October 24, 2022/United Capital Research
Macro Highlights and Outlook
Last week, according to the National Bureau of Statistics (NBS) CPI report for Sept-22, the headline inflation climbed 27bps to settle at 20.77% y/y in May-2022, from August’s 20.52%. On a m/m basis, the headline CPI rose by 1.36%, 41bps lower than Aug-22’s m/m inflation. Across the sub-indices, food inflation expanded 22bps to print at 23.34% y/y in Sept-2022, from 23.12% y/y in Aug-2022. On a m/m basis, the food sub-index moderated by 55bps to 1.43% in Sept-22. In tandem, the core inflation sub-index rose 40bps to print at 17.60% in Sept-22, from 17.20% as of Aug-22. On a m/m basis, the core sub-index rose 1.59% m/m, the same rate recorded in Aug-22.
Also, Moody’s Investors Service has placed on review for downgrade the long-term deposit ratings, as well as long-term issuer and senior unsecured debt ratings, where applicable, for 9 Nigerian Banks. They include all tier-1 banks, Fidelity Bank, FCMB, Union Bank and Sterling Bank.
According to a document on Power Generation Trend (2013 – Aug-22) by the Association of Power Generation Companies, Nigeria’s available power generation capacity fell by 981.8 MW to 5,6to 5,64.5MW over the period despite the estimated N1.5tn intervention in the sector by the Federal Government. The National grid has collapsed 98 times in the period under review.
The Nigeria Liquefied and Natural Gas (NLNG) has declared a force majeure due to the widespread flooding that has disrupted gas supply. Force majeure is a common clause in contracts which essentially frees both parties from liability when an extraordinary event or circumstance beyond the control of the parties, prevents one or both parties from fulfilling their obligations under the contract.
According to the States’ Internally Generated Revenue (IGR) report released by the National Bureau of Statistics (NBS), Nigerians paid a total of N1.2tn in taxes to the 36 states in 2021, up 19.2% y/y from the N1.0tn paid in 2020. Tax revenues accounted for 64.9% of the total IGR by the states in 2021. Although tax revenue increased y/y, the 36 states still rely on federal allocation to sustain themselves.
The “Schedule of Promissory Notes Issued by Category as of March 2022” released by the Debt Management Office revealed that the government has at least $715.9mn judgment debts owed to judgment creditors, which are listed as 16 promissory notes that will mature at different times between October 15, 2023, and October 15, 2031.
Finally, The Central Bank of Nigeria and the Asset Management Company of Nigeria (AMCON) have formally announced the completion of a Share Purchase Agreement for the acquisition of 100.0% of the equity in Polaris Bank by Strategic Capital Investment Limited.
This week the National Bureau of Statistics is expected to release the M2 Money Supply report. We expect the macro/socio-economic space to be relatively quiet for most of the week as conversations begin to revolve around manifestoes of key presidential aspirants.
Global Markets: Global equities show resilience amidst the chaos
Last week, the US equities market closed in the green on the back of investors’ expectation for a less aggressive Fed in coming months as well as better-than-expected earnings announcements by several corporates. First, several FOMC voters and non-voters gave speeches during the week coming across with divergent opinions. However, a notable comment the market decided to hang-on to was the suggestion that the Fed will raise rates by another 75bps at the November meeting but may consider a smaller increase at the December meeting. In addition, positive earnings results from several blue-chip companies further fortified the rally and provided a nice tailwind for stocks. Bank of America (BAC) and Goldman Sachs (GS) were standouts for financials; AT&T (T) and Verizon (VZ) were standouts for communication services; United Airlines (UAL) and Lockheed Martin (LMT) were standouts for industrials; IBM (IBM) and Lam Research (LRCX) were standouts for information technology. In summary, all indexes closed in the green, with the NASDAQ Composite, S&P 500 and DIJA rising 5.2% w/w, 4.7% w/w and 4.9% w/w, respectively.
In Europe, on a week-on-week basis, the equity markets continue to ride on the back of major UK policy reversal, showing much resilience despite a myriad of political and economic uncertainty. In Britain, we saw the resignation of the interior minister on Wednesday and, finally, the resignation of the Prime Minister Thursday. In the public sector, net borrowing reached £20.0bn ($22.2bn) in the U.K. in September, up from £11.8bn in August, according to the Office for National Statistics (ONS). It is the second highest September borrowing figure since monthly records began in 1993. In addition, according to the ONS, Britain’s retail sales figures were lower than expected, down 1.4% in September. Despite all these, the pan-European STOXX 600 Index (+1.3% w/w), the UK FTSE 100 (+1.6% w/w), France’s CAC 40 Index (+1.7% w/w) and Germany’s DAX 30 Index (+2.4% w/w) closed in the green.
In Asia, investors were broadly bearish as multi-year high Treasury bond yields joined a lack of significant data/events on Friday (China was due to release home prices data Wednesday, but the release has been delayed.). Also, negatively affecting the region’s equities are fears of higher inflation and central bank meddling to defend the respective currencies in Japan, China, and India. Furthermore, fresh covid fears from China exerted additional downward pressure on market sentiment amid a sluggish week. The NIKKEI 225 and the Shanghai Composite lost 0.7% w/w and 1.1% w/w, respectively, while in India, the SENSEX closed higher by 2.4% w/w.
Last week, brent crude oil price hovered around the $92 per barrel mark. Oil prices rallied at the start of the week due to a weaker dollar, boosting demand. However, by mid-week, prices moderated on fears of a higher US supply following reports that the Biden administration may sell more of the nation’s emergency oil reserves to counter output cuts announced by the OPEC+ alliance. Sustained fears of an economic slowdown and lower Chinese fuel demand provided further downward pressure. Although towards the end of the week, crude oil prices settled higher as market participants were bullish on the back of renewed optimism in oil demand outweighing supply. Data from the U.S Energy Information Administration (EIA) showed that U.S. crude oil inventories unexpectedly shrank, falling 1.7 million barrels last week. Implying that crude consumption in the world’s largest economy remained steady despite pressure from rising inflation and interest rates. It also dampens the effects of the additional sales of crude from the country’s Strategic Petroleum Reserve (SPR). All in, Brent futures closed higher by 2.0% w/w to print at $93.50/bbl.
Entering the week, we expect the release of key economic reports that will drive market sentiments as we advance. China is expected to release its Q3-2022 GDP report; US and Germany will release their October Composite PMI numbers and Germany will release its Q3-2022 GDP report. The Bank of Japan (BoJ) will release its outlook report for the year, and finally, the European Central Bank (ECB) will announce its interest rate decision for the month.
Domestic Equities: Sell-offs in AIRTELAF drag the local bourse
Last week, the bears dominated the domestic equity market for three out of five trading sessions of the week. We saw sell pressures across the market as investors continued to favour fixed-income instruments over the stock market, given the rising yield environment. Notably, price depreciation in large-cap stocks, AIRTELAF (-27.1% w/w), MTNN (-2.0% w/w) and NB (-9.6% w/w), drove the local bourse southwards. As a result, the benchmark NGX-All Share Index (NGX-ASI) declined, falling 6.7% w/w to print at 44,396.7 points. Hence, YTD return weakened to 3.9%, while market capitalisation lost N1.6tn to print at N24.3tn. Activity level improved as average volume and value traded climbed by 52.8% w/w and 12.4% w/w to 187.3mn units and N3.3bn.
Across sectors, overall w/w performance was mainly bearish as three of the five (5) sectors we cover closed red. The Insurance sector (-3.7% w/w) sector led the laggards due to price depreciation in NEM (-10.0% w/w), AIICO (-3.5% w/w) and LINKASSU (-8.5% w/w). Trailing behind were the Oil and Gas (-1.5% w/w) and the Consumer Goods (-0.9% w/w) sectors following sell pressures in TOTAL (-6.7% w/w), MRSOIL (-9.8% w/w), NB (-9.6% w/w) and CHAMPION (-6.9% w/w). On the flip side, the Industrial Goods sector (+3.2% w/w) led the gainers as a result of bargain-hunting activities in BUACEMEN (+9.7% w/w) and CUTIX (+8.0% w/w). Lastly, the Banking sector gained 1.2% w/w due to price appreciation in FIDELITY (+10.1% w/w) and UBA (+1.5% w/w).
On corporate actions, Unilever Plc released its Q3-2022 results with a 21.5% y/y growth in revenue printing at N21.0bn. Gross profit declined by 46.6% y/y to N3.0bn (vs N5.6bn in Q3-2021) due to a 54.0% growth in Cost of Sales to N18.0bn in Q3-2022 from N11.7bn in Q3-2022. Thus, the company recorded a loss of N2.5bn at the end of the period.
This week, we expect bearish sentiment to continue to dominate the market as investors stay off equities and take advantage of the rising interest rates in the fixed income market. However, we may see some bargain hunting in stocks that have underlying fundamentals as investors look to take positions ahead of the Q3-2022 earning season.
Money Market Review: Funding rates maintain resilience above the 15.0% – 16.0% region
Last week, the financial system opened with a balance of N117.0bn amid pending deductions from the previous week’s CRR debit (N80.0bn) and FX retail auction. System liquidity tightened even further during the week as no maturity hit the system. As a result, funding rates between banks remained elevated above the 15.0% – 16.0% region. That said, the financial system closed the week in deficit with a balance of -N134.5bn. Average funding rates closed the week flat as the average Open Repo Rate (OPR) maintained at 16.2% while the average Overnight Rate (OVN) declined by a 3bps w/w margin to settle at 16.5%.
The secondary NT-bills market was met with intense bearish sentiments from investors as they remained poised to take advantage of the prevailing rising yield environment, in anticipation of the upcoming primary market auction. As a result, the average yield on NT bills in the secondary markets climbed 297bps w/w to close at 10.3% (previously 7.3%). The secondary market for OMO bills was relatively quiet, as the average yield on OMO bills declined by a 2bps w/w margin to close at 10.3%.
This week, we expect the CBN to conduct its last NT Bills auction for the month with a total offer size of N238.6bn in view. We maintain our higher rates prognosis across all money market instruments, with funding rates remaining elevated around current levels, supported by an overall tight financial system amid the prevailing rising yield environment. As a result, we expect rates to tick higher in the scheduled auction. Lastly, we expect OMO maturities to the tune of N30.0bn to hit the financial system this week.
Bond Market: Bearish sentiments show no respite at the secondary market
On Monday, the Debt Management Office (DMO) conducted its October FGN bond auction in the primary market, with an offer of N225.0bn across three (3) tenors, MAR 2029 (6-year bond), APR 2032 (10-year bond) and APR 2037 (15-year bond). Overall, investor demand was underwhelming, with the observed mild appetite skewed toward the tail-end of the curve. The auction was undersubscribed with total submitted bids from investors printing at N119.2bn, implying an overall bid-to-cover ratio of 0.5x. The 2029s and 2032s were undersubscribed with bid-to-cover ratios of 0.1x and 0.2x. On the other hand, the 2037s was oversubscribed by a bid-to-cover ratio of 1.3x. Interestingly, the DMO undersold the auction, by an allotment rate of 0.5x, allotting a total of N107.9bn vs 225.0bn on offer.
In line with the overall market expectation of a continued uptick in the yield environment, marginal rates across the 2032s, and 2037s climbed c.115bps, and 150bps, to print at 15.0%, and 16.0% respectively, while the marginal rate on the re-issued 2029s printed at 14.5%.
The secondary bonds market on the other hand continued to witness sell pressure, as investors and fixed income-obligated managers remained standoffish in the market in a bid to drive yields in that space to preferred levels, amid rising rates in the fixed income market. As a result, the average bond yields in the secondary market climbed 40bps to settle at 14.1% (previously 13.7%). In tandem, corporate bonds traded on a bearish note, as the average yield on corporate bonds gained 116bps w/w to settle at 15.7% (previously 14.6%).
The Nigerian Eurobonds market witnessed significant bearish sentiments from investors, with selling interest witnessed across the curve driven by the UK’s consumer inflation for Sep-22 printing higher than expected (10.1% vs estimated 10.0%) and Bank of America’s forecast of the Naira to be devalued by 20.0% in 2023. As a result, the average yields rose by 168bps w/w to close at 15.6% (previously 13.95%).
Looking forward, we expect the observed bearish sentiments across all fixed-income segments to remain sustained with the current momentum, with rates trending even higher. Our expectations are hinged upon tight liquidity within the bonds market as coupon inflows are expected to be weak (N258.3bn in Q4-22 vs N669.3bn in Q3-22) while stubbornly elevated inflation will likely keep monetary policy aggressive. In addition, we retain expectations of continued reliance on the domestic debt market by the Federal Government which will continue to drive supply of bonds. Lastly, we expect the bulk of Q4-22’s coupon payments to the tune of N189.5bn (73.4% of the total expected coupon inflow for Q4-22) to hit the system this week.
Currency Market: The Naira depreciated at the I&E window
Last week, the Naira depreciated against the dollar by 9bps w/w at the Investors & Exporters (I&E) window to close at N441.7/$, from its previous week’s close of N441.3/$. At the parallel market, we found offer quotes in the N735.0/$ – N745.0/$ as Foreign Exchange (F.X.) pressures persist. Activities in the I&E window strengthened, as average F.X. turnover rose by 22.0% w/w to settle at $87.7mn. However, most recent CBN figures print Nigeria’s external reserves at $37.7bn on 20-Oct, down from last week’s N37.9bn close..
This week, we expect to witness continued pressure on the Naira across all market segments.
