September 19, 2022/United Capital Research
Macro Highlight and Outlook
According to the Organisation of Petroleum Exporting Countries (OPEC), Nigeria’s crude oil production plunged by 10.3% to 972,000bpd in Aug-2022 from 1,083,899bpd in Jul-2022. Thus, Angola and Libya overtook Nigeria in terms of producing higher volumes of crude oil during the month under review, printing at 1.2mbpd and 1.1mbpd, respectively.
The National Bureau of Statistics (NBS) recently published its Company Income Tax (CIT) report for Q2-2022. The report shows that CIT printed at N714.4bn in the period under review, a 29.5% q/q increase and a 51.3% increase from Q2-2021.
The National Bureau of Statistics released Inflation estimates for August 2022. On a year–on–year basis, the headline inflation rate was 20.52%. This was 3.52% points higher compared to the rate recorded in August 2021. On a month-on-month basis, the Headline inflation rate in August 2022 was 1.77%. The food inflation rate in August 2022 was 23.12 % on a year-on-year basis, which was 2.82% higher than in the corresponding period in August 2021. Core inflation stood at 17.20% in August 2022 on a year-on-year basis, up by 3.79% compared to 13.41% in August 2021.
In the coming week, we expect the National Bureau of Statistics to release the Q2-2022 Terms of Trade Report. We expect the macro/socio-economic space to be relatively quiet for most of the week.
Global Markets: Bearish sentiments drive markets downward
Last week, US equities closed bearish. The primary driver was Tuesday’s higher-than-expected Consumer Price Index (CPI) print. US CPI printed 8.3% in Aug-2022, down 20bps from Jul-2022 and 100bps from Aug-2021. This happened as higher utility bills, and food costs offset falling gasoline prices. The S&P 500 fell 4.0% in a single session. It raised concerns that the US economy had finally hit an inflexion point whereby it has begun importing foreign weakness, impacting earnings estimates. The more significant concern was core CPI which increased 0.6% m/m, with all components aside from used car prices rising. On the other hand, US PPI dipped 0.1% m/m in Aug-2022, seasonally adjusted. Weakness within equity markets was broad-based across sectors and asset classes, mainly Materials (-6.7% w/w) and Industrials (-6.4% w/w) sectors, given commodities weakness. For context, the NASDAQ Composite, S&P 500, and DJIA lost 5.5% w/w, 4.8% w/w, and 4.1% w/w, respectively.
In Europe, markets closed bearish amid signs of continued economic slowdown. Markets reacted to Eurozone industrial production falling 2.3% y/y in Jul-22, its largest in 2 years, due to rising energy prices. Also, the European Commission last week published a proposal that could impose a windfall tax on fossil fuel companies and cap revenue from non-gas energy producers in a move to reduce electricity demand and raise €140.0bn to lessen the impact of rising energy prices. In the UK, CPI data printed at 9.9% y/y in Aug-22, 20bps less than Jul-22 CPI, owing to falling fuel prices. However, Core CPI rose 10bps from Jul-22 to 6.3% y/y. Also, the Sterling fell by 1.5% w/w to the US Dollar to £1.14/$, a 37-year low. As a result, investors’ sentiments toward European stocks were significantly weakened, with the pan-European STOXX 600 Index (-2.8% w/w) closing red. Similarly, the UK FTSE 100(-1.6% w/w), France CAC 40 Index (-2.2% w/w), and Germany’s DAX 30 Index (-2.7% w/w) bearish.
In Asia, equity markets mirrored global bearish sentients. Despite positive news from Japan concerning its removal of COVID-related restrictions on tourists and daily international arrivals plus exports growing 22.1% y/y in Jul-22, the Japanese NIKKEI 225 index fell by 2.3% w/w. In China, better-than-expected growth in industrial production (+4.2% y/y) and retail sales (+5.4% y/y) were outweighed by a slump in the property sector. According to its National Bureau of Statistics (NBS), new home prices declined 0.3% m/m and contracted 1.3% y/y. The Shanghai Composite (-4.2% w/w) Index and the Indian SENSEX 30(-1.6% w/w) Index closed red last week.
Last week, crude oil prices moderated as concerns of another US Federal Reserve interest rate hike following a higher-than-expected CPI for Aug-2022 outweighed robust OPEC’s robust oil demand growth forecast. From a w/w perspective, oil prices closed lower, with the Brent Crude declining 1.6% w/w to print at $91.35/bbl, hitting a new weekly low.
This week, over ten major Central Banks, including the Fed, PBOC, BOJ, Bank of Brazil and BOE, are expected to decide on their key interest rate. We also expect crucial economic releases, including Japanese inflation, Chinese FDI, Taiwan Exports and Germany’s PPI. The week will end with Friday’s Rig Count and Italy elections.
Domestics Equities: Local bourse continues southward, down by 44bps w/w
Last week, trade sessions in the local bourse ended on a bearish note. Negative investor sentiment toward the Nigerian equities market continued without respite, extending the previous week’s losses. We observed that sell pressure across banking stocks like FBNH (-5.7% w/w), ACCESSCO (-6.2% w/w), UBA(-6.0% w/w), ZENITHBA(-1.5% w/w), UBN(-4.2% w/w), and STANBIC (-1.7% w/w) significantly influenced the bourse’s bearish close last week. Thus, the NGX All-Share Index (NGX-ASI) declined by 44bps w/w to print at 49,475.4, bringing the YTD return to 15.8%, with the total market capitalisation shedding N117.2bn w/w to close at N26.8tn. For the week, activity level reflected the bearish dominance, as average volume and value traded fell 25.8% w/w and 22.2% w/w to close at 140.5mn units and N1.6bn, respectively. In line with the bearish trend for the week, investor sentiment weakened to 0.3x from 0.6x the previous week, as 13 tickers appreciated while 39 depreciated during the week.
On a sectoral level, overall w/w performance was weak as all the five (5) sectors we cover closed in red. The Banking Index (-3.3% w/w) recorded the most loss, leading the laggards for the week owing to sell pressure across ACCESSCO (-6.2% w/w), UBA (-6.0% w/w), ZENITHBA (-1.5% w/w), UBN (-4.2% w/w) and FIDELITY (-3.8% w/w). The Insurance (-2.6% w/w), Consumer goods (-0.3% w/w), Oil & Gas (-0.2% w/w), and Industrial (-0.2% w/w) indices all trailed behind, on the back of share price depreciation in AIICO (-3.6% w/w), CORNERST (-6.3% w/w), CHIPLC (-9.5% w/w), WAPIC (-5.3% w/w), NEM (-1.1% w/w), DANGSUGA (-3.0% w/w), INTBREW (-3.0% w/w), VITAFOAM (-5.9% w/w), OANDO (-1.0% w/w), WAPCO (-1.2% w/w), and BETAGLAS (-10.0% w/w).
On corporate actions, ACCESSCO released its Q2-2022 results. The tier-1 bank recorded a 31.4% y/y (N141.5bn) growth in its gross earnings to settle at N591.8bn. The bank recorded a decline in Net interest income for the period, with total profit climbing by 2.2% (N1.95bn) to N88.8bn, owing to a 14.3% (N1.51bn) reduction in allotted income tax for the period. An interim dividend of N0.20k per share was proposed.
Looking ahead, we expect the local bourse to remain in a lull in anticipation of the upcoming MPC meeting scheduled on the 26th and 27th of September. We recommend that investors and fund managers continue to cherry-pick stocks with solid underlying fundamentals amid an overall bearish-dominated bourse.
Money Market Review: Improved system liquidity
Last week, the financial system opened relatively liquid with a balance of N101.1bn. We saw an influx of N35.0bn worth of OMO maturities, and N185.8bn coupon payments hit the system. Despite mop-up activities via auctions conducted by the Central Bank, system liquidity remained elevated, with inter-bank lending rates trading in the single-digit region. Overall, system liquidity closed the week liquid with a balance of N262.4bn. Consequently, the average Open Repo Rate (OPR) and Overnight Rate (OVN) declined by 267bps and 272bps to close the week at 8.5% and 9.0%, respectively.
The Central Bank of Nigeria (CBN) conducted an NT-bills Primary Market Auction (PMA) with N159.6bn worth of bills across the 91-day, 182-day, and 364-day papers. Due to improved system liquidity and a relatively smaller size on offer, investor apprtite was strong as total subscriptions printing at N407.3bn, implying a bid-to-cover ratio of 2.6x. Investor demand was skewed towards the tail of the curve as the 364-day bill was oversubscribed by 3.1x. The 91-day and 182-day papers had bid-to-cover ratios of 1.0x and 0.2x, respectively.Interestingly at the auction, the CBN opted not to oversell. Notably, the stop rate on the 364-day bill declined by 25bps to close at 9.75% (previously 10.00%). However, the stop rate on the 182-day bill climbed by 15bps to print at 6.0%, while the stop rate on the 91-day bill closed unchanged from the previous auction at 5.5%.
In addition, the apex bank conducted an OMO auction, rolling over N35.0bn worth of bills across the 96-day, 194-day and 362-day tenors. Investor’s appetite was high as the auction was oversubscribed by 4.6x, with the total subscriptions printing at N162.7bn. However, the apex bank opted to sell just the amount on offer. Thus, the stop rate across the 96-day, 194-day and 362-day bills closed at 7.0%, 8.5% and 10.1%, respectively.
In the secondary NT-bills market, investors’ sentiment was broadly bullish. As a result, the average yield on NT bills dropped by 7bps w/w to close at 7.6% (previously 7.7%). Similarly, the average yield on OMO bills declined by 20bps w/w to print at 10.6% (previously 10.8%).
Looking ahead, we expect interbank lending rates to be elevated and return to their double-digit region as system liquidity becomes tight in the absence of any maturities. Despite the N34.9bn coupon payment scheduled to hit the system this week, we expect retail FX auction and CRR debits by the Central bank to shrink liquidity further.
Bond Market: Bullish sentiments in the secondary market
Last week, in the secondary bonds market, we observed a general bullish sentiment across the markets in the presence of a liquid system. Overall, the average yield across sovereign bonds declined by 24bps w/w to close at 12.7% (previously 13.0%). In tandem, corporate bonds traded on a bearish note, albeit with steeper movements in the yield curve, as the average yield on corporate bonds lost 52bps w/w to 13.7% (previously 14.3%).
On the other hand, in the Nigerian Eurobonds, we saw sell pressures dominate the market as market sentiments were bearish. Thus, the average yields rose by 36bps w/w to close at 12.6% (previously 12.3%).
The Debt Management Office (DMO) is scheduled to conduct a bond auction this week with N225.0bn worth of paper across the 2025s, 2032s and 2037s on offer. In line the uptick in rates in the NTB auction, we expect marginal rates at the bond auction to tick higher.
Currency Market: The Naira remained flat at the I&E window
Last week, the Naira remained relatively flat at the Investors & Exporters (I&E) window to close at N436.3/$, gaining less than 1bps w/w from its previous close of N436.5/$. At the parallel market, we found offer quotes in the region of N708/$- N712.0/$ as the Naira continued to exert strains from extended pressure. Activities in the I&E window improved significantly, with average FX turnover increasing by 18.6% w/w to $82.8mn. In contrast, as of 15th September, Nigeria’s external reserves declined by 58bps w/w, shedding $226.4mn to close at $38.7bn.
This week, we expect to witness continued pressure on the Naira across all market segments.
