September 26, 2022/United Capital Research
Macro Highlight and Outlook
Last week, according to the Nigeria Communication Commission (NCC), the Federal Government estimated it would generate over N500.0bn in 2023 through the 5G spectrum. Notably, the commission generated N257.0bn in Q1-2022. It also remitted N195bn to government coffers.
The Federal Government announced its plans to increase the N30,000 minimum wage considering the rising inflationary pressures globally. According to the Minister of Labour and Employment, the adjustment had become essential to reflect the persistent uptick in global prices.
Also, according to Debt Management Office (DMO), Nigeria’s total public debt stock, representing the domestic and external debts, rose by 2.9% to N42.8tn in Jun-2022, from N41.6tn in Mar-2022. Thus, this implies that domestic debt pushed Nigeria’s total public debt by N1.2tn in three months.
Finally, the Federal Government, through the National Agricultural Seeds Council (NASC), has commenced moves to make Nigeria a full member of the Organisation for Economic Cooperation and Development (OECD). This was disclosed by the Director-General, NASC, in a workshop on international OECD seed certification, an entry requirement. Membership will ease Nigeria’s entry into the international seed trade, among other benefits.
In the coming week, we expect the National Bureau of Statistics to release the H1-2022 Air Transportation Data and Q1-2022 Daily Energy Generated and Sent Out Reports. The MPC will hold its penultimate meeting this year on the 26-27th of September. Otherwise, we expect the macro/socio-economic space to be relatively quiet for most of the week.
Global Markets: Hawkish Central Banks stir bearish sentiments
Last week, most global equities closed in the red, driven by central banks’ policy moves. Bearish sentiments continued in the US equities market after the Federal Open Market Committee (FOMC) voted to raise the target rate for the fed funds rate by 75 basis points to 3.00-3.25%. In addition, Fed Chair Powell iterated that restoring price stability will require maintaining a restrictive policy stance for some time, and the historical record cautions strongly against prematurely loosening policy. For context, the NASDAQ Composite, S&P 500, and DJIA lost 5.1% w/w, 4.7% w/w, and 4.0% w/w, respectively.
In Europe, in line with global trends, markets closed red, despite the UK announcing its biggest tax cut in 50 years to stimulate growth. The continued hawkish stance from the Bank of England, which hiked rates further by 50bps to 2.25%, the highest since 2008, fueled the bear market. In addition, market participants did not take kindly to the UK’s fiscal stimulus plan and understood that it would require more debt issuance. The Euro and Pound sterling fell further by 3.2% w/w and 4.9% w/w to €0.97/$ and £1.09/$ amid heightened fears about a deepening regional energy crisis. As a result, investors’ sentiments toward European stocks were significantly weakened, with the pan-European STOXX 600 Index (-4.4% w/w) closing red. Similarly, the UK FTSE 100(-3.0% w/w), France CAC 40 Index (-4.8% w/w), and Germany’s DAX 30 Index (-3.6% w/w) bearish.
Asian equity markets, like their western contemporaries, closed bearish despite the decisions by Asian central banks to maintain rates, the Peoples Bank of China (PBOC) and the Bank of Japan but decided to hold rates at their policy meetings. The Japanese NIKKEI 225 index fell by 2.5% w/w. The Shanghai Composite (-1.2% w/w) Index and the Indian SENSEX 30(-1.3% w/w) Index also closed red last week.
Last week crude oil prices extended losses due to increasing fears of reduced demand caused by a global economic slowdown. Rising interest rates and persistent inflation pressures were also catalysts. From a w/w perspective, oil prices closed lower, with the Brent Crude declining 5.2% w/w to print at $86.63/bbl.
This week, we expect an influx of economic data releases globally; in the UK, the Government Spending and Consumption report will be released, Whilst in the US, the new home sales August report will be dropped. In China, the September Manufacturing and Non-manufacturing PMI reports will be released. Germany will release its inflation numbers for September.
Domestics Equities: Large-cap stocks drag local bourse down
Last week, the bears dominated the domestic equity market for four out of five trading sessions of the week. We saw sell pressures across the market as investors shifted their focus from the equities to the fixed income space amidst the rising yield environment. Notably, price depreciation in large-cap stocks, BUACEMEN (-10.4% w/w) and SEPLAT (-3.9% w/w), drove the local bourse southwards. As a result, the benchmark NGX-All Share Index (NGX-ASI) declined, falling 0.9% w/w to print at 49,026.6 points. Hence, YTD return weakened to 14.8%, while market capitalisation lost N352.6bn to print at N26.4tn. Activity level was mixed as average volume traded fell by 21.8% w/w to 112.5mn units while average value traded rose by 17.9% w/w to N1.9bn. Thus, investor sentiment moderated to 0.4x from 0.3x last week, as 17 tickers appreciated while 42 depreciated.
Across sectors, overall w/w performance was mainly bearish as four of the five (5) sectors we cover closed red. The Banking sector was the sole gainer (+2.3% w/w) due to price appreciation in FIDELITY (+10.9% w/w) and ZENITHBA (+1.5% w/w). On the flip side, the Oil and Gas sector (-4.7% w/w) sector led the laggards due to price depreciation in TOTAL (-10.0% w/w) and SEPLAT (-3.9% w/w). Trailing behind were the Industrial (-3.9% w/w) and the Insurance (-2.1% w/w) sectors following selloffs pressures in BUACEMEN (-10.4% w/w), CORNERST (-11.1% w/w), MANSARD (-4.5% w/w). Lastly, the Consumer goods sector (-0.2% w/w) dipped as a result of losses in GUINNESS (-5.6% w/w), CADBURY (-11.2%) and UNILEVER (-2.6% w/w).
Also, First Pension, a subsidiary of FBNH, has acquired 100.0% share capital of Access Pension from Access Bank. Lastly, the Central Bank has approved Hydrogen, a payment company subsidiary of Access Corporation.
This week, we expect bearish sentiment to dominate the market as we project a rate hike, in line with rising inflationary pressures and global monetary hawkish tone, by the MPC in its September meeting. Accordingly, this will result in an increasing rate in the fixed income market, thus making the equities market unattractive.
Money Market Review: Funding rates stroll back into double-digit terrain
Last week, the financial system opened tight with a balance of N91.1bn. In the absence of any maturities during the week, after the CRR debit from the previous week, system liquidity shrunk considerably, forcing lending rates between banks into the double-digit terrain. Following PMA settlements and repayments, system liquidity closed the week in deficit with a balance of -N248.8bn. Consequently, the average Open Repo Rate (OPR) and Overnight Rate (OVN) climbed by a significant 4.1ppts and 3.8ppts to close the week elevated at 12.6% and 13.0%, respectively.
In the secondary NT-bills market, Yields closed flat as the average yield on NT bills dropped by 16bps w/w to close at 7.4% (previously 7.6%). On the other hand, the average yield on OMO bills declined by 113bps w/w to print at 10.6% (previously 10.8%).
On corporate actions, Julius Berger has established an N30.0bn Commercial Paper (CP) Issuance Programme.
Looking ahead, we expect the CBN to roll over maturing NT-Bills to the tune of N141.3bn. We expect stop rates to climb higher in the auction due to the illiquid financial system. Also, we posit that the outcome of the upcoming MPC meeting scheduled to hold from the 26th to the 27th of September will stand as a determinant factor for the rate climb in the coming auction, as investors will remain poised to demand higher rates for their funds. We expect funding rates to continue in the double-digit region this week.
Bond Market: Bearish sentiments in the secondary market
On Monday, the DMO conducted its September Auction in the primary market, the last auction for Q3-2022, offering N225.0bn across three (3) tenors, the MAR 2025 (three-year bond), APR 2032 (10-year bond) and APR 2037 (15-year bond). Overall, investor demand was relaxed, majorly skewed toward the tail-end of the curve, with submitted bids amounting to N246.4bn, oversubscribed with an overall bid-to-cover ratio of 1.1x. The 2025s and 2032s remained undersubscribed by 0.6x and 0.6x. On the other hand, the newly issued 2037s (coupon rate: 16.25%) attracted significant interest from investors, with an oversubscribed rate of 1.9x. Interestingly, the DMO oversold the auction, allotting a total of N229.2bn vs 225.0bn on offer. In line with the overall market expectation of a continued uptick in the yield environment of the sovereign bonds market, marginal rates across the 2025s, 2032s, and 2037s climbed 100bps, 35bps, and 50bps, to print at 13.5%, 13.85%, and 14.5%, respectively. The secondary bonds market, on the other hand, the secondary bonds market witnessed sell pressure from investors, as the average yield in that space climbed 15bps to settle at 12.9% vs last week’s close of 12.7%. In tandem, corporate bonds traded on a bearish note, as the average yield on corporate bonds gained 24bps w/w to settle at 14.0% (previously 13.7%).
In the Nigerian Eurobonds market, we saw sell pressure continue to dominate the market as market sentiments were bearish. Thus, the average yields rose by 38bps w/w to close at 13.0% (previously 12.6%).
Looking forward, we expect an uptick in the fixed income rate environment following the expectation of a rate hike from the MPC. Also, we expect coupon payments to the tune of N131.2bn to hit the system this week.
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 1bps w/w from its previous close. At the parallel market, we continue to see 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 27.6% w/w to $105.6mn. In contrast, Nigeria’s external reserves declined by 0.4% w/w, shedding $162.9mn to close at $38.5bn.
This week, we expect to witness continued pressure on the Naira across all market segments.
