October 17, 2022/United Capital Research
Macro Highlight and Outlook
The International Monetary Fund (IMF) revised Nigeria’s 2022 economic growth projection to 3.2% from its 3.4% projection in Jul-2022 due to tighter financial and monetary conditions. This weaker outlook reflects lower trading partner growth and a negative shift in the commodity terms of trade. The IMF also downgraded the economic growth projection for Sub-Sahara Africa to 3.6% from 3.8%
According to Nigerian Upstream Petroleum Regulatory Commission (NUPRC), crude oil production slumped by 3.5% to 937,766bpd in Sep-2022 from 972,395bpd the previous month, 47.9% less than the OPEC+ production quota. The continued decline in crude oil production can be associated with oil thefts, pipeline vandalism and low CAPEX allocation to the sector.
The Finance Minister, Zainab Ahmed, stated that Nigeria is considering restructuring its debt and extending the repayment period of its credit obligations and has appointed consultants to advise the government as it faces a rising debt-service burden. Later in the week, the DMO released a statement stating the minister’s comment were taken out of context.
The Federal Government also plans to refinance domestic debt obligations due this year and next. At the same time, the country’s N20.0tn ($45.4bn) in outstanding borrowings from the central bank will be bundled into government bonds.
According to the International Air Transport Association (IATA), air traffic increased by 67.7% y/y in Aug-2022 compared to the same period in 2021. As measured by revenue passenger kilometres, African airlines sustained a 69.5% y/y rise in traffic in Aug-2022.
According to a statement by the Infrastructure Concession Regulatory Commission (ICRC), The Federal Executive Council (FEC) has approved the establishment of a Maintenance Repair and Overhaul (MRO) centre for the aviation industry. Nigeria is estimated to generate $185.0mn from the centre.
According to a statement by the Minister of Trade and Investment, Otunba Niyi Adebayo, at the Manufacturers Association of Nigeria Export Promotion Group AGM, the Federal Government may exclude micro, small, and medium enterprises from the recently re-introduced N10.0/ltr excise duty for carbonated drinks.
This week the National Bureau of Statistics is expected to release the CPI and Inflation report for September. We expect that inflation will print higher at 21.29% y/y.
Global Markets: Markets end the week on a sour note
Last week, market volatility centred around two primary issues; the concerns related to financial stability with the U.K. at the epicentre and the U.S. Fed war on inflation. The Bureau of Labor Statistics (BLS) printed Sept-2022 headline CPI at 0.4% y/y, up 8.2 ppts from Sept-2021. Core-CPI increased by 0.6ppts to reach a new YoY high of 6.6%. There was a deceleration in goods inflation while inflation in services rose to 0.8% y/y from 0.6% y/y in Aug-2022. Transportation and medical services were the most significant contributors, up 1.9% y/y and 1.0% y/y, respectively. Yields continued to move higher, with the 2yr ICE BofA MOVE yield up 19.5bps w/w to 4.5% while the 10/30yr yields are up 13/14 bps w/w to 4.0%. These developments amplified inter-day volatility. In summary, all indexes closed in the red, with the NASDAQ Composite and S&P 500 falling -3.1% w/w and -1.6% w/w, while the DJIA rose 1.2% w/w, respectively.
In response to the disconnects in the U.K. Gilt market following the release of PM Truss’s new fiscal agenda, the BoE had announced an emergency bond purchasing program in the week ending 30-Sept as U.K. pension funds were facing margin calls, including expanding the securities purchased to inflation-indexed Gilts. With the overarching concern of how markets will function this week as the program end, coupled with the ultimate firing and replacement of Mr Kwarteng with Jeremy hunt, investors scrambled to purchase Sterling money market funds. The 10yr and 30yr Gilt ended the week up to 4.4% and 4.2%, respectively. There was also volatility in the currency market, with the Pound ending the week stronger, rising 0.8% w/w to the USD vs the Euro’s -0.2% w/w decline, though both currencies have fallen -17.3% and -14.5% YTD, respectively. Shares on the continent were little changed following the previous week’s bull market. Improved Eurozone industrial output, up 1.5% m/m in Aug-2022, was tempered by a £51.0bn trade deficit. This is up from £34.0bn in July 2022. Therefore, the pan-European STOXX 600 Index (-0.1% w/w) and the UK FTSE 100(-1.9% w/w) closed bearish. However, France’s CAC 40 Index (1.1% w/w) and Germany’s DAX 30 Index (1.3% w/w) closed marginally bullish.
In Asia, developments in the U.S drove Japanese equity markets, as its currency (the Yen) fell -2.3% w/w and -29.2% YTD. To a 32yr low. The Japanese NIKKEI 225 index fell -0.1% w/w. In China, markets were supported by comments from the Governor of the People’s Bank of China (PBOC) on the institution’s focus on infrastructure construction and its commitment to implement prudent monetary policy to support the real economy. The capitalisation-weighted Shanghai Composite (3.3% w/w) Index closed green last week.
Last week, Crude oil prices began the week on a decline amid growing concerns of a new COVID outbreak in China and a worsening global economic outlook that could cripple demand as major cities in China, such as Shanghai and Shenzhen, ramped up COVID testing and introduced new curbs. OPEC cut its outlook for demand growth this year by between 460,000 BPD to 2.6million BPD. Also, the U.S. Energy Department lowered its expectations for both production and demand in the United States and globally, now seeing a 0.9% increase in U.S. consumption in 2023, down from a previous forecast for a rise of 1.7%., and 1.5% worldwide, down from an earlier forecast for 2.0% growth. Brent futures closed the week down 6.4% w/w at $91.63/bbl. On Friday.
This week, we do not expect the ongoing earnings season to shift focus from macro developments. The week begins with the Chinese Communist Party Congress on 16-Oct. The bulk of Chinese data, its industrial production, retail sales and Q3-2022 GDP figures, will be released on 18-Oct. U.S. housing data and regional surveys will be released this week. As last Friday officially started the earnings season, over 10.0% of companies in the S&P 500 will report their earnings. As the BoE ended its bond-buying program on 14-Oct, with options expiration, we expect market volatility to be magnified. U.K., Eurozone and Canada CPI figures will be released on 19-Oct.
Domestic Equities: Local bourse reverses northward… ASI up by 46bps w/w
Last week, the domestic equities market closed the week higher on the back of increased bargain hunting in BUACEMEN (+8.7% w/w), GTCO (+5.3% w/w), and ACCESSCO (+5.3% w/w). The benchmark NGX-All Share Index (NGX-ASI) climbed 46bps w/w to print at 47,569.0 points. Consequently, YTD return inched up to 11.4%, with market capitalisation printing at N28.0tn, thus bagging a total of N118.5bn last week. Similarly, the activity level was reflective of the bargain hunt as the average value traded increased by 34.3% w/w to print at N3.0bn, while the average volume of shares traded declined 16.4% w/w to print at 122.6mn units, reflecting the overall bearish sentiment. Investor sentiment from last week’s trading session witnessed improvement, strengthening to 1.0x from 0.2x as 25 tickers appreciated while 24 depreciated, as measured by market breadth.
On a sectoral level, overall w/w performance was bullish as three (3) out of the five (5) sectors we cover closed in green, while the remaining two (2) closed in the red. The Industrial goods (+3.2% w/w) sector led the gainers owing to increased bargain hunting in BUACEMEN (+8.7% w/w). Trailing behind were the Banking (+1.9% w/w) and Insurance (+1.7% w/w) sectors on the back of share price appreciation in ACCESSCO (+5.3% w/w), ZENITHBA (+2.3% w/w), UBA (+2.2% w/w), AIICO (3.6% w/w), WAPIC (+9.4% w/w) and CORNESRST (+4.0% w/w). On the other side of the coin, the Oil & Gas (-2.1% w/w) and Consumer goods (-0.7% w/w) sectors closed red owing to profit taking across SEPLAT (-4.0% w/w), OANDO (-0.4% w/w), NB (-4.0% w/w), INTBREW (-5.3% w/w), UNILEVER (-2.4% w/w), and CADBURY (-6.9% w/w).
This week, we expect continued bargain hunting as investors look forward to the Q3-2022 earnings season, thus cherry-picking stocks with great underlying fundamentals. However, we maintain that the broader equities market will remain in a lull pending the release of Q3-2022 results.
Money Market Review: Stop rates in PMA inch higher
Last week, the financial system opened with a deficit balance of N157.8bn. We saw an inflow of N10.0bn worth of OMO maturities hit the system. Despite the NT-bills auctions conducted by the Central Bank, system liquidity improved following primary market repayments from maturing NT-bills, as the CBN undersold the auction significantly. Overall, system liquidity closed the week liquid with a balance of N197.0bn, with inter-bank lending rates remaining in the double-digit region. Consequently, the average Open Repo Rate (OPR) and Overnight Rate (OVN) declined by 2bps and 13bps to close the week at 16.2% and 16.6%, respectively.
The Central Bank of Nigeria (CBN) conducted an NT-bills Primary Market Auction (PMA) rolling over a total of N190.9bn worth of bills across the 91-day, 182-day, and 364-day papers. Investors showed abysmal interest in the auction owing to the tight system liquidity and the new CBN directive that restricts auction participants from accessing the discount window on settlement dates. Thus, the auction was undersubscribed, with total subscriptions printing at N111.9bn, implying a bid-to-cover ratio of 0.6x. Notably, the CBN undersold significantly, allotting just N34.8bn, 18.2% of the total amount on offer. The stop rate on the 91-day bill declined 2bps to 6.47% while the 182-day and 364-day bills inched higher by 40bps and 100bps to settle at 7.5% and 13.0%, respectively.
In the secondary NT-bills market, investors’ sentiment was mildly bullish. As a result, the average yield on N.T. bills dropped marginally by 1bps w/w to close at 7.3%. Similarly, the average yield on OMO bills declined marginally by 2bps w/w to print at 10.3%.
Looking ahead, we expect interbank lending rates to be elevated as system liquidity remains tight in the absence of any maturities hitting the system. We expect money market yields to print higher and funding rates to stay at their ceiling as system liquidity remains tight.
Bond Market: Bearish sentiments in the secondary market
Last week, in the secondary bonds market, we observed a general bearish sentiment across the markets as market participants took positions ahead of the upcoming bonds auction. Overall, the average yield across sovereign bonds climbed by 21bps w/w to close at 13.7% (previously 13.5%). In tandem, corporate bonds traded on a bearish note, albeit with a moderate movement along the yield curve, as the average yield on corporate bonds lost 5bps w/w to 14.6% (previously 14.5%).
In the same vein, sell pressures dominated the Nigerian Eurobonds market as investors maintained a bearish sentiment with steep movement along the tail-end of the curve. Thus, the average yields rose by 88bps w/w to close at 14.0% (previously 13.1%).
The Debt Management Office (DMO) is scheduled to conduct a bond auction this week with N225.0bn worth of paper across the 2029s, 2032s and 2037s tenors. In line with previous auctions, we expect yields to tick higher as investors remain standoffish and demand higher rates for their funds.
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 N441.4/$, from its previous week’s close of N439.2/$. At the parallel market, we found offer quotes in the N735.0/$ – N745.0/$ as Foreign Exchange (F.X.) pressures persist. Activities in the I&E window weakened, as average F.X. turnover declined by 22.0% w/w to settle at $73.3mn. Similarly, Nigeria’s external reserves fell by 44bps w/w, shedding $165.6mn to close at $37.9bn. .
This week, we expect to witness continued pressure on the Naira across all market segments.
