October 4, 2022/United Capital Research
Macro Highlight and Outlook
The Monetary Policy Committee (MPC) concluded its penultimate meeting of the year 2022. In line with our expectations, the chairman announced the unanimous decision by the committee to continue combatting inflation. The MPC decided to increase the Monetary Policy Rate (MPR) by 150bps, bringing it to 15.5%. The MPC also raised the Cash Reserve Ratio (CRR) similarly by 500bps to 32.5% from 27.5%. The MPC retained the Asymmetric corridor at +100/-700 basis point around the MPR, and the liquidity ratio was retained at 30.0%.
Last week, the Governor of the Central Bank informed foreign airlines that the CBN is not compelled by law to repatriate U.S. Dollars to them while restating its commitment to clearing the forex backlog owed to the airlines. The CBN disclosed that it had earlier released the sum of $265.0mn, a portion of which would settle trapped funds owed to foreign airlines. According to the International Air Transportation Association (IATA), International airlines have $464.0mn trapped in Nigeria.
The World Bank’s draft report for State Action on Business Enabling Reforms stated that Nigeria’s economic outlook is uncertain, and she faces increasing difficulty in attracting foreign investments compared to her peers. It also noted that the welfare condition within the country is deteriorating despite Nigeria’s economic recovery this year. Also, it stated that private sector investment’s contribution to growth has declined due to macroeconomic and financial policies constraining investment.
According to the Nigerian Electricity Regulatory Commission (NERC), the number of freshly issued licenses and permits to companies stood at 37, bringing the total of issued licenses to 85, generating a total of 762.3 MW of electricity. The NERC approved the issuance of 4 new generation licenses with a total nameplate capacity of 508.5 MW, 46 metering service providers and 25 mini grid permits.
We expect the macro/socio-economic space to be relatively quiet for most of the week.
Global Markets: Global equities continue on their bearish note
Last week, the global equities market ended the month of Sep-2022 with the bears dominating the market on the back of rising interest rates, extreme volatility in the currency and bonds market and worries of a global economic recession. Most Federal Reserve officials reiterated the plan to keep raising rates to combat inflationary pressures and get the headline inflation under control. In particular, Cleveland Fed President, Mester (FOMC voter), argued that policy rates are not yet at the restrictive levels. These comments dampened investors’ sentiment toward the equities market. In addition, losses in APPLE and NIKE stocks further dampened the NASDAQ and S&P index, dragging the market southwards. The selloffs in NIKE resulted from a huge inventory build (+44.0% y/y) for Q1-2022, which might lead to gross margin pressures in its Q2-2022 results. That said, the NASDAQ Composite, S&P 500, and DJIA declined by 2.7% w/w, 2.9% w/w, and 2.9% w/w.
The European markets recorded a bearish run last week, in tandem with the US market, with major European equity indices closing in the red. There was a nagging concern that the volatility across capital markets and the rapid increase in interest rates would lead to an economic crisis that could have systemic implications. Although the news of the buy-back of UK government bonds by the Bank of England (BoE) spurred the market on Wednesday, the market relapsed following Prime Minister Truss’s reiteration that the country will be sticking with the tax cut plan. Thus, the UK FTSE declined by 1.8% w/w. In the Eurozone, headline inflation for Sep-2022 jumped to 10.0%, reaching double-digits for the first time, from 9.1% in Aug-2022. This marks the fifth consecutive month of rising inflation, with prices showing no signs of reaching a peak. This negative economic data release stoked concerns about the ECB pursuing an aggressive rate hike in its October meeting. Overall, the broad-based pan-European STOXX 600 ended the week lower by 0.7% w/w, with all other stock performance across the individual countries sustaining a similar stance in momentum as the French CAC 40 and the German XETRA DAX lost 0.4% w/w and 1.4% w/w, respectively.
In Asia, the equities market mirrored the activities of the US equities market as investor sentiment towards Asian stocks closed bearish. President Putin announced the unlawful annexation of four Ukraine regions on Friday. Although Ukraine and most countries worldwide will not recognise the move, the temperature around the conflict will further be raised since the Russian government will deploy any means to protect its territory if threatened. As a result, we saw selloffs across major stocks in the Asian market. For context, Japan’s Nikkei 225 index, China’s Shanghai Composite Index and the Indian SENSEX plummeted by 1.3% w/w, 2.1% w/w, and 1.2% w/w.
Last week, volatile trading sessions saw oil prices close on a positive note, rebounding from last week’s w//w loss. Increased consumer demand, larger-than-expected drawdowns in US fuel inventory, and the shutdown of the Gulf of Mexico due to Hurricane Ian drove a modest increase in oil prices last week. Overall, from a w/w perspective, oil prices closed higher, with the Brent Crude gaining 0.1% w/w to print at $87.96/bbl.
Looking ahead, we expect to see the global equities remain bearish as market participants consider the impact of the hawkish monetary policy stance on the economy. We believe intensifying global inflationary pressure will continue to stand as an irrefutable argument for continuous interest rate hikes across major central banks. Lastly, members of the Organisation of Petroleum Exporting Countries (OPEC) will conduct their Oct-2022 meeting on Wednesday to consider oil demand and supply.
Domestics Equities: Bears dominate the market
Last week, the domestic equity market was bearish for most of the week, closing red in four out of five trading sessions. 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 NESTLE (-10.0% w/w) and GTCO (-7.1% w/w) drove the local bourse southwards. Overall, the benchmark NGX-All Share Index (NGX-ASI) declined marginally by 1bps w/w to print at 49,024.2 points. Hence, YTD return weakened to 14.8%, while market capitalisation gained N6.4bn to print at N26.5tn. Activity level was mixed as average volume traded gained by 29.0% w/w to 145.2mn units while average value traded declined by 21.9% w/w to N1.5bn. Thus, at the end of the week, investor sentiment moderated to 2.1x from 0.4x the prior week, as 17 tickers appreciated while 8 depreciated.
Across sectors, overall w/w performance was mainly bearish as three (3) of the five (5) sectors we cover closed red. The Industrial sector led the gainers (+3.0% w/w), driven by buy interest in BUACEMEN (+3.8% w/w). Followed by the Oil and Gas sector (+0.2% w/w) due to price appreciation in ARDOVA (+7.4% w/w). Trailing behind was the Banking sector (-0.9% w/w) due to selloffs in UBA (-2.8% w/w) and ACCESSCO (-0.6% w/w). Followed by the Insurance (-3.2% w/w) sector driven by selloffs in NEM (-8.9% w/w) and AIICO (-5.5% w/w). Lastly, the Consumer goods sector (-3.4% w/w) led the laggards because of losses in NESTLE (-10.0% w/w), and UNILEVER (-5.4%).
This week, we expect continued bearish sentiment to dominate the market as investors continue to react to the MPC’s rate hike. However, we expect some dampening of the southward trend of the local bourse driven by bargain hunters as companies release their Q3-2022 results.
Money Market Review: Stop rate on 364-day paper strolls into double-digit terrain at PMA
Last week, the financial system opened tight with a balance of N26.6bn. During the week, coupon payments to the tune of N131.2bn hit the system. However, despite mop-up activities via NT-Bill auctions by the Central Bank the financial system closed the week liquid with a balance of N578.6bn. The MPC in its September meeting opted to hike the benchmark interest rate by 150bps to settle at 15.5%, which essentially bolstered investors’ appetite for higher rates, thus forcing lending rates between banks even higher in the double-digit terrain, above the 14.0% -15.0% region. The Apex bank also opted to hike CRR for banks by 500bps, to settle at 32.5%. Consequently, the average Open Repo Rate (OPR) and Overnight Rate (OVN) climbed by a significant 2.7ppts and 2.9ppts to settle at 15.3% and 15.9%, respectively.
The Central Bank of Nigeria (CBN) conducted an NT-bills Primary Market Auction (PMA) with N141.3bn worth of bills across the 91-day, 182-day, and 364-day papers. Due to improved system liquidity, investor appetite was strong as total subscriptions printed at N239.2bn, implying a bid-to-cover ratio of 1.7x. Investor demand was skewed towards the tail of the curve as the 364-day bill was oversubscribed by 2.1x. The 91-day and 182-day papers had bid-to-cover ratios of 0.2x and 0.2x, respectively. In line with the overall market expectation of a continued uptick in the yield environment, the stop rate on the 364-day bill rose by 225bps to close at 12.0% (previously 9.75%). Similarly, the stop rate across the 91-day and 182-day papers climbed 99bps and 15bps to print at 6.5% and 7.5%, respectively. Interestingly, the DMO allotted a total of N179.2 vs. N141.3bn, thereby overselling the auction.
The secondary NT-bills market was met with bullish sentiments from investors, tricking down from the unmet bids at PMA amid rising yields in the NT-bills market. As a result, the average yield on NT bills in the secondary markets dropped by 26bps w/w to close at 7.1% (previously 7.4%). Similarly, the average yield on OMO bills declined by 30bps w/w to print at 10.3% (previously 10.6%).
We expect money market rates to continue northward following last week’s MPC meeting. We expect funding rates to continue in the double-digit region this week. Lastly, we expect OMO maturities to the tune of N60.0bn to hit the financial system this week.
Bond Market: Bearish sentiments prevail at secondary market
The secondary bonds market witnessed sell pressure from investors, as investors sought to drive yields to preferred levels, amid rising rates in the fixed income market, following the 150bps MPR hike by the CBN. As a result, the average yield in that space climbed 39bps to settle at 13.29% vs last week’s close of 12.9%. In tandem, corporate bonds traded on a bearish note, as the average yield on corporate bonds gained 23bps w/w to settle at 14.23% (previously 14.0%).
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 132bps w/w to close at 14.32% (previously 13.0%).
Looking forward, we expect the recent MPR hike to fuel bearish sentiment. We maintain our higher yield expectation across fixed income market instruments.
Currency Market: The Naira depreciated at the I&E window
Last week, the Naira continued to decline at the Investors & Exporters (I&E) window to close at N437.0/$, losing 16bps w/w from its previous close of N436.3/$. At the parallel market, we found offer quotes in the N724/$- N735.0/$ as the Naira continued to exert strains from extended pressure. Activities in the I&E window improved, with average FX turnover gaining by 7.3% w/w to settle at $113.2mn. On the other hand, Nigeria’s external reserves declined by 46bps w/w, shedding $178.0mn to close at $38.3bn.
This week, we expect to witness continued pressure on the Naira across all market segments
