November 7, 2022/United Capital Research

Macro Highlights and Outlook

Last week, the Minister of Agriculture and Rural Development, Mahmood Abubakar, disclosed that the Federal Government received $249.0mn ($244.0mn from the African Development Bank and $5.0mn from the International Fund for Agricultural Development) for flood impact mitigation and food production. In addition, he disclosed that the construction of mini-earth dams has also commenced, and the FG is currently restocking the country’s strategic food reserves with 200,000 MT of assorted commodities.

The World Bank in its most recent Commodity Markets Outlook report warned that the depreciation of most currencies of developing economies against the US Dollar, including the Naira, could deepen the food and energy crisis they already face.  

United Capital Infrastructure Fund (UCIF), a N150.0bn close-ended fund, announced its maiden investment in a brownfield lead production and exporting plant, with an initial capacity of 7,000 MT. The investment was made through a senior secured six-year medium-term refinancing facility provided to BPL Nigeria Limited (BPL). The project will be implemented in three phases, with expansion of its 7,000 MT initial capacity to 28,000 MT ultimately. 

Railway transportation data from the National Bureau of Statistics (NBS) has revealed that the number of train passengers in Q2-2022 was 422,393, down from 953,099 in Q1-2022. The data also showed that the number of cargoes for Q2-2022 was zero, compared to Q1-2022 when the total cargo transported through the railway system was 32,139 tons.  

As disclosed by the Minister of Transportation, the FG looks to acquire multi-billion dollar loans from Chinese, Portuguese, and Turkish financial institutions to complete ongoing rail projects across the country. 

The Canadian Trade Commissioner to Nigeria, Temitayo Dada, has revealed at the Canada-Nigeria Trade Mission’s Event 2022 Agenda that Nigeria is Canada’s largest trading partner in Africa, with $2.7bn in bilateral merchandise trade. 

According to the Ministry of Finance, the Federal Government may present a supplementary budget to the National Assembly due to a further depreciation of the Naira and galloping inflation that have made the 2023 budget nearly unrealistic. 

This week we expect the Nigerian Bureau of Statistics to release its report on Daily Energy Generated and Sent out for Q3-2022, and Internally Generated Revenue at State Level H1-2022. 

Global Markets: US stocks shed on dashed hopes for a Fed Pivot 

Last week, stocks in the US equities market fell after the Federal Reserve dashed market hopes for an impending pivot in monetary policy in the form of a pause or slower pace of rate hikes. The Board of Governors of the Fed in the recently concluded Federal Open Market Committee (FOMC) meeting, voted unanimously to raise the interest rate, approving a 3/4 percentage point (+75bps) increase in the primary credit rate (benchmark interest rate) to 3.75% – 4.0%, effective November 3, 2022 (marking its sixth successive adjustment). The technology-heavy Nasdaq Composite Index was hit particularly hard as growth stocks declined more than value companies. The Dow Jones Industrial Average held up much better, extending its relative outperformance from October. Tech stocks suffered as the fallout from a largely disappointing earnings season for bellwethers such as Meta Platforms, Amazon, and Microsoft continued. That said, trading sessions last week saw all US equities close in the red, with major US equity indices losing values w/w. For context, the NASDAQ Composite, S&P 500, and DJIA fell by 5.6% w/w, 3.3% w/w, and 1.4% w/w.

Shares in Europe rose for the third week running, as central banks signaled that they may curb the pace of rate increases. Investor sentiment also received a boost from hopes that China might walk back its zero-COVID policies. As disclosed by Eurostat, annual inflation in the Euro area accelerated more than expected to settle at 10.7% y/y in October, from 9.9% y/y in September, fueled by higher energy prices. Food and imported industrial goods prices also rose sharply, with core inflation increasing to 6.4% y/y from 6.0% y/y. Despite the Bank of England hiking its bank rate by 0.75ppts to 3.0%, at the close of last week, the single biggest increase in more than three decades, shares in the European stock market closed northwards. In local currency terms, the pan-European STOXX Europe 600 Index ended the week 1.5% higher. Germany’s DAX Index (+1.6% w/w), France’s CAC 40 Index (+2.3% w/w), and the UK’s FTSE 100 Index (+4.1% w/w) all closed the week green.

The Asian equity markets recoded positive sentiments from Investors on the back of hopes that China might walk back its zero-COVID policies, thus reopening its economy. However, the U.S. Federal Reserve’s hawkish stance curbed gains somewhat. China’s stock markets rallied amid speculation that the country was preparing to relax its zero-tolerance approach to the coronavirus, as a result, the broad-based capitalization-weighted Shanghai Composite Index gained 5.3% w/w. Japan’s NIKKEI 225 Index rode on similar sentiments, closing the week higher by 0.4% w/w. In the same vein, the Indian SENSEX gained 0.3% w/w, extending previous week’s gains.

Crude oil prices started the week strong as the market reacted to OPEC raising its medium to long term demand forecast, iterating their commitment to stabilize prices when required. Mid-week, Crude oil prices extended gains even further despite the Federal Reserve’s fourth interest rate hike (+75bps) of the year which caused other risk assets to drop as worries about global energy supply continue to linger. The mid-week resilience of crude oil prices was supported by another decline in U.S. oil inventories as refineries picked up activity ahead of the winter heating season. That said, from a w/w perspective, oil prices closed higher, with Brent Crude climbing by 6.2% w/w to print at $98.57/bbl at the close of the week.

Looking forward, we expect bearish sentiments to persist in the global equities market, as investors remain attracted the rising yield on fixed income denominated assets. Also, we expect the US Bureau of Statistics to release the country’s October Inflation report this week.

Domestic Equities: Local bourse halt consecutive weeks of losses

Last week, the domestic equities market appreciated following two consecutive weeks of losses. Overall, we witnessed Increased buy interest in blue-chip companies like DANGCEM (+8.8% w/w), GEREGU (+4.6% w/w), ACCESSCO (+3.3% w/w) and BUACEMEN (+2.9% w/w). As a result, the benchmark NGX-All Share Index (NGX-ASI) rose by 81bps w/w to close at 44,269.18 points. Consequently, YTD return rose to 3.6%, with market capitalisation settling at N24.1tn. In line with the improvement in sentiments, activity level strengthened as average volume and value traded rose 135.5% w/w and 9.0% w/w to 282.1mn units and N3.1bn.

Our sectoral analysis reflected the overall negative sentiment, as four (4) out of five (5) sectors under our coverage closed in the red. The Industrial Goods sector (+5.4% w/w) was the outlier this month due to buying interest in BUACEMEN (+2.9% w/w) and CUTIX (+2.0% w/w). Leading the laggards was the Oil and Gas sector (-5.4% w/w) owing to sell pressure in SEPLAT (-8.3% w/w) and OANDO (-6.1% w/w). The Consumer Goods Sector (-2.3% w/w) followed closely, dragged by losses in BUAFOODS (-4.1% w/w), NB (-4.7% w/w), and INTBREW (-9.8% w/w). Similarly, the Banking index (-1.9% m/m), dragged by losses in ETI (-9.1% w/w) and UBN (-9.5% w/w) despite ACCESSCORP (+3.3% w/w) gains. Finally, the Insurance sector (-1.4% w/w) closed in the southwards as investors sold off MANSARD (-30.0% w/w), AIICO (-17.9% w/w), and CORNEST (-23.5% w/w).

On corporate actions, companies continued releasing their Q3-2022 earnings. In last week’s releases, the Oil palm subsector mad mixed results, with OKOMU growing its revenue by 61.6%y/y to N50.2bn and profit after tax (PAT) 55.6% y/y to N18.1bn and announced an interim dividend of N2.0/share. However, PRESCO had a less impressive showing, growing PAT by 15.3% y/y to N15.9bn despite growing revenues 72.9% y/y to N59.2bn. It also announced an interim dividend of N2.0/share. BUAFOODS released its Q3-2022 results with a 20.2% y/y growth in revenue printing at N289.8bn. Gross profit rose by 14.5% y/y to N94.2bn (vs N82.3bn in Q3-2021). PAT grew 17.2% y/y to N68.8bn.

The banking sector continued to show resilience, growing their PAT. STANBIC to N55.2bn (+38.1% y/y), ACCESSCO to N137.0bn (+12.3% y/y), and STERLNBANK to N13.4bn (+41.6% y/y). In the consumer goods sector, NESTLE posted revenue of N333.5bn (+27.5% y/y), gross profit of N117.3bn (+15.8% y/y) and PAT of N40.2bn (+19.6% y/y), announcing an interim dividend of N25/share. Also, INTBREW reported revenue of N160.4bn (+25.0% y/y), gross profit of N47.0bn (+63.1% y/y). It however made a loss of N2.8bn.   

Despite the rebound recorded last week, we retain a near-term expectation of persistent sell pressure in the Nigerian equities market and thus recommend the market is only good for investors with patient capital. We advise speculators to trade with caution.
 

Money Market Review: Interbank rates return to single digits

Last week, the financial system opened with a surplus balance of N170.7bn. Within the week, we saw inflows of N20.0bn worth of OMO maturities hit the system in addition to FAAC inflows to the tune of c. N354.7bn, which came in at the end of the prior week. As a result, system liquidity improved significantly, supported by a quiet primary market. Overall, system liquidity closed the week liquid with a balance of N470.4bn, with inter-bank lending rates falling back to single digits. Consequently, the average Open Repo Rate (OPR) and Overnight Rate (OVN) declined by 6.1ppt and 5.9ppt to print at 9.9% and 10.3%, respectively.

In the secondary NT-bills market, investors’ sentiment was mildly bearish. As a result, the average yield on NT-bills rose by 8bps w/w to close at 11.1%. In contrast, the average yield on OMO bills declined marginally by 2bps w/w to print at 10.2%.

Looking ahead, the CBN is expected to roll over N63.4bn worth of NT-bills within the week. In addition, N105.0bn worth of OMO bills will be maturing within the week. We expect interbank lending rates to be deflated as the financial system remains buoyant due to the residue of FAAC inflows and the OMO maturities hitting the system. We expect money market yields to maintain current levels and placement rates to decline marginally, albeit elevated.

Bond Market: Bullish sentiments in the Eurobonds market

Last week, in the secondary bonds market, we observed a general bearish sentiment as market participants continue to shun long duration fixed income instruments, exerting extended sell pressures across the curve, especially on the 24s and 29s. Overall, the average yield across sovereign bonds climbed by 20bps w/w to close at 14.5%.  In tandem, corporate bonds also traded on a bearish note, as the average yield on corporate bonds rose 16bps w/w to 16.1%.

However, investors’ demand for the Nigerian Eurobonds increased significantly as market participants sort to hedge against FX risk as the naira continued depreciating exponentially. The increased buy pressures pushed prices higher across the curve. Thus, the average yields declined significantly by 62bps w/w to close at 13.8%.

This week, we expect to see a continued uptick in yields on the naira-denominated papers. In the Eurobond markets, we envisage continued bullish sentiments due to increased buy pressure from currency hedgers. However, we expect the US Feds continued hawkish stance and most recent 75bps hike to oscillate this as the bears continue offloading papers.

Currency Market: Naira appreciates at the I&E window 

Last week, the Naira appreciated against the dollar by 30bps w/w at the Investors & Exporters (I&E) window to close at N445.5/$. At the parallel market however, we found offer quotes in the N860.0/$ – N890.0/$, with the Naira maintaining a downward spiral, reaching yet another historic low. This follows renewed foreign exchange pressures, triggered by the CBN’s decision to redesign the Naira. Activities in the I&E window strengthened, as average FX turnover rose by 16.1% w/w to settle at $84.2mn. However, most recent CBN figures print Nigeria’s external reserves at $37.3bn on 26th-Oct, 23bps down from last week’s close, on a steady decline since its $38.4bn on 27-Oct.       

This week, we expect to witness continued pressure on the Naira across all market segments, as electioneering activities continue to unfold. We believe the most recent wave of pressure on the Naira following the CBN’s move to redesign the Naira would persist through the weeks leading up to the effective date (31-Jan-23) when old Naira notes will cease to be legal tender.