November 14, 2022/United Capital Research

Macro Highlight and Outlook
The Federal Government has increased the compulsory contributions of revenue-generating agencies to the Federation Account to 40.0% from 25.0%. This implies that 40.0% of Internally Generated Revenues (IGRs) by all government agencies are now meant for the Federal Government to execute projects. Notably, the Ministry of Aviation has raised concerns about its inability to raise enough money to meet the new target.

The Federal Government has disbursed a total of $64.8mn and committed an additional $392.0mn for the development of off-grid electrification projects in the 36 states of the federation and the Federal Capital Territory (FCT). Hence, the total commitment made by the government to steer the projects in the power sector is estimated at $456.8mn.

The Basel Institute on Governance has rated Nigeria as a high-risk country for Money Laundering and Terrorist Financing (ML/TF). Nigeria was rated 6.77 out of 10, with the country in 17th position out of 128 countries. Notably, countries with high risks of ML/TF often suffer from increased risks of environmental crime.

The Asset Management Corporation of Nigeria (AMCON) recovered a total of N307.0bn in debts between 2020 and 2021. This represents a 10.0% growth in the recovery performance across various asset classes. Notably, the sum of N146.0bn was recovered in 2020, while in 2021, the sum of N161.0bn was recovered.

According to the Minister of Budget and National Planning, the Federal Government (FG) is targeting a 6.3% unemployment rate, 7.0% economic growth and 0.3% poverty rate by 2050 as contained in its Nigeria Agenda 2050. The agenda was designed to transform the country into an upper middle-income developing country with a per capita income of $33,000. Notably, the Agenda would be implemented through a series of medium-term plans and annual budgets.

According to the Nigerian Upstream Petroleum Regulatory Commission (NUPRC), the country’s crude oil production averaged 1.0mbpd in Oct-22, a first since Jul-22. This implies an 8.2% m/m increase compared to its 0.9mbpd print in Sept-22. However, it is still considerably below the1.8mbpd OPEC production quota for the month under review.
 
This week, we expect the National Bureau of Statistics to release the Consumer Price Index (CPI) data for Oct-2022. We project that inflation will print at 21.4% y/y due to persistent inflationary pressures arising from increases in food prices and energy costs.
  
Global Markets: Cooling inflation turns headwinds to tailwinds
Last week, US markets were driven by the Oct-22 CPI data. There was deceleration in year-on-year CPI which printed at 7.8% y/y for Oct-22, from 8.2% y/y in Sept-22. Month-on-month CPI remained at 0.4%. This was driven by a deceleration in food prices. Core CPI also printed at 0.3% m/m vs the Sept-22 0.6% m/m print. There was a drop in transportation services (0.8% m/m vs 1.9% m/m in Sept-22), and medical services (-0.6% m/m vs 1.0% m/m in Sept-22) due to a technical adjustment as the Labor Department updated the health insurance index data. This opens the possibility that the Fed eases the pace of rate hikes going forward. The data moved the US dollar index lower (-4.0% w/w) and yields with the 2yr, 10yr and 30yr down 34.0bps w/w, 35bps w/w and 19bps to 4.3%, 3.8% and 4.1% respectively. Thus, all indexes closed in the green with the NASDAQ Composite and S&P 500 rising 8.1% w/w and 5.9% w/w, while the DJIA rose 4.1% w/w, respectively.

Similarly, in Europe, positive US CPI data and positive company earnings lifted investor sentiment. Yields on European Government bonds also mirrored US bond yields, slipping from multi-weak highs. However, this was tempered by high inflation in Italy and France. In the UK, according to the Office of National Statistics (ONS), Q3-22 GDP saw a 0.2% q/q decline, the first since Q1-21. Sept-22 economic output alone saw a 0.6% m/m decline, while Jul-22 and Aug-22 were revised up to 0.3% m/m and -0.1% m/m respectively, reflecting stronger readings from the wholesale and retail sectors. The Bank of England (BoE) predicts that Q3-22 results signal the start of a protracted 2-year recession. In Germany, the Federal Statistical Office reported that German industrial production had a surprise positive showing, rebounding 0.6% m/m from the Aug-22 1.2% m/m contraction. However, production in energy-intensive industries fell 0.9% m/m. Therefore, the UK FTSE 100(-0.2% w/w) closed bearish. However, the pan-European STOXX 600 Index (3.9% w/w), the France CAC 40 Index (3.4% w/w), and Germany’s DAX 30 Index (6.2% w/w) closed bullish.

In Asia, Japanese equity markets were driven by U.S. CPI data and market developments, as well as the Bank of Japan’s decision to commit to its loose monetary policy in its bid to sustain the country’s fragile economic recovery.  The Japanese NIKKEI 225 index rose 3.3% w/w. Similarly, In China, in addition to US developments, markets were supported by news that officials ordered tier-2 banks to extend an additional US $56.0bn in loans to housing developers. That said, the capitalisation-weighted Shanghai Composite (0.8% w/w) Index, closed green last week.

Last week, crude oil prices declined amid growing concerns over demand after major importer China reiterated its commitment to maintaining its zero-COVID policy. US Energy Information Agency (EIA) data released midweek showed that US crude oil stockpiles rose by 3.9mbbl. to 440.8mbbl., reflecting weakened demand. Brent contracts rose at the close of the week, tracking a broader rally in risk-driven assets, following the release of US CPI inflation data for Oct-22 which slowed more than expected. News that Hong Kong relaxed some of its COVID restrictions for inbound travel also added to optimism. Brent futures closed the week down 2.6% w/w at $95.99/bbl. on Friday.

This week, the key catalysts will be economic data, central bank commentary and retail earnings. The highlights in terms of economic data are US retail sales, housing data, and China Industrial Production, unemployment, and retail sales data. There will be a host of central bank speakers, including the BOE’s Bailey and the ECB’s European Banking Congress; the focal point being the New York Fed as it has its Treasury Market Conference. Also, earnings from major retailers from 15-Nov., including WMT, TGT, BABA and NVDA, will indicate the state of consumers. Finally, OPEC and the IEA will release their Monthly Oil Market Reports.
 
Domestic Equities: Local bourse turns bearish…NGX-ASI down 68bps w/w
Last week, the domestic equities market reverted course as mild sell pressures returned in the face of persistently elevated money market yields. As a result, the NGX-ASI closed red, down by 68bps w/w owing to the observed sell-pressure across large-cap stocks like MTNN (-2.0% w/w), DANGCEM (-0.6% w/w), NB (-6.3% w/w), and GUINNESS (-10.0% w/w). The benchmark NGX-ASI settled at 43,968.7 points, bringing YTD performance to 2.9%. Market capitalisation shed N163.6bn to close at N23.9tn. Activity level in the bourse was reflective of lack of interest from investors as total volume and value traded fell 21.9% w/w and 24.5% w/w 220.3mn units and N2.3tn, respectively.

Across sectors, overall w/w performance was broadly bearish as four (4) of the five (5) sectors we cover closed in the red. The Banking sector (+0.2% w/w) emerged as the lone gainer during the week owing to increased bargain hunting in UBA (+2.9% w/w), ACCESSCO (+1.3% w/w), and ZENITHBA (+0.5% w/w). The Insurance sector (-2.3% w/w) sector led the laggards due to price depreciation in NEM (-7.5% w/w), PRESTIGE (-15.2% w/w), and MANSARD (-6.1% w/w). Trailing behind were the Consumer Goods (-2.0% w/w), Oil & Gas sector (-0.7% w/w), and the Industrial goods (-0.3% w/w) sectors following sell pressures in NB (-6.3% w/w), GUINNESS (-10.0% w/w), FLOURMIL (-9.9% w/w), OANDO (-5.6% w/w), and DANGCEM (-0.6% w/w).

We expect the local equities market to remain in a lull going forward. Positive drivers to catalyse investor interest in the equities market are far and few. Elevated money market rates, pre-election jitters and dwindling corporate performance will likely keep investors’ interest at bay.

Money Market Review: Stop rate on the 364-day bill trend lower at the PMA
Last week, the financial system opened liquid with a balance of N351.1bn. We saw an inflow of N105.0bn worth of OMO maturities hit the system, which further boosted liquidity. Despite mop-up activities via the NT-bills and OMO auctions conducted by the Central Bank, system liquidity remained elevated throughout the week. Overall, system liquidity closed the week with a balance of N297.1bn, with inter-bank lending rates declining to the single-digit region. Consequently, the average Open Repo Rate (OPR) and Overnight Rate (OVN) declined by 70bps and 72bps to close the week at 9.2% and 9.6%, respectively.

The Central Bank of Nigeria (CBN) conducted an NT-bills Primary Market Auction (PMA) rolling over a total of N193.0bn worth of bills across the 91-day, 182-day, and 364-day papers. At the auction, investors’ demand was strong, particularly skewed towards the tail-end of the curve, owing to the liquidity in the system. Thus, the auction was oversubscribed, with total subscriptions printing at N520.9bn, implying a bid-to-cover ratio of 2.7x. Notably, the apex bank opted to oversell the auction, allotting N310.1bn vs N193.0bn on offer. Consequently, the stop rate on the 91-day and 182-day bills remained unchanged at 6.5% and 8.1%, respectively. The stop rate on the 364-day bill, on the other hand, declined by 51bps to settle at 13.99%.

In the addition, the Central Bank conducted an OMO auction to mop up the excess liquidity in the system, with a total of N20.0bn worth of bills on offer across the 110-day, 180-day, and 334-day papers. The auction was met with robust demand as investors sought to take positions following the liquid system. Thus, the auction was oversubscribed, with total subscriptions printing at N98.4bn, implying a bid-to-cover ratio of 4.9x. Notably, the CBN sold just the total amount on offer. The stop rate on the 110-day, 180-day and 334-day bills settled at 7.0%, 8.5% and 10.1%, respectively.

In the secondary NT-bills market, activities mirrored the outcome of the auction as investors sought to fulfil unmet demands from the primary market. As a result, the average yield on NT bills dropped by 50bps w/w to close at 10.6% (previously 11.1%). The average yield on OMO bills declined marginally by 2bps w/w to print at 10.2%.

Looking ahead, we expect interbank lending rates to return to the double-digit terrain as we expect system liquidity to be tight in the absence of any maturities, CRR debit and FX retail activities. We expect money market rates (NT-Bills and FTDs) to remain sustained at current levels this week.

Bond Market: Buy-interests dominate the secondary market
Last week, in the secondary bonds market, we observed bullish sentiments across the markets as the recent bearish trend rode to a halt, likely on the back of the NT-bills auction result which raised concerns of a short-term downward pressure on rates. Overall, the average yield across sovereign bonds declined by 6bps w/w to close at 14.5%. In tandem, corporate bonds traded on a bullish note as the average yield on corporate bonds dropped by 14bps w/w to 16.0% (previously 16.1%).

In the same vein, we saw buy interests dominate the Nigerian Eurobonds market as investors continued to take dollar positions to hedge against the depreciating naira. Thus, there were bullish sentiments across the market, and average yields fell by 13bps w/w to close at 14.6% (previously 14.7%).

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 a general uptick in bond yields as investors maintain a standoffish approach and the supply of bonds remains elevated due to the FG’s reliance on the domestic debt market.

Currency Market: Naira appreciates at the parallel market
Last week, the Naira depreciated by 6bps w/w at the Investors & Exporters (I&E) window to close at N445.8/$, from its previous close of N445.5/$. At the parallel market, we found offer quotes in the N680.0/$- N720.0/$ as the Naira appreciated significantly from previous weeks’ losses (N860.0/$ – N890.0/$). The increase in the value of the naira can be attributed to the CBN’s collaboration with the EFCC to revoke BDC licenses and raid black market operators in Lagos and Abuja. Activities in the I&E window improved, with average FX turnover rising 70.3% w/w to settle at $143.4mn. On the other hand, Nigeria’s external reserves declined by 38bps w/w, shedding $141.1mn to close at $37.2bn.

This week, we expect to witness continued pressure on the Naira across all market segments. We believe that the appreciation of naira at the parallel market will be short-lived, given that FX pressures will return as electioneering activities continue to unfold. Also, we are of the view that a stronger greenback owing to sustained hawkish tone by the Fed will remain a downside to improved (NGN/USD) FX rates across all market segments.