w, respectively, while the DJIA lost 0.1% w/w.

In Europe, overall market performance was in tandem with the US market, with positive momentum overshadowing the negative data releases in the zone. The Bank of England (BOE) hiked its benchmark interest rate by 50bps to 1.75% from 1.25%, representing its highest hike in 27 years as it seeks to tamp down inflationary pressures. The apex bank also forecasted that the UK economy would enter a prolonged recession in Q4-2022, with inflation estimated to reach 13.0% in Oct-2022. The Eurozone Manufacturing PMI fell by4.4% to 49.8 from 52.1 in Jun-2022. The downturn is the sharpest since the eurozone sovereign debt crisis in 2012, as steep inflation squeezed demand. Hence, the Europe STOXX declined by 0.6% w/w. Similarly, as recession risk intensifies, the UK Manufacturing PMI dropped to a 25-month low in Jul-2022 to 52.1 (vs 52.8 in Jun-2022). Although it managed to stay above the 50.0 mark, unlike other European countries, this still implies no significant output growth. Against all odds, the Germany DAX (+0.7% w/w), France CAC (+0.4% w/w) and UK FTSE (+0.2% w/w) closed the week higher.

In Asia, we saw mixed investors sentiments in the market as unrest in Taiwan made headlines. The US House Speaker, Nancy Pelosi, visited Taiwan disregarding China’s firm opposition, interfering with China’s internal affairs. In response to the visit, the Chinese government-imposed sanctions on Pelosi and her immediate family. In addition, the Chinese government announced that it would be cutting back on cooperation with the US on climate change initiatives and blocking imports from hundreds of Taiwanese food producers. Notably, this weakened investors’ sentiment toward the market as China’s Shanghai Composite declined by 0.8% w/w. In other parts of Asia, the Bank of Thailand plans to extend its development of a retail Central Bank Digital Currency (CBDC) by initiating a pilot study by the end of 2022. The Japan Nikkei 25 gained 1.3% w/w, while the India SENSEX rose by 1.4% w/w.

Last week, the Organisation of Petroleum Exporting Countries (OPEC) concluded its 31st OPEC and non-OPEC Ministerial meeting. At the meeting, the members decided to raise the production quota to 100,000bpd in Sep-2022 (compared to 60,000bpd in Jul and Aug-2022), as more robust global oil demand continues to outweigh supply in the market. As a result, Brent crude oil prices dropped by 13.7% w/w to $94.9/bbl from its previous week’s print at $110.0/bbl.

Going forward, we maintain that rising inflationary pressure in the global space will remain a strong consideration for further mild interest rate hikes, which will continue to pose a significant headwind to global equities.

Domestics Equities: Bullish Sentiments Return

Last week, the domestic equities market had a turnaround ending the week with bullish momentum. Following the end of the H1-2022 earnings season, market participants continued bargain hunting strong stocks with strong underlying fundamentals, with companies like BUAFOODS driving the rally. The market closed green on two out of the five trading sessions of the week. Hence, YTD return gained printing at 18.7%, while market capitalisation appreciated by 72bps to close at N27.4tn. Last week, activity level declined as average value and volume traded fell by 54.3% w/w and 22.1% w/w to N2.6bn and 141.1mn, respectively, in line with the bullish trend for the week, investor sentiment strengthened to 2.4x from 0.2x, as 24 tickers appreciated while ten (10) depreciated at the close of the week.

On a sectoral level, overall w/w performance was bullish as three (3) out of all the five (5) sectors we cover closed green. The Consumer goods sector (+3.0% w/w) led the gainers, driven by price appreciations in BUAFOODS (+7.3% w/w) and FLOURMILL (+4.9% w/w), followed closely by the Banking sector (+2.6%) driven by appreciations from ZENITHBA (+5.8% w/w) and GTCO (+3.8% w/w). The Oil and Gas sector (+0.6%) also had a bullish run, driven by appreciations from ARDOVA (+8.3% w/w) and ETERNAOIL (+15.3% w/w).  The Industrial Goods sector (-5.8% w/w) sector led the laggards due to price depreciation in DANGCEM (-3.7% w/w) and BUACEMEN (-19.8% w/w). Trailing behind was the Insurance sector (-0.4% w/w) following selloffs in AIICO (-1.8% w/w) and LINKASSU (-5.6% w/w).

This week, we expect the impact of the increased benchmark lending rate on equity markets to continue to take effect, returning to a bear market. Investors are expected to continue cherry-picking stocks with solid underlying fundamentals.

Money Market Review: Funding rates remain in the double-digit terrain

Last week, financial system liquidity opened at N248.5bn, reflecting the influx of FAAC payments at the previous week’s close. However, the financial system closed the week congealed at N74.9bn, as there were no maturities into the system. However, banks continued to rely on the repo and CBN lending facility windows to fund their short-term needs. Overall, funding rates for the banks-maintained ceiling in the double-digit region are between 14.0% and 15.0%. Thus, at the close of the week, the Open Repo Rate (OPR) and Overnight rate (OVN) interbank lending rates ceiling closed at 14.5% and 15.0%, respectively, with the OPR declining 0.25ppts w/w while the OVN remained flat.

The secondary NT-bills market witnessed bullish sentiments toward the longer end of the curve as investors sought to re-invest their funds in a rising yield environment. As a result, average yields declined 11bps w/w to close at 7.6%.

In the coming week, the CBN is expected to conduct a PMA, rolling over N150.6bn worth of NT bills maturing next week. We expect stop rates to tick higher following the recent uptick in rates. Also, we expect N5.0bn worth of OMO maturities to hit the financial system next week, which will cause little to the system, and thus expect money market yields to remain elevated.

Bond Market: Average yields climb higher in the 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 0.3ppts w/w to close at 12.25%, from 11.95%, while the average yield on corporate bonds rose 12bps to close at 12.83%.

However, the Nigerian Eurobonds space witnessed positive investor appetite the following the inflow of coupon payments has further supported the recent rally. Thus, average yields on Nigerian Sovereign Eurobonds fell by 75ppts w/w to close at 12.0% from 12.75% in the prior week.

Looking ahead, we expect investors’ bearish sentiment in the bond market to be sustained. In the eurobond space, we expect the continued oscillation of rates, as local interest in Nigerian Eurobonds moderates the interest in the secondary market.

Currency Market: The Naira appreciated at the I&E window

Last week, the Naira appreciated at the Investors & Exporters (I&E) window to close at N428.13/$, gaining 20bps w/w from its previous close of N429.00/$. At the parallel market, we found offer quotes in the region of N620/$- N650.0/$ as the Naira continued to stray further from its historic ₦700.0/$ mark on 28-July, following the intervention of the local financial authorities. In the I&E window, average FX turnover improved, climbing 13.3% w/w to $105.0mn. On the other hand, Nigeria’s external reserves declined by 34bps w/w, shedding $133.0mn to close at $39.2bn. 

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