October 31, 2022/United Capital Research

Macro Highlights and Outlook

According to the Governor of the Central Bank of Nigeria, the apex bank would commence the release of the re-designed 200, 500, and 1000 naira notes by December 15, 2022. In addition, he emphasised that the move was targeted at controlling currency in circulation as well as curb currency and ransom payments to kidnappers and terrorists.

According to available data from the CBN, N2.7tn out of the N3.2tn currency in circulation is outside the vaults of commercial banks across the country, and supposedly held by the members of the public.

According to the Chairman of the Independent Petroleum Marketers Association of Nigeria (IPMAN), Western Zone, the recently witnessed increase in fuel pump prices across the region is as a consequence of NNPC depots having no PMS. The IPMAN Chairman stated that the depot price of fuel rose 20.3% w/w to N178.0/ltr., driving its members to sell the commodity at the current N195.0 – N200.0/ltr. price range.

As disclosed by the Chief Executive of the Nigerian Midstream and Downstream Petroleum Regulatory Authority, the Federal Government has developed 12 new regulations for midstream and downstream operators. According to the Chief Executive, the FG did so to accelerate the full implementation of key provisions of the 2021 Petroleum Industry Act.

The most recent Domestic and Foreign Portfolio Participation in Stock Trading report by the Nigerian Exchange Limited (NGX) showed that domestic and foreign portfolios in the Nigerian equities market declined 33.9% m/m from N124.0bn($289.0mn) in Aug-22 to N81.9bn ($187.1mn) in Sept-22. Total domestic and foreign transactions decreased by 35.0% and 30.3% to N62.2bn and N19.7 ($44.9mn) respectively.

According to data from the National Bureau of Statistics in its report on Liquefied Petroleum Gas (cooking gas) Price Watch for Sep-22, the price of 12.5kg of cooking gas climbed 61.0% y/y to N9,906 in Sep-22 from N6,165 in Sep-21.

The Federal Executive Council approved the sum of N17.4bn for the provision of broadband infrastructure for micro, small and medium enterprises as well as tertiary and higher learning institutions across the six geo-political zones.

This week we expect the macro/socio-economic space to be relatively quiet for most of the week.

Global Markets: Positive economic data and earnings results spurs positive sentiments

Last week, the global equities market was dominated by bullish sentiments, maintaining the previous week’s gain, following the release of impressive Q3-2022 results by blue-chip stocks and better-than-expected economic data. The US Bureau of Economic Analysis (BEA) released the first estimate of the Q3-2022 Gross Domestic Product (GDP), which showed that the economy grew by 2.6%, returning to growth after two consecutive quarters of decline. Investors reacted positively to the GDP estimate as it hinted at a softening economy. In addition, the core Personal Consumption Price Index (PCE), the Fed’s preferred inflation gauge, rose to 5.1% y/y in Sep-2022 from 4.9% y/y in the prior month, albeit below market expectations of 5.2%. Although this showed that annual core inflation came slightly weaker than expected, inflationary pressures still persist in the economy. According to the University of Michigan, consumer sentiment for the US climbed to 59.9 in Oct-2022 from 58.6 in Sep-200, signalling consumers’ optimism in the US economy. On corporate actions, revenue and profit increases in Apple, Caterpillar and McDonald’s outweighed disappointing earnings results from Microsoft, Alphabet and Meta. That said, trading sessions last week saw all US equities close in the green, with major US equity indices gaining values w/w. For context, the NASDAQ Composite, S&P 500, and DJIA increased by 2.2% w/w, 4.0% w/w, and 5.7% w/w.

In Europe, market activities mirrored the US equity market as major European indices climbed w/w. Investors welcomed the appointment of Rishi Sunak as the new Prime Minister (PM) of the UK. During his first speech, the PM reiterated his administration’s focus on economic stability, bringing some relief to markets rattled by former Prime Minister Liz Truss’s mini-budget. On the corporate side, oil giant, Shell, declared a 128.9% growth in its profit printing at $9.5bn. Notably, the UK FTSE climbed by 1.1% w/w. In the Euro Area, the European Central Bank raised its benchmark interest rate by 75bps to 2.0% during its Oct-2022 meeting, following a similar move in the previous month, bringing borrowing costs to the highest since early 2009 as it battles high inflation and looming recession. According to the European Commission, the Euro Area consumer confidence indicator increased by 1.2pts to -27.6 in Oct-2022 from a Sep-2022 record low of -28.8 as consumers were more optimistic about their outlook on their household’s future financial situation. Thus, Europe STOXX (3.7%) and France CAC (3.9% w/w) closed the week higher.

The Asian equity market closed in the red as earnings jitters and economic concerns stemming mainly from China’s Covid lockdowns weighed on major indices in the region. China continued to report rising new Covid cases nationwide, prompting cities like Wuhan and Xining to double down on Covid control measures to arrest widening outbreaks. President Xi Jinping secured a third five-year term as China’s leader since taking office in Mar-2018. The market fretted about the President’s tightening grip on power which may lead to the continuation of strict Covid controls and more sectorial crackdowns. In other parts of Asia, the Bank of Japan (BoJ) maintained its policy rate at -0.1% during its Oct-2022 meeting. However, the bank lifted its 2022 inflation forecast to 2.9% from 2.3%, citing surging prices of energy, food and durable goods. On that note, the capitalisation-weighted Shanghai Composite Index lost 4.0% w/w, while the Indian SENSEX and the Japanese NIKKIE gained 1.1% w/w and 0.8% w/w, respectively.

Last week, crude oil prices recorded gains, despite the US government data showing a jump in crude-oil inventories, printing at 4.5mn bbl. Even as the US follows through with the sale of an additional 15.0mn bbl. from its Strategic Petroleum Reserve (SPR), the weaker dollar continued to serve as a buffer to help oil longs find their feet in a market that is still beset with volatility and less-than-flattering fundamentals. Overall, from a w/w perspective, oil prices closed higher, with Brent Crude climbing by 2.7% w/w to print at $95.77/bbl.

Looking forward, we anticipate a very busy week in the US, with the Federal Reserve’s committee scheduled to meet to consider the benchmark interest rate decision amid rising inflationary pressures in the nation. In addition, we expect the release of the US labour report and more earnings reports to influence the direction of the market and investors’ sentiments. Also, investors will be watching closely other central bank meetings in the UK, Australia, Norway, and Malaysia. Finally, China will be releasing its manufacturing and services Purchasing Managers Index (PMI) for Oct-2022.

Domestic Equities: Bearish sentiments persist, ASI down 1.1% w/w

Last week, the equities market started with a bullish run, closing green in the first few trading sessions of the week. However, at the end of the week, sell pressure across large-cap stocks; DANGCEM (-10.0%) and AIRTELAFRI (-2.8% w/w), dragged on the local bourse. Overall, investors continued tilt toward fixed-income instruments, dumping stocks whose performance was below market expectations amid the rising yield environment. That said, the benchmark NGX-All Share Index (NGX-ASI) declined 1.1% w/w to settle at 43,912.6 points. As a result, YTD return weakened to 2.8%, as market capitalisation lost N0.4tn to print at N23.9tn. Activity level in the bourse dampened even further as average volume and value traded declined by 36.2% w/w and 14.8% w/w to 119.7mn units and N2.8bn.

Across sectors, overall w/w performance was mainly bearish as three (3) of the five (5) sectors we cover closed red. The Insurance sector (-2.4% w/w) sector led the laggards due to price depreciation in NEM (-15.2% w/w), and LINKASSU (-9.3% w/w). Trailing behind were the Consumer Goods (-0.4% w/w) and the Oil & Gas sector (-0.2% w/w) sectors following sell pressures in UNILEVER (-10.4% w/w), HONYFLOU (-11.3% w/w), NB (-0.4% w/w) and OANDO (-2.0% w/w). On the flip side, the Industrial Goods sector (+0.3% w/w) led the gainers as a result of bargain-hunting activities in BUACEMEN (+12.9% w/w) and WAPCO (+1.4% w/w). Lastly, the Banking sector gained 0.1% w/w due to price appreciation in FIDELITY (+7.9% w/w), UBN (+2.5% w/w), UBA (+1.4% w/w), JAIZBANK (+6.7% w/w), and ZENITHBA (+0.3% w/w).

The Q3-2022 earning season is in full swing, with companies releasing results. The banking sector showed resilience, with banks growing their profit after tax ZENITHBANK (N174.3bn, +8.6% y/y), FIDELITYBK (N35.0bn, +31.9% y/y), WEMABANK (N8.2bn, +31.2% y/y), FBNH (N91.3bn, +123.5% y/y), UBA (N116.0bn, +10.9% y/y) and GTCO (N130.3bn, +0.7% y/y). The consumer goods sector had mixed results, with companies like GUINNESS (N2.7bn, -32.0% y/y) and FLOURMILL (N5.7bn, -45.9% y/y) profit after tax underperforming year-on-year and companies like CADBURY (N2.8bn, +86.1% y/y), CHAMPION (N1.3bn, +98.3% y/y), NB (N14.8bn, +79.6% y/y) profit after tax exceeding expectations.

In the Oil and Gas sector, SEPLAT and TOTAL grew revenues by 41.6% y/y and 39.2% y/y/ to N258.7bn and N337.2bn, respectively. SEPLAT maintained margins growing profit after tax by 143.7% y/y to N33.8bn and announced an interim dividend of $2.5. Conversely, TOTAL’s profit after tax shrunk by 6.6% y/y to N12.5bn. In the Telecommunication sector, MTNN and AIRTELAFRI grew revenues by 12.9% y/y and 20.7% y/y to N2.6bn and N1.5tn, respectively. Profit after tax for MTNN grew by 22.1% to N269.0bn, while for AIRTELAFRI, it declined by 1.5% y/y to N330.0mn.

The Industrial sector BUACEMENT, WAPCO, and DANGCEM revenues grew by 40.5%, 23.1% and 15.2% y/y to N262.6bn, N269.8bn and N1.2tn, respectively. In addition, Profit after tax increased by 12.3% and 11.2% y/y to N74.0bn and N44.9bn, while DANGCEM’s PAT declined by 23.4% y/y to N213.1bn.

This week, we expect bearish sentiment to continue to dominate the market as investors remain on the sidelines with sight on attractive yield environment in the fixed-income market. However, we may see some bargain hunting in stocks with underlying fundamentals as investors are likely to take positions in fundamentally sound stocks with fantastic Q3-22 earnings, especially dividend paying stocks.

Money Market Review: Investor appetite skewed toward tail-end of the curve at PMA

Last week, the financial system opened with a deficit of N111.9bn. Over the week, OMO maturities to the tune of N30.0bn hit the system, causing little or no stir to the system’s liquidity at the time. The system received c.189.5bn from coupon payments, with the bulk of it hitting the system toward the end of the week. Despite CRR debits to the tune of N102.5bn, the system closed the week liquid with a balance of N279.3bn. Funding rates between banks maintained within the 16.0% – 17.0% region. Reflective of the liquidity at the time, average funding rates declined with average Open Repo Rate (OPR) and Overnight Rate (OVN) declining by 23bps w/w and 20bps w/w to settle at 16.0% and 16.2% respectively (previously 16.2% and 16.5%).

Diving into primary market activities, the CBN conducted its last auction for the month of October, with an offer to sell N240.3bn worth of NT-Bills. The auction was met with weak appetite from investors, as the effect of the CBN’s discount window restriction continues to linger. Demand was particularly skewed toward the longer end of the curve, with total bids summing up to N136.96bn, implying an under-subscription rate of 0.6x vs offer. In line with the recent trend, the apex bank undersold by an allotment rate of 0.5x, selling only N109.2bn worth of NT-Bills vs N240.3bn on offer. In line with our expectation, stop rates across the 91-day, 182-day and 364-day climbed 3bps, 15bps, and 150bps to settle at 6.5%, 8.05%, and 14.5% respectively.

On the flip side, bearish sentiments prevailed at the secondary NT-bills market, as investors maintain sight on price, encouraged by the prevailing rising yield environment. As a result, the average yield on NT bills in the secondary markets climbed 75bps w/w to close at 11.0% (previously 10.3%). The secondary market for OMO bills was relatively quiet, as the average yield on OMO bills declined by a 7bps w/w margin to close at 10.2%. (previously 10.3%)

Looking ahead, 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.

Bond Market: The bulls dominate the Nigerian Eurobonds market

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. 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 on the other hand witnessed a bull market. Local investors’ appetite was bolstered by the weaker Naira relative to the US Dollar, as they sought to gain from the high yields of Nigerian Eurobonds. As a result, the average yields declined by 118bps w/w to close at 14.5% (previously 15.6%).

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, in anticipation of upcoming bond auction.

Currency Market: The Naira depreciates at the I&E window

Last week, the Naira depreciated against the dollar by 70bps w/w at the Investors & Exporters (I&E) window to close at N445.8/$, from its previous week’s close of N441.7/$. At the parallel market, we found offer quotes in the N800.0/$ – N810.0/$, with the Naira maintaining a downward spiral, reaching another historic low as Foreign Exchange (F.X.) pressures persist. Activities in the I&E window weakened, as average F.X. turnover declined by 17.3% w/w to settle at $72.5mn. However, most recent CBN figures print Nigeria’s external reserves at $37.5bn on 26th-Oct, 42bps down from last week’s N37.7bn close.                                                   

This week, we expect to witness continued pressure on the Naira across all market segments, as electioneering activities continue to unfold. Going forward, we believe the CBN’s move to redesign the Naira could be a panacea to provide a significant buffer for the Nigerian Naira against stronger currencies like the green back ($).