August 29, 2022/United Capital Research

Macro Highlight and Outlook
According to the National Bureau of Statistics, Nigeria’s real Gross Domestic Product (GDP) grew by 3.5% y/y in real terms in Q2-2022, indicating a 44bps increase compared to 3.1% in Q1-2022 and a 147bps decrease from 5.0% growth rate in Q2-2021. On a quarterly basis, real GDP recorded negative growth of 0.4%, reflecting lower economic activities in Q2-2022. The non-oil sector drove the growth due to contributions from Telecommunication, Transport, Financial Institutions, Agriculture and Manufacturing.

According to the Federal Ministry of Power, the recent one-day strike by workers of the Transmission Company of Nigeria (TCN) crashed Nigeria’s power generation to 43MW from a peak of 4,829.5MW. The TCN workers decided to strike action to protest unpaid entitlement and low promotion of principal managers.

According to the Central Bank of Nigeria (CBN), the combined bank borrowings by oil firms operating in the downstream and upstream subsectors of the Nigerian oil and gas industry increased by 4.4% to print at 5.9tn in H1-2022 (vs N5.7tn as at Dec-2021). Notably, operators in the downstream, natural gas and crude oil refining subsector owed banks N4.3tn, while operators in the upstream and services subsectors owed banks N1.7tn.

Lagos State has flagged off the construction of the largest Food Security Systems and Central Logistics Park in sub-Saharan Africa. Notably, the establishment of the food park is a component of an audacious five-year Agricultural and Food Systems Road Map (2021-2025) launched last year by the current administration to enhance food sufficiency in Lagos.

When completed, the central food and logistics hub is expected to create direct wealth for more than 5.0mn traders in the agricultural value chain while guaranteeing uninterrupted food supplies to more than 10.0mn Lagosian for at least 90 days in a period of scarcity.

Looking forward, we expect the Nigerian Bureau of Statistics (NBS) to release the Capital Importation report for Q2-2022.
 
Global Markets: U.S. Fed’s statement drives Global stocks down w/w
Last week, the global equities market declined following comments from the United States Federal Reserve Chairman, Jerome Powell; he iterated in a speech that the Fed will not be shifting to a rate-cut cycle anytime soon. He pointed out the need to take rates into the restrictive territory and hold them at higher levels for some time until the Fed is confident inflation is returning to the Federal Open Market Committee’s 2.0% goal. Notably, Friday’s session started with some positive inflation data. The PCE Price Index and core-PCE Price Index, which excludes food and energy, both moderated in July to 6.3% and 4.6% y/y, respectively, versus 6.8% and 4.8% in June. However, the inflation numbers were insufficient to dampen investors’ worries. The U.S. equities closed in red after the closing bell on Friday as the S&P 500, NASDAQ and DIJA declined 4.0% w/w, 4.4% w/w and 4.2% w/w, respectively.

In Europe, overall market performance was in tandem with the U.S. market, with the markets reacting to Powell’s comments. In addition, the U.K energy regulator, The Office of Gas and Electricity Markets (OFGEM), announced its latest increase in the country’s energy price cap by 80.0% to £3,549 ($4,189.64) per year from its current level of £1,971, as a result of a continued rise in wholesale gas prices, worsening the energy cost forecast and the U.K. inflation outlook. Hence, the Europe STOXX declined by 2.6% w/w. Also, recession fears intensify across Europe, and German consumer sentiment is set to hit a record low for the third month in September, according to surveys, as household energy bills rise. In contrast, French consumer confidence rose unexpectedly in August. However, the Germany DAX (-4.2% w/w), France CAC (-3.4% w/w) and UK FTSE (-1.6% w/w) closed the week lower.

In Asia, we saw bearish themes across the board as Asian stocks closed lower following the Fed’s statement. China’s National Bureau of Statistics revealed that China’s industrial output growth slowed to 3.8% y/y from 3.9% in June because of new anti-Covid measures imposed in manufacturing hubs Shenzhen and Tianjin. In addition, investors remain apprehensive as the US-Taiwan-China debacle unfolds, weakening investors’ sentiment toward the market; China’s Shanghai Composite declined by 0.7% w/w. In other parts of Asia, losses in power, manufacturing and Electricals saw the Japan Nikkei 25 declining 1.0% w/w, and the India SENSEX also falling by 1.2% w/w.

Last week, crude oil prices gained further on the back of released API data revealing U.S inventories continue to decline in addition to other supply headwinds such as terminal backlog in the black sea and signals from Saudi Arabia that OPEC could cut output, which aided the rally in petroleum prices. As a result, Brent crude oil prices rose by 4.4% w/w from $96.72/bbl. to $100.99/bbl.

Looking ahead this week, the Consumers’ Confidence report and August jobs report will be released. The strength of the labour market would significantly affect the posturing of the fed when considering the extent of a rate hike next month.
 
Domestic Equities: Large-cap stocks drove the bull market
The domestic equity market halted its bearish run closing the week green as bullish sentiments dominated the market. Despite trading in the red in the first two trading sessions of the week, the local bourse reversed, with the bulls dominating in the last three days of the trading week. Notably, buying interest in large-cap stocks such as AIRTELAF (+7.1%) and MTNN (+2.0%) drove the local bourse northwards. As a result, the All-Share Index (ASI) climbed by 0.63% to print at 49,682.15. Hence, YTD return moderated to 16.3%, while market capitalisation lost N200.0bn to print at N26.8tn. Overall. activity level increased as the average value and volume traded climbed by 24.0% w/w and 11.2% w/w to N3.1bn and 182.9mn, respectively. Thus, investor sentiment weakened to 1.1x from 1.6x last week, as 17 tickers appreciated while 16 depreciated.

Overall w/w performance was mainly bearish on a sectoral level as four (4) of the five (5) sectors we cover closed in red. The Industrial sector (-4.2% w/w) sector led the laggards due to price depreciation in DANGCEM (-5.3% w/w) and BUACEMEN (-3.4% w/w). Trailing behind were the Oil and Gas (-4.1% w/w) and the Consumer goods (-1.7% w/w) sectors following sell pressures in SEPLAT (-8.4% w/w), ETERNA (-8.3% w/w), BUAFOODS (-6.9% w/w) and GUINNESS (-4.8% w/w). The Banking sector lost 0.7% on the back of losses in ACCESSCORP (–1.2% w/w) and GTCO (-1.2% w/w). Lastly, the Insurance (+3.9% w/w) sector was the sole gainer as a result of bargain hunting in NEM (+30.9% w/w) and MBENEFIT (+20.0% w/w) drove the sector northwards.

We saw an influx of impressive performance on corporate actions as a few banks released their H1-2022. Zenith’ revenue grew by 18.1% y/y to print N390.1bn, while PAT grew by 5.0% to record N111.41bn from N106.1bn in H1-2021. As a result, the bank declared an interim dividend of 3 kobo. Stanbic IBTC recorded strong profit growth as PAT grew by 36.0% to print at N30.7bn. Thus, the bank declared an interim dividend of N1.50k.

This week, we expect the market to reverse to a bear market as investors remain cautious about the equity market amidst a rising yield environment and tight system liquidity. 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 relatively tight with a balance of N96.8bn. Into the week, OMO maturities to the tune of N45.0bn hit the financial system, spurring system liquidity even further. Despite the CBN’s mop-up activity in the primary market, rolling over maturing bills, in a bid to considerably shrink the system’s liquidity, the financial system closed the week with a balance of N120.4bn. Overall, interbank lending rates remained between 14.0% and 15.0% in the double-digit region. For context, the Open Repo Rate (OPR) and the Overnight Rate (OVN) declined 13bps w/w and 17bps w/w to settle at 14.4% and 14.7%.

The CBN conducted a primary market auction to roll-over N295.5bn worth of maturing bills. Overall, there was mild investors’ demand with total subscription printing at N311.1bn, implying a bid-to-cover ratio of 1.1x, skewed majorly toward the short and mid-end of the curve. The CBN’s allotment yet again was equivalent of the total offer of N295.5bn. In line with market expectations, stop rates across the short (90-day), mid (180-day), and longer (364-day) tenor offerings climbed 50bps, 50bps, and 105bps to settle at 4.0%, 5.0%, and 8.5% (vs 3.5%, 4.5%, and 7.45% in antecedent auction). Notably, the upward trend further showed that investors remained relentless at demanding higher rates for their funds amidst tight system liquidity.

In the secondary NT-bills market, we observed bullish sentiments from investors, especially toward the short-mid end of the curve, as investors sought to lock in funds in a high-interest rate environment amidst a relatively liquid financial system. As a result, the average yield on N.T. bills declined by 6bps w/w to close at 7.8%, from 7.9% the previous week.

Looking ahead, we expect the financial system to tighten owing to no maturities scheduled in the coming week, with the OPR and OVN rates maintaining current double-digit level. We expect money market yields to print higher and funding rates to remain at their ceiling as system liquidity remains tight.

Bond Market: Muted activity in secondary bonds market
Last week, the secondary bonds market was muted as investors remained standoff-ish towards the bonds market to drive yields to a preferred level given the tight system liquidity. Overall, the average yield across sovereign bonds inched down by 1bp w/w to close at 12.8%. On the other hand, investors’ sentiment toward corporate bonds was bearish as the average yield declined by 8bps w/w to close at 13.9%.

However, the Nigerian Eurobonds space witnessed buy-pressures last week, as local investors resorted to taking positions in dollar-denominated instruments amid depreciation of the naira and F.X. pressures. Thus, average yields on Nigerian Sovereign Eurobonds declined by 23bps w/w to close at 11.9% from 12.2%.

Looking ahead, we expect market players to remain standoffish towards the fixed-income market, demanding higher rates for their funds amid the illiquid market.

Currency Market: Naira depreciated at the I&E window
Last week, the Naira depreciated against the dollar by 0.3% w/w at the Investors & Exporters (I&E) window to close at N430.3/$ (previously N429.1/$). We continue to find quotes in the N670.0 – 690.0/$ region at the parallel market. In the I&E window, average F.X. turnover climbed by 51.5% w/w to $126.8m, indicating the CBN’s intervention in the currency market as F.X. pressures persist. Nigeria’s external reserves fell by 77bps to close at $38.9bn.

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