September 5, 2022/United Capital Research

Macro Highlight and Outlook
According to the Capital Importation data released by the NBS, Nigeria attracted a sum of $1.5bn as capital inflows in Q2-2022, 2.4% q/q lower than $1.6bn in Q1-2022. On an annual basis, the capital inflow increased by 75.3% y/y compared to $875.6mn recorded in Q2-2021. Foreign portfolio investment contributed the bulk of the influx, which accounted for 49.3%, while other investments and foreign direct investment accounted for 41.1% and 9.6%, respectively.

In addition, the Federal Government received N1.1tn from indirect taxes in the H1-2022, representing a 10.3% increase from N984.3bn obtained in H1-2021. Indirect taxes are taxes paid to the government by a producer or retailer and later passed on to the consumer. They include value-added taxes, customs or import duties, among others.

According to The Central Bank of Nigeria, oil revenue declined by 29.0% q/q to N790.0bn in Q1-2022 from N1.1tn the previous quarter and 17.1% y/y lower than its N956.0bn print in Q1-2021. The decline in revenue was due to low production levels on the back of oil theft and pipeline vandalism in the nation.
 
In the coming week, we expect the National Bureau of Statistics to release its report on the nation’s foreign trade statistics for Q2-2022. That aside, we expect the macro/socio-economic space to be relatively quiet for most of the week.
 
Global Markets: Global equities closed the month of Aug-2022 on a bearish note
Last week, the global equities market closed the month of Aug-2022 in the red as market participants reacted to the release of the US Gross Domestic Product (G.D.P.) data. The U.S real G.D.P. contracted by 0.6% y/y in Q2-2022, less than the 0.9% drop the Commerce Department announced earlier last month. This is 100bps less than its print of 1.6% in Q1-2022, indicating a technical recession in the United States. In other news, the Bureau of Labour Statistics reported that total non-farm payroll employment increased by 315,000 in Aug-2022, and the unemployment rate rose by 20bps to 3.7% from 3.5%. The Chairman of the US Federal Reserve, Jerome Powell, signalled the previous week that there might not be a rate cut in the short term. That said, trading sessions last week saw all U.S equities close in the red, with major US equity indices losing their values w/w. For context, the NASDAQ Composite, S&P 500, and DJIA declined by 4.2% w/w, 3.3% w/w, and 3.0% w/w.

In Europe, market activities mirrored the U.S equity market as major European indices declined w/w. According to the Federal Statistics Agency, Germany’s exports fell by 2.1% to $131.4bn in Jul-2022 for the first time in four months compared to the previous month. Against all odds, the Germany DAX gained 0.6% w/w. In other news, the Russian energy, Gazprom, extended the shutdown of gas flows through its key Nord Stream 1 pipeline to Germany. The state-owned oil and gas firm noted that supplies would remain halted indefinitely after a leak was detected, and the pipeline would not restart until repairs were fully implemented. The decision came shortly after G7 members agreed to implement a price cap on exports of Russian oil. As a result, the negative news drove a bearish sentiment in market participants across European markets. Notably, France CAC (-1.7% w/w), Europe STOXX (-2.4%) and UK FTSE (-2.0% w/w) closed the week lower.

In Asia, market sentiment was generally bearish as Covid-19 worries resumed. The U.S announced a $1.1bn arms package for Taiwan, vowing to keep boosting the island’s defences as tensions soar within Beijing. The Chinese government has urged the U.S to immediately revoke their arms sales as it sends the wrong signals to Taiwan’s independence and severely jeopardises China-US relations. In addition, the Chinese government ordered the closure of the country’s technology hub and the world’s largest electronics wholesale market, Shenzhen, to contain a recent spike in coronavirus cases in the southern city. On that note, the capitalisation-weighted Shanghai Composite Index and the Japanese NIKKIE lost 1.5% w/w and 3.5% w/w, respectively, while the Indian SENSEX closed flat.

Last week, crude prices declined to a new week low despite U.S inventories declining larger than expected. Nonetheless, the 3.3mn decline in U.S inventories indicates a robust global oil demand as renewed worries that the global economy would slow further weighed on investors’ sentiments. In addition, renewed restrictions in China, aimed at curbing the unyielding coronavirus pandemic in the Republic, were another major factor for declining oil prices. Overall, from a w/w perspective, oil prices closed lower, with the Brent Crude falling by 5.8% w/w to print at $93.3/bbl.

Looking forward, we expect the rate decision in the U.S. to remain the primary driver of equities. In the oil market, the Organisation of Petroleum Exporting Countries (OPEC) is scheduled to meet this week to decide on the global oil supply. We believe the low U.S crude oil inventories and growing global oil demand will shape OPEC’s output decision.

Domestics Equities: Local bourse extends green run
Last week, the domestic equities market extended its bullish 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. Hence, the NGX- All Share Index (ASI) climbed by 0.7% with YTD return moderating to 17.2%, while market capitalisation appreciated by N197.5bn to close at N27.0tn. Last week, activity level increased as volume traded rose by 30.7% w/w to 239.1mn. In comparison, value traded declined 16.1% w/w to N2.6bn, in line with the bullish trend for the week, investor sentiment strengthened to 2.6x from 1.1x, as 23 tickers appreciated while nine (9) depreciated at the close of the week.

On a sectoral level, overall w/w performance was bullish as all the five (5) sectors we cover closed green. The Consumer goods sector (+2.0% w/w) led the gainers, driven by price appreciations in BUAFOODS (+4.5% w/w) and NESTLE (+3.3% w/w). Trailing behind was the Industrial Goods sector (+1.4% w/w) due to bargain hunting in BUACEMEN (+2.7% w/w) and WAPCO (4.4% w/w).  The Banking (+1.2%) and Oil and Gas (+0.6% w/w) sectors advanced on the back of buying interest in ACCESSCO (+6.1% w/w), FIDELITY (+11.1% w/w), OANDO (+4.0% w/w) and CONOIL (+2.1% w/w).  Lastly, the Insurance sector gained 5bps due to price increases in NEM (+1.0% w/w) and MBENEFIT (+3.6% w/w).

On corporate actions, Fidelity Bank released its H!-2022 results. Gross earnings grew by 37.9% y/y to print at N154.8bn on account of a 52.9% growth in interest income to N136.2bn from N89.1bn in H1 2021 . Hence, Profit After Tax (PAT) increased by 20.7% to print at N23.3bn, while an interim dividend of N0.10K  was declared by the bank. Also, Access Bank Plc announced the completion of the divestment of its entire equity interest in Access Pension Custodian Limited to First Pension Custodian Nigeria Limited, a subsidiary of First Bank of Nigeria Limited.

Looking ahead, we expect to see a gradual reduction in activity in the market as the MPC meeting draws nearer. In addition, we expect the impact of the increased benchmark lending rate on equity markets to continue to take effect. Investors are expected to continue cherry-picking stocks with solid underlying fundamentals.

Money Market Review: Funding rates trend lower after FAAC inflow
Last week, the financial system opened relatively liquid with a balance of N175.3bn. Liquidity improved significantly mid-week, rising to N752.8n, reflecting FAAC inflows from the previous week. The CBN conducted mop-up activities in the primary market to absorb as much liquidity as possible via O.M.O. offerings. That said financial system closed the week liquid with a balance of N392.5bn. Overall, interbank lending rates sank way below 14.0% and 15.0% in the double-digit region, owing to improved system liquidity. For context, the average funding rates for banks, Open Repo Rate (O.P.R.) and the Overnight Rate (O.V.N.) declined 5.3ppts w/w and 5.1ppts w/w to settle at 9.1% and 9.7%.

The CBN held an O.M.O. auction offering bills to the tune of N50.0bn across the 89-day, 194-day, and 362-day papers. At the auction, the stop rates for the 89-day, and 362-day papers printed at 7.0% and 10.1%, respectively, while the CBN elected to a no sale for the 194-day paper, given the bid ranges submitted were above previous stop rates. Total auction sale printed at N50.0bn, with a total subscription of N146bn implying a bid-to-cover ratio of 2.9x, skewed majorly toward the tail-end of the curve.

In the secondary NT-bills market, we observed bullish sentiments from investors, as investors sought to lock in funds in a high-interest rate environment amidst a liquid financial system. As a result, the average yield on N.T. bills declined by 14bps w/w to close at 7.7%, from 7.8% the previous week.

Looking ahead, we expect the CBN to rollover NT-bills to the tune of N167.2bn. We anticipate stronger demand for NTBs at the auction owing to the liquid financial system. Also, we believe stop rates will take a brief breather in ascent in the coming auction, as we expect to begin to see supply and demand fundamentals come into play. Also, an OMO maturity totaling N5.0bn is scheduled to hit the system this week adding to existing liquidity.

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. Overall, the average yield across sovereign bonds inched down by 2bp w/w to close at 12.79%. Similarly, investors’ sentiment toward corporate bonds was mildly bullish as the average yield declined by 4bps w/w to close at 13.92%.

However, the Nigerian Eurobonds space witnessed sell pressures last week, in anticipation of further U.S Fed rate hikes. Thus, average yields on Nigerian Sovereign Eurobonds climbed by 97bps w/w to close at 12.9% from 11.9%.

Looking ahead, we expect market players to remain standoffish towards the fixed-income market, demanding higher rates, even as the market expects a further rate hike in the upcoming M.P.C. meeting. However, given the U.S Fed’s recent signalling of a potential rate hike, we expect to see continued sell-pressures on Nigerian Sovereign Eurobonds.
 
Currency Market: The Naira depreciated at the I&E window
Last week, the Naira depreciated at the Investors & Exporters (I&E) window to close at N431.5/$, losing 27bps w/w, from its previous close of N430.3/$. At the parallel market, we found offer quotes in the region of N690/$- N700.0/$ as the Naira continued to exert strains from extended pressure. In the I&E window, average..F.X. turnover improved, climbing 17.5% w/w to $149.9mn. 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.