September 12, 2022/United Capital Research
Macro Highlight and Outlook
According to the International Trade Center, between 2020 and 2021 Nigeria spent $5.3bn to supplement its electricity and electrical needs. It stated that imported electrical machinery, equipment, and parts included electric motors and generators, electric generating sets and rotary converters, electrical transformers, and static converters.
The Minister of Communication and Digital Economy, Isa Pantami, announced that the Federal Government had suspended its planned implementation of a 5.0% excise duty on telecommunication services.
Data from the Nigerian Inter-Bank Settlement System revealed that POS transactions in the first seven (7) months of the year totalled N4.61tn, costing users a total of N92.2bn in the same period under review.
According to the Central Bank of Nigeria’s (CBN) Sectoral Analysis of Deposit Money Bank’s Credit, debts accruing to operators within the manufacturing sector rose 11.0% to N4.5trn between Dec-21 and Jun-22. This is despite the CBN’s inability to keep its single-digit lending rate to the sector in the current double-digit interest rate environment.
The Federal Executive Council (FEC) has approved the National Social Investment Programme (NSIP) Establishment Bill, 2022. The Executive Bill ratifies the NSIP, establishing it as an institution to drive the administration’s agenda to lift 100 million Nigerians out of poverty by 2030. In addition, the council approved the National Flood Emergency Preparedness and Response Plan for Nigeria to ensure a more resilient and effective response to tackle flooding nationwide.
According to the Nigerian Upstream Petroleum Regulatory Commission Report, Nigeria’s average daily crude oil production fell to 972.3kbpd in August from 1.1mbpd the prior month. Angola is now technically Africa’s largest oil producer, with an average daily production of 1.2mbpd.
In the coming week, we expect the National Bureau of Statistics to release CPI and Inflation report for August. We expect a continued uptick in Inflation numbers, with the price increase in food as the main index driver. That aside, we expect the macro/socio-economic space to be relatively quiet for most of the week.
Global Markets: Global equities break losing streak against all odds
Last week, US stocks broke the streak of three weekly losses as investors appeared to grow more confident that the market had reached at least a temporary bottom, after surrendering about half of its summer rally. The northward close in the US markets was driven by what seemed to be a dovish indicator (contrary to market expectations) from comments made by the FED Vice Chairman amid slower economic growth in the US. Also, investor sentiment was bolstered by signs that inflation was cooling quicker than expected, as lower fuel prices and cooling overall demand alleviated cost pressures, especially freight shipping rates. That said, trading sessions last week saw all US equities close in the green, with major US equity indices gaining value w/w, despite the presence of bearish catalysts such as China’s lockdown extension of Chengdu, Russia’s position that the shutdown of the Nord Stream 1 pipeline will be long-lasting with blames on sanctions imposed by Western nations, as well as the aggressive rate hikes by Bank of Canada, Reserve Bank of Australia, and the European Central Bank (+75bps), last week. For context, the NASDAQ Composite, S&P 500, and DJIA gained 4.1% w/w, 3.6% w/w, and 2.7% w/w, respectively.
In Europe, market activities improved significantly after some countries announced plans to deal with the energy crisis and boost their economies. The European Central Bank (ECB) opted to increase its key interest rates by a record 75bps to curb further inflation pressures. Accordingly, the interest rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility will be increased to 1.25%, 1.50%, and 0.75%, respectively, effective from 14th September 2022. As a result, investors’ sentiments toward European stocks were significantly bolstered, with the pan-European STOXX 600 Index (+1.1% w/w) closing green. Similarly, the UK FTSE (+1.0% w/w), France CAC 40 Index (+0.7% w/w), and Germany’s DAX Index (+0.3% w/w) all reflected investors’ positive sentiments despite hawkish indicators.
In Asia, overall market sentiment was bullish in tandem with the European and US markets. In Japan, investors’ sentiment toward the equities market improved significantly after the government announced new measures to help Japan cope with rising inflation, while the Yen fell to its lowest level in 24 years. The Chinese stock markets recorded weekly gains, as tame inflation data and expectations of further policy support prompted improved investor sentiment toward the Chinese stock market. China’s consumer and factory gate inflation in August (2.5% y/y) recorded a decline from July’s level (4.2% y/y), coming in way below analysts’ expectations. Earlier in the week, official data revealed that exports and imports lost momentum in August as inflation curbed overseas demand, while coronavirus restrictions and heatwaves disrupted China’s output. That said, despite lingering downsides vs upsides, the Japanese NIKKEI (+2.0% w/w) Index, the capitalisation-weighted Shanghai Composite (+2.4% w/w) Index, and the Indian SENSEX (+1.7% w/w) Index all closed green last week.
Last week, crude prices recorded a second consecutive weekly loss as renewed demand fears, rate hike expectations, and global recession woes weighed down the OPEC+ production cut-induced rally at the start of the week. We note that the downbeat Chinese trade data for Aug-22, indicating a 7.1% y/y climb in China’s total exports in August vs the 18.0% y/y climb in Jul-22, fed investors’ worries about possible global recession risks amid covid-19 lockdown extensions in China. However, buy interest from investors at the close of the week, after Russia’s threat to halt oil and gas exports to some buyers, narrowed the weekly loss of oil prices for the week. That said, from a w/w perspective, oil prices closed lower, with the Brent Crude declining 0.2% w/w to print at $92.8/bbl, hitting a new weekly low.
Looking forward, we expect the global equities market to be in a lull this week, underpinned by volatility, in anticipation of the FED’s decision in the next FOMC meeting. We expect the US Bureau of labour Statistics to release the United State’s August Inflation number, the outcome of which we believe will be a key consideration in the next FOMC meeting scheduled for the 20th and 21st of September, amid lingering hawkish indicators. Also, we expect the US Census Bureau to release the country’s August Retail Sales report, which would reveal the country’s overall demand position for finished goods.
Domestics Equities: Local bourse falls 0.7% w/w, ending its bullish run
Last week, the domestic equities market ended its bullish run, closing the week red as bearish sentiments dominated the market, reversing the previous week’s gains. This was on the back of sell pressures on AIRTELAF (-1.96% w/w), ZENITHBA (-5.34% w/w), FBNH (-1.4% w/w) and NGXGROUP (-9.55% w/w). Hence, the NGX All-Share Index (NGX-ASI) closed lower by 0.7% w/w printing at 49,695.1, bringing the YTD to return to 16.3%, and the total market capitalisation lost N189.0bn w/w to hit N26.8tn. For the week, activity level declined as average volume traded fell 20.5% w/w to 190.0mn units while value traded fell 27.8% to print at and N1.9bn. In line with the bearish trend for the week, investor sentiment weakened to 0.6x from 2.0x the previous week, as ten tickers appreciated while 17 depreciated during the week.
On a sectoral level, overall w/w performance was bearish as three (3) of the five (5) sectors we cover closed red. The Insurance Index (+1.0% w/w) led the gainers due to price appreciation in NEM (+11.9% w/w) and SOVRENIN (3.7% w/w). The Consumer goods index (+0.7% w/w) also closed green, driven by price appreciations in NB (+3.0% w/w), FLOURMILL (+8.0%w/w), UNILEVER (+9.4%w/w) and PZ (+12.8% w/w). On the flip side, the Banking index (-0.6%) led the laggards on the back of losses in ZENITHBA (-5.3% w/w), JAIZBANK (-3.4% w/w) and STERLNBA (-1.34% w/w). The Oil & Gas index (-0.11% w/w) and the Industrial Goods index (-0.01% w/w) followed due to price depreciation in OANDO (-3.1% w/w) and WAPCO (-0.4% w/w).
On corporate actions, GTCO released its Q2-2022 results. Despite a 12.9% y/y growth in Net interest income to N120.8bn, a 17.0% y/y N9.2bn rise in operating expenses and 88.3% y/y N12.1bn jump in income tax expense thereafter drove PAT down 2.3% y/y to print at N77.6bn. An interim dividend of N0.30k per share was proposed. UBA also released its Q2-2022 results, revealing a 19.9% y/y growth in Net interest income to N177.5bn. Despite a 30.1% y/y N32.3bn increase in fees and commission income, a 22.6% y/y N17.8bn increase in operating expenses ultimately moderated PAT to N70.3bn. FLOURMILL shareholders were presented a final dividend payment of N2.15k for approval at its AGM.
Looking ahead, we expect market activity to remain quiet, as investors would stay on the sidelines following the continued hike in NT bills stop rates.
Money Market Review: Stop rate on 364-day paper climbs into the double-digit region at PMA
Last week, the financial system opened relatively liquid with a balance of 112.4bn. Within the week, a blend of mop-up activities by the CBN in the primary market, CRR debit (c. N160.0bn), and debits from FX retail auction (N300.0bn) absorbed system liquidity to a large extent, forcing funding rates back to the double-digit terrain. Despite the lack of significant inflows, with only N5.0bn worth of OMO maturities hitting the system, the financial system remained relatively liquid at last week’s close with a balance of N101.1bn. For context, average funding rates for banks, Open Repo Rate (OPR), and the Overnight Rate (O/N) gained 2.1ppts w/w and 2.1ppts w/w to settle at 11.2% and 11.7%, respectively.
The Central Bank of Nigeria conducted the first NT-bills PMA for September. The CBN offered N214.7bn worth of bills at the auction across the 91-day, 182-day, and 364-day papers. The auction was met with mild investor demand, with total subscriptions printing at N220.6bn, implying a bid-to-cover ratio of 1.0x. The 91-day and 180-day papers were undersubscribed by 0.1x and 0.3x, respectively. The bulk of the demand came for the 364-day bill, oversubscribed by 1.3x. Interestingly at the auction, the CBN opted not to oversell. Stop rates across all tenors continued their upward trend, although higher than anticipated. The stop-rate on the 91-day, 180-day, and 364-day papers climbed 150bps, 85bps, and 150bps, to settle at 5.50%, 5.85%, and 10.00% (vs 4.00%, 5.00%, and 8.50%) respectively.
In the secondary NT-bills market, we observed bullish sentiments. As a result, the average yield on NT bills declined marginally by 1bps w/w to close at 7.7%
Looking ahead, the CBN will be conducting an NT-bill rollover worth N159.6bn. We expect a total of N35.0bn worth of OMO maturities to hit the system within the week.
Bond Market: Bearish Sentiments in the secondary bonds market
Last week, the secondary bonds market was awash with bearish sentiments as investors began preparations for the upcoming bond auction. Overall, the average yield across sovereign bonds climbed 18bp w/w to close at 13.0%. In tandem, the bears dominated the corporate bonds auxiliary markets, as a result, the average yield climbed by 34bps w/w to close at 14.3%.
However, the Nigerian Eurobonds space witnessed buy interest last week, as investors were bullish across the curve. Thus, average yields on Nigerian Sovereign Eurobonds declined by 65bps w/w to close at 12.3%
Additionally, MTNN has notified the NGX and the investing public of its proposed issuance of up to N23.0bn Series 3 Commercial paper notes under its N150.0bn commercial paper issuance programme.
Looking ahead, we expect increased activity in the secondary markets as investors start posturing in anticipation of the September PMA, in the coulisse of a hawkish Fed and MPC. In addition, N51.1bn worth of coupon payments is expected within the week.
Currency Market: The Naira depreciated at the I&E window
Last week, the Naira declined at the Investors & Exporters (I&E) window to close at N436.5/$, losing 1.1ppts w/w from its previous close of N431.3/$. At the parallel market, we found offer quotes in the N690/$- N710.0/$ as the Naira continued to exert strains from extended pressure. Activities in the I&E window regressed significantly, with average FX turnover declining by 53.4% w/w to $69.8m. Similarly, Nigeria’s external reserves declined by 21bps w/w, shedding $82.0mn to close at $38.9bn.
This week, we expect to witness continued pressure on the Naira across all market segments.
