August 15, 2022/United Capital Research

Macro Highlight and Outlook
According to the World Bank and the Budget office of the Federation, remittances to Nigeria were estimated at $60.22bn from 2019-2021. The figures were disclosed in the 2023-2025 Medium Term Expenditure Framework and Fiscal Strategy Paper (MTEF/FSP). Notably, the World Bank projects Nigeria’s Diaspora remittance inflow to increase by 7.1% in 2022.

President Muhammadu Buhari reversed his authorisation of the acquisition of the entire share capital of Mobil Producing Nigeria Unlimited by Seplat Energy Offshore Limited. The reversal came after the Nigerian Upstream Petroleum Regulatory Commission (NUPRC) countered the President’s approval on Monday because the commission is the sole regulator, and such consent remains within its jurisdiction.

According to data from the Federal Ministry of Power in Abuja, power generation on the national power grid crossed 4,000MW at 6:00 am on Wednesday, hitting 4045.1MW, as the Federal Government announced it had commenced construction of transmission lines and substations to add 204MW to the grid.

A recently released report by the Bank of Industry revealed that an estimated N21.0tn would be required to fund the housing sector deficit in Nigeria. The Ministry of Works and Housing is working with the National Population Commission on more research.

Looking forward, we expect the Nigerian Bureau of Statistics (NBS) to release the Consumer Price Index (CPI) and inflation report for the month of Jul-2022. We forecast inflation to print at 19.6%, 100bps above its 18.6% print in Jun-2022, as food price pressures, elevated energy cost and low base effect persist.
 
Global Markets: Lower-than-expected US inflation numbers extend the bullish run
Last week, the global equities market rallied as investors’ worries about more aggressive rate hikes by central banks amid persistent inflationary pressure in the global economy eased off mildly. US stocks rallied after inflation data released by the US bureau of statistics recorded no m/m change in the US inflation number, remaining at 8.5% y/y before seasonal adjustment. Investors welcomed the encouraging inflation data, which indicated that, while inflation was still elevated on a y/y basis, it had started to slow, supporting the view that the rise in consumer prices may have peaked. Federal reserve officials reiterated that the central bank still had work to tame inflation. However, the market lowered expectations for a possible 75bps rate hike in September. That said, trading sessions last week saw all US equities close in the green, with major US equity indices gaining extended value w/w. For context, the NASDAQ Composite, S&P 500, and DJIA climbed by 3.1% w/w, 3.3% w/w, and 2.9% w/w.

The European markets recorded a bullish run last week, in tandem with the US market, with major shares climbing as the aggressive hawkish tone across major central banks began to ease. Several major European countries announced they would provide more emergency funds to bolster slowing economies and help citizens tackle the cost-of-living crisis. Notably, the German Finance Minister, Christian Lindner, announced that the government would offer €10.0bn in tax relief, while the French parliament passed a support package of €44.0bn. In other news, the UK economy contracted less than its forecast in Jun-2022 when public holidays for Queen Elizabeth II’s platinum jubilee celebrations weighed on output. UK’s GDP shrank 0.6% m/m, with consensus forecast for Jun-2022 printing at 1.3% m/m contraction. UK’s GDP for Q2-2022 declined 0.1% sequentially, with the Bank of England (BoE) maintaining expectations of a possible recession at the end of the year. Industry production in the euro area rose for a third consecutive month in June, with output increasing by a much stronger-than-expected 0.7% sequentially, thanks to a large uptick in capital goods, mainly in smaller countries. Overall, the broad-based pan-European STOXX 600 ended the week higher by 1.2% 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 gained 1.3% w/w, 1.6% w/w and 0.8% w/w, respectively.

In Asia, the equities market maintained bullish momentum as investor sentiment toward Asian stocks remained strong, supported by weaker-than-anticipated US inflation data, which dampened expectations that the US Fed would continue in its recent hawkish tone. In Japan, sentiments were also bolstered by the reshuffling of Japan’s Cabinet, following the Liberal Democratic Party’s (LDP’s) convincing win with its coalition partner Komeito in the parliamentary upper house election on July 10, which signalled policy continuity, as top figures in key posts were retained, including the Finance Minister Shunichi Suzuki. As a result, Japan’s Nikkei 225 index climbed 1.3% w/w. On the other hand, the Chinese stock markets ended the week on a mixed note, as a flare-up in coronavirus cases offset news of a record trade surplus last month and a central bank report signalling support for growth. On that note, the capitalisation-weighted Shanghai Composite Index gained 1.5% w/w, and the Indian SENSEX gained 1.8% w/w.

Last week, volatile trading sessions saw oil prices close on a positive note, extending weekly gains into the second week. Increased oil demand from China, encouraging figures on US gasoline demand, lower-than-expected US inflation numbers, and the upward revision by the International Energy Agency (IEA) of its oil demand growth forecast for 2022 by +380,000bpd (as soaring natural gas prices have pushed consumers to switch to oil), drove the modest gains last week. Overall, from a w/w perspective, oil prices closed higher, with the Brent Crude gaining 3.4% w/w to print at $98.2/bbl.

Looking ahead, we expect the interest rate environment will remain the main determinant in the movement of equities going forward.

Domestic Equities: Large-cap stocks drove the bear market
Last week, the domestic equities market reversed its bullish momentum from the prior week as market participants book profits off impressive H1-2022 earnings results, and the fixed income market remains attractive due to high money market rates. Notably, losses in large-cap stocks, BUACEMEN (-10.0% w/w) and MTNN (-6.9% w/w) drove the bear market. The market closed red in four of the five trading sessions of the week. Hence, the NGX ASI and market capitalisation declined by 2.1% w/w to close at 49,664.07 and N26.8tn, respectively, with the YTD return weakening to 16.3%. On activity level, average value and volume traded rose by 114.1% w/w and 5.4% w/w to 302.2mn and N2.7bn, respectively. Investor sentiment weakened to 1.3x from 1.9x, as thirty-three (33) tickers appreciated while twenty-six (26) depreciated at the week’s close.

On a sectoral level, overall w/w performance was bearish as three (3) out of all the five (5) sectors we cover closed red. The insurance sector (+6.0% w/w) led the gainers, driven by price appreciations in NEM (+29.7% w/w) and WAPIC (+7.3% w/w). The Consumer goods sector (+3.0% w/w) followed behind as bargain hunting in BUAFOODS (+10.0% w/w) and DANGSUGA (+1.2% w/w) drove the sector northward. On the flip side, the Industrial Goods sector (-5.2% w/w) led the laggards for the second week running due to price depreciation in BUACEMEN (-10.0% w/w) and DANGCEM (-2.3% w/w). Trailing behind was the Banking sector (-0.9% w/w) following selloffs in ZENITHBA (-3.0% w/w) and ACCESSCO (-2.2% w/w). Lastly, the Oil and Gas sector (-0.4% w/w) closed red, driven by sell-offs in OANDO (-1.8% w/w) and ARDOVA (-3.8% w/w).

This week, we expect the bear market to persist as the impact of the increased benchmark interest rate continues to weigh down equity markets. However, investors are expected to continue cherry-picking stocks with solid underlying fundamentals.
 
Money Market Review: Stop rates trend higher at the NTB auction
Last week, the financial system opened with deficit liquidity of N78.9bn. The financial system further shrunk due to the absence of maturities and inflows. Like in previous weeks, banks were forced to continue relying on the repo and CBN Standing Lending Facility (SLF) window to fund short-term obligations. At the end of the week, system liquidity improved significantly, although still closing in a deficit of N3.6bn. Overall, interbank rates maintained double digits although declining w/w. Consequently, the average Open Repo Rate (OPR) decreased by 15bps w/w to print at 13.5%, and the average Overnight Rate (OVN) decreased by 23bps w/w to print at 13.9%.

The Central Bank of Nigeria (CBN) conducted an NT-Bills auction in the primary market rolling over N150.6bn worth of bills across the 91-day, 182-day and 364-day tenors. The auction was met with decent investor appetite, although interest was significantly less than in previous outings. Investors submitted bids totalling N187.5bn, implying a bid-to-cover ratio of 1.3x. The apex bank, however, only sold the amount on offer. Notably, stop rates across the offerings climbed 70bps, 40bps and 45bps to print at 3.5%, 4.5%, and 7.45%, respectively.

In the secondary NT-bills market, we observed significant bearish sentiments as several banks continued 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 rose by 31bps w/w to close at 7.9%.

Looking ahead, N100.0bn OMO maturities will hit the financial system this week. We expect money market yields to print higher and funding rates to remain at their ceiling as system liquidity remains tight, mainly as banks try to raise the liquidity.

Bond Market: Sovereign Eurobond Bonds market close bullish
Last week the FGN bond auxiliary market saw increased activity as investors began positioning for the upcoming Primary Market Auction (PMA). Overall, the average yield across sovereign bonds gained by 44bps w/w, closing at 12.7%. Similarly, corporate bonds traded on a bearish note, albeit with steeper movements in the yield curve, as the average yield on corporate bonds rose 74bps w/w to 13.6%.

In the SSA sovereign Eurobond markets, sentiments were mixed; we observed sell-offs in Ghanaian Eurobonds as Fitch downgraded the sovereign papers to junk bond status (to “CCC” from “B-“). Investor appetite for Nigerian Eurobonds increased as sentiments were broadly bullish, and average yields declined by 148bps w/w to close at 10.5%.

The Debt Management Office (DMO) will be conducting this month’s Primary Market Auction (PMA) today, a total of N225bn papers will be offered across the 2025s, 2032s and 2042s. We anticipate an increase in the marginal rates, as it remains a buyers’ market due to the illiquid financial system, and the increased crystallisation of various risk factors. We expect the domestic bonds secondary market to be active within the week as investors rebalance portfolios before and after the auction settlement.

Currency Market: Naira depreciated at the I&E window
Last week, the Naira depreciated against the dollar by 35bps w/w at the Investors & Exporters (I&E) window to close at N429.6/$ (previously N428.1/$). At the parallel market, we continue to find quotes in the N650.0 – 680.0/$ region. In the I&E window, average FX turnover shrank by 29.1% w/w to $74.4mn, indicating a further reduction in activity level in the currency market as FX pressures persist. Notably, Nigeria’s external reserves fell by $21.0mn to close at $38.9bn.

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