October 11, 2022/United Capital Research

Macro Highlight and Outlook
Last week, the President, Muhammadu Buhari, presented the 2023 Appropriation Bill, with a total of N20.5tn proposed expenditure for the period, up 19.9% from the N17.1tn proposed in 2022. The projected budget revenue stood at N9.7tn, with oil and non-oil revenue estimated at N1.9tn and 2.4tn, respectively. Thus, this results in a total budget deficit of N10.8tn, representing 4.8% of the GDP, up 180bps from the 3.0% threshold set by the Fiscal Responsibility Act 2007.

The National Assembly approved the 2023-2025 Medium Term Expenditure Framework and Fiscal Strategy Paper (MTEF/FSP). Among the parameters approved include the oil price benchmark of $73.0/bbl, the exchange rate of N437.57/$, N3.6tn as subsidy on petroleum products for 2023, projected borrowings of N8.44tn, including foreign and domestic borrowings, a retained revenue of N9.35tn due to increased oil benchmark, fiscal deficit of N10.56tn, estimated debt servicing of N6.31tn, among others.

According to the Debt Management Office (DMO), the Federal Government (FG) spent a total of N1.3tn on domestic debt servicing in H1-2022 versus N935.5bn spent in H1-2021 and N1.2tn in H2-2021. Notably, the country’s debt stock stood at $103.3bn in Jun-2022, of which 61.3% of the total can be attributed to domestic debt ($63.3bn).

The Chairman of the Association of Licensed Telecommunications Operators of Nigeria (ALTON) disclosed that total bank debt owed to telecommunications operators for the provision of the Unstructured Supplementary Service Data (USSD) currently stands at N80.0bn, up from N42.0bn in Dec-2021. It was further stated that operators might resort to withdrawing their services from defaulting banks.
 
We expect the macro/socio-economic space to be relatively quiet for most of the week.
 
Global Markets: Global equities rebounded from the previous week’s losses
Last week, US equities closed higher for the first time in four weeks but surrendered most of their gains on the last trading day, as economic data releases suggested that the economy was not slowing enough to satisfy Federal Reserve policymakers. Inflation worries seemed to resurface somewhat after the OPEC+ group of oil exporters announced a 2.0mbpd cut in target production, also bolstered by signs of a stronger labour market, as data released by the US Labour Department reported that the economy added 263,000 jobs in September, while unemployment rate contracted back to multiyear lows of 3.5%. Strong performance in energy stocks drove the S&P 500 Index northwards as oil prices surged following a decision by major exporters to cut global production. Stocks bounced off from near two-year lows as the NASDAQ Composite, S&P 500, and DJIA climbed by 0.7% w/w, 1.5% w/w, and 2.0% w/w.

Also, shares in the European markets recorded gains, following global peers’ gains, in hopes that central banks might start scaling back interest rate increases. The minutes from the ECB’s September monetary policy meeting showed clear-cut support for aggressive action due to rising concerns about high inflation becoming entrenched. Some policymakers initially backed increasing a key interest rate by 0.50%, but after discussion, a “huge” number favoured taking it up by 0.75%. A higher-than-forecasted jump in eurozone producer prices in Aug-2022 highlighted the upside risk to headline inflation. Factory gate prices rose 5.0% sequentially and 43.3% y/y, mainly driven by surging energy costs. Overall, the broad-based pan-European STOXX 600 ended the week higher by 1.0% w/w, with all other stock performance across the individual countries sustaining a similar stance in momentum as the French CAC 40, UK FTSE 100, and the German XETRA DAX gained 1.8% w/w, 1.4% w/w and 1.3% w/w, respectively.

In Asia, the equities market mirrored the activities of the US equities market as investor sentiment towards Asian stocks closed bullish. Following a rough September for Asian markets, the first week in October saw a solid bounce, with Japanese equities finishing the week notably higher. For context, the Japanese Nikkei 225 Index gained 4.6% w/w. In China, stock markets were shut for the National Day Holiday from October 1 to October 7, otherwise known as Golden Week. The weeklong break followed a risk-off September for Chinese assets as foreign investors sold off Chinese stocks and bonds and pushed the offshore yuan to a record low against the U.S. dollar at month-end. According to Bloomberg, the onshore yuan exchange rate ended September near levels not seen since the 2008 global financial crisis. The Indian SENSEX also gained 1.3% w/w at the close of last week.

Last week, volatile trading sessions saw oil prices close on a positive note, extending weekly gains for the third consecutive week. We note that the rally was mainly influenced by the OPEC+ 2mbpd cut in target production, as investors priced in a potential supply crunch amid steady aggregate demand. Overall, from a w/w perspective, oil prices closed higher, with the Brent Crude gaining 11.3% w/w to close at $97.9/bbl.

Looking ahead, we expect to see global equities in a loop-like scenario as investors continue to price in possible retention of a hawkish posture by major central banks in their final meeting for the year to tame rising inflationary pressure. We expect the US Bureau of Labour Statistics to release the Sep-2022 inflation position, which should be a major consideration factor in the FED’s November meeting.

Domestics Equities: Local bourse slides as investors vote with their feet
Last week, the domestic equity market was bearish for three of the four trading days, despite gaining 19bps on the last trading day. We continued to see sell pressures across the market as investors gravitated towards fixed-income instruments amidst the rising yield environment. Selloffs in large-cap stocks as AIRTELAF (-10.0 w/w), GTCO (-4.5% w/w), and STANBIC (-6.0% w/w) also drove the bourse southwards. As a result, the benchmark NGX-All Share Index (NGX-ASI) declined, falling 3.4% w/w, to print at 47,351.43 points. Hence, YTD return weakened to 10.9%, while market capitalisation depreciated by 2.5% to print at N25.8tn. Similarly, the activity level was weak as the average volume traded declined by 41.6% w/w to 586.9mn units while the average value traded fell by 15.1% w/w to N8.8bn. Thus, at the end of the week, investor sentiment moderated to 0.2x from 0.8x the week prior, as 11 tickers appreciated while 46 depreciated.

Across sectors, overall w/w performance was mainly bearish as all five (5) sectors we cover closed red. The Banking sector led the losers (-3.4% w/w), driven by selloffs in ACCESSCO (-5.6% w/w) and ZENITHBA (-2.3% w/w). It was followed by the Insurance sector (-1.2% w/w) due to price depreciation in CORNERST (-10.7% w/w), WAPIC (-8.6% w/w) and MANSARD (-26.9% w/w). Trailing behind was the Oil & Gas sector (-1.0% w/w) due to selloffs in OANDO (-6.3% w/w). The Consumer Goods sector (-0.6% w/w) declined, mainly driven by selloffs in NASCON (-13.6% w/w) and INTERBREW (-4.0% w/w), PZ (-9.2% w/w). Lastly, the Industrial Goods sector lost 0.3% w/w due to losses in WAPCO (-4.1% w/w).

On corporate actions, the Nigeria Energy Sector Fund (NESF) closed its register for coupon distribution for the year ended 31-Mar-22, with a proposed coupon distribution of N152.00 per Note. Also, Geregu Power Plc (Gerugu Power) listed 2.5bn ordinary shares on the Main Board of the Nigerian Exchange Limited (NGX) on 05-Oct with the trading symbol GEREGU, opening at N100/share. At the close of the week, Geregu Power rose by 20.9% to N120.9/share.

This week, we expect continued bearish sentiment to dominate the market, given the high-yield environment. However, investors will continue to hunt growth stocks.

Money Market Review: Funding rates trend higher
Last week, the financial system opened relatively liquid after the extended break, with a balance of N352.8bn as of Wednesday. In addition, during the week, OMO maturities worth 60.0bn hit the financial system, further supporting liquidity. However, the prior week’s FX retail auction and CRR debit still weighed on banks keeping funding rates elevated. As such, the average Open Repo Rate (OPR) and Overnight Rate (OVN) climbed by 95bps and 98bps to print at 16.3% and 16.9%, respectively. The rates closed the week at 16.3% and 17.3%, respectively.

The NT-bills secondary market was relatively quiet last week, with market participants anticipating the next Primary Market Auction (PMA). However, investors’ sentiment was broadly bearish due to increased sell pressures from banks trying to raise funds. As a result, the average yield on NT bills climbed by 22bps w/w to close at 7.3%. However, the average yield on OMO bills declined marginally by 2bps w/w to print at 10.3%.

The Central Bank will roll over N190.9bn worth of maturing NT-Bills within the week. We expect stop rates to climb higher at the auction, as investors will remain poised to demand more for their funds, owing to a generally illiquid financial system. In addition, we expect N10.0bn worth of OMO bills to hit the system, supporting liquidity. However, we expect interbank rates to continue in the double-digit region this week.

Bond Market: Bullish sentiments in the Eurobonds market
The secondary bonds market witnessed sell pressures from investors, as the average yield in the market climbed 24bps to settle at 13.5%.  In tandem, corporate bonds traded on a bearish note, as the average yield on corporate bonds gained 29bps w/w to settle at 14.2%.

In the Nigerian Eurobonds auxiliary market, we saw bullish sentiments across the curve in tandem with other SSA markets driven by increased buy interest from retail investors and a positive outlook on SSA papers driven by the rally in oil prices. Thus, the average yields declined by 1.25ppt w/w to close at 13.1%.

Looking forward, 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 depreciated against the dollar by 50bps w/w at the Investors & Exporters (I&E) window to close at N439.2/$, from its previous week’s close of N437.0/$. At the parallel market, we found offer quotes in the N730.0/$ – N740.0/$ as Foreign Exchange (FX) pressures persist. Activities in the I&E window weakened, as average FX turnover declined by 16.3% w/w to settle at $94.8mn. Similarly, Nigeria’s external reserves fell by 52bps w/w, shedding $200.0mn to close at $38.3bn.

This week, we expect to witness continued pressure on the Naira across all market segments.