November 21, 2022/United Capital Research

Macro Highlight and Outlook

Last week, the National Bureau of Statistics (NBS) published the Consumer Price Index (CPI) report for Oct-22. According to the report, the headline inflation climbed 32bps to settle at 21.09% y/y in Oct-22, from September’s 20.77%. On a m/m basis, the headline CPI rose by 1.24%, 12bps lower than Sept-22’s m/m inflation.

Across the sub-indices, food inflation expanded 38bps to print at 23.72% y/y in Oct-22, from 23.34% y/y in Sept-22. On a m/m basis, the food sub-index moderated by 20bps to 1.23% in Oct-22. In tandem, the core inflation sub-index rose 16bps to print at 17.76% in Oct-22, from 17.60% as of Sept-22. On a m/m basis, the core sub-index rose 0.93% m/m, its slowest m/m increase since Oct-21.

According to the National Bureau of Statistics (NBS) in its latest National Multidimensional Poverty Index report, 63.0% of Nigerians were poor due to the lack of access to health, education, living standards, employment, and security. The index offers a multivariate form of poverty assessment, identifying deprivations across health, education, living standards, work, and shocks. Thus, it was noted that 133.0mn Nigerians were multi-dimensionally poor in 22, higher than World Bank’s projection of 95.1mn Nigerians

According to a statement on its website, the Bank of Industry (BOI) has increased the fund size of its Solar Energy Fund to N6.0bn. It was launched as a N1.0bn fund in 2017. It’s target market includes households & businesses, project developers and deposit money banks. A maximum of N350.0mn can be accessed per end-user.

The International Oil and Gas Companies (IOC) have signed a Memorandum of Understanding (MoU) for the construction of a $5.0bn Floating Liquefied Natural Gas (FLNG) facility in Nigeria, the first ever in the country. The facility will have a capacity of 1.5mn tonnes p.a. and is expected to process 176.0mn standard cubic feet of natural gas per day, as well as condensate.

In a document titled “Nigeria’s Cretaceous Basins: The Potentials for Gas”, composed by the Nigerian Upstream Petroleum Regulatory Commission, the Federal Government has identified 213 gas blocks that are open for investment. They are located across the Niger Delta, Anambra state, the Benue Trough, Bida, Chad, Dahomey and Sokoto.

The Associated Foreign Exchange (AFEX) has projected an average decline of 11.5% in production across commodities like maize, paddy rice, sorghum, and cocoa. This comes on the back of season changes and activities in the agricultural value chain as well as larger macroeconomic event.

This week, we expect the National Bureau of Statistics (NBS) to release Nigeria’s GDP report for Q3-22. In addition, the Monetary Policy Committee (MPC) is scheduled to begin its last meeting for the year, today. We anticipate another hike (within the region of 50 – 100bps) by the CBN hinged on the need to curb elevated inflationary pressure and to prevent capital flight considering the recent hawkish stance across major central banks.

Global Markets: Investors record mixed sentiments

Last week, despite positive economic data, US markets closed in the red. For context, the Retail Sales Report highlighted that sales rose 1.3% m/m in Oct-22. In addition, the Oct-22 Producer Price Index revealed disinflation at the producer level, with total PPI up 8.0% y/y, down from the 8.4% y/y recorded in Sept-22, and core PPI, which excludes food and energy printed at 6.7% y/y declining from the 7.1% recorded in Sept-22. However, statements from several fed officials reiterated that the FOMC would continue its current trajectory in rate hikes. This oscillated investors’ positive sentiments, as they began to anticipate decline in discretionary spending activity in coming months, with consumers purchasing appetite weakening on the back of rising interest rates pressures, stubbornly high inflation, increased layoff announcements and concerns about job security. However, overall bearish sentiments saw the NASDAQ (-1.6%w/w), the S&P 500 (-0.7% w/w) and the DIJA (-1bp w/w) all closed in the red.

Investors remain broadly bullish in the European equities market despite rising inflation. The Eurostat released its inflation numbers which revealed the Euro area inflation came in at +10.6% y/y in Oct-22, up from 9.9% y/y in Sept-22 and 4.1% in the same month last year. A year earlier, the rate was 4.4%. Critical of note, Britain’s stock market has lost its position as Europe’s most-valued equity market, with France taking the top spot. The combined value of British shares is now estimated at around $2.8tn (£2.3tn), while France’s are worth about $2.8tn. A weakening pound and recessionary fears in the UK are driving catalysts. The FTSE 100 (+0.9% w/w) closed green. In addition, the pan-European STOXX 600 Index (+0.2% w/w), the France CAC 40 Index (+0.8% w/w), and Germany’s DAX (+1.5% w/w) extended their bullish run.

In Asia, the Chinese equity markets continued their bullish run this week, despite bearish investor sentiments towards the end of the week due to increased covid cases and inflation risks. However, bullish sentiments on technology companies supported the market. Hence the cap-weighted Shanghai Composite Index rose 0.3% w/w. In other parts of Asia, Japan’s equity markets suffered losses for various reasons, including selloffs in tech companies as the chip supply shortages worsened. Also, the Cabinet Office released preliminary data revealing that the country’s seasonally adjusted real gross domestic product shrank 0.3% from the previous quarter, indicating an annualised decline of 1.2%. In India, selloffs were driven by investors who booked profits after recent gains. Hence, the Japanese NIKKEI 225 index declined by 1.3% w/w, and India’s SENSEX fell by 0.2% w/w.

Last week, crude oil prices declined at the beginning of the week as reports came in of an increase in COVID cases in China, dampening analysts projected oil demand. However, mid-week, the US dollar depreciated against other currencies providing some support for oil prices. Nonetheless, the market feared the anticipated drop in demand despite the tightening supply due to the rising COVID cases and the continued hawkish stance of major central banks. The OPEC Secretary General announced that the organisation is ready to intervene for the benefit of oil marketers, but this failed to sway investors in the week under review. For context, Brent futures closed the week down 8.7% w/w at $87.62/bbl. on Friday.

This week, economic data from German’s Q3-22 GDP report, the US new home sales report and the release of the FOMC minutes will be significant drivers of the larger global economy.

Domestic Equities: Bulls dominate the market…ASI up 1.2% w/w

Last week, the local equities market closed bullish despite closing red in three out of the five trading sessions of the week. We saw buy interests in stocks with strong fundamentals even in the face of a pessimistic outlook for the equities market amid the rising yield environment. Notably, buy interests in large-cap stock, MTNN (+2.6% w/w) and major tier-1 banking stocks, GTCO (+10.8% w/w) and ZENITHBA (+7.0% w/w), drove the local bourse northwards. As a result, the benchmark All Share Index (NGX-ASI) climbed by 1.2% w/w to print at 44,492.7 points. Hence, YTD return strengthened to 4.2%, while market capitalisation gained N285.4bn to print at N24.2tn. However, activity level declined as average volume and value traded fell by 36.9% w/w and 26.0% w/w to 138.9mn units and N1.7bn, respectively. Investor sentiment improved to 0.9x from 0.8x last week, as 31 tickers appreciated while 33 depreciated.

Across sectors, overall w/w performance was mainly bullish as three of the five (5) sectors we cover closed green. The Banking sector (+4.2% w/w) led the gainers due to bargain-hunting activities in GTCO (+10.8% w/w), ZENITHBA (+7.0% w/w) and STANBIC (+9.1% w/w). Trailing behind, the Consumer Goods and Insurance sectors climbed by 0.9% w/w each following price appreciations in NB (+10.3% w/w), BUAFOODS (+2.0% w/w), MANSARD (+15.7% w/w) and CHIPLC (+5.2% w/w). On the flip side, the Oil and Gas sector (-1.3% w/w) led the laggards due to selloffs in OANDO (-4.9% w/w) and ETERNA (-10.0% w/w). Lastly, the Industrial Goods sector lost 0.4% w/w due to price depreciation in WAPCO (-5.6% w/w).

This week, we maintain our pessimistic outlook for the equities market as the market remains unattractive to investors amid the prevailing rising yield environment. We posit that the MPC’s decision in its Nov-22 meeting is a crucial factor that will determine the direction and tone of the local bourse going forward.

Money Market Review: Average funding rates reclaim spot in double-digit region

The financial system has been mostly liquid in the past two (2) weeks, owing to the absorbed FAAC inflow for Oct-22. However, mid- last week, the liquidity in the system dried up after primary market settlements, to close the week in deficit (-N159.4bn). As a result, funding rates between banks strolled back into the double-digit terrain, further supported by the absence of maturities in the week under review. For context, average Open Repo Rate (OPR) and Overnight Rate (OVN) rose 6.9ppts and 6.7ppts to close the week at 16.1% and 16.4%, respectively.

The secondary market was quiet last week mirroring the scarce liquidity of the system at the time. The average yield on N- bills remained unchanged at 10.6%. Similarly, the secondary market for OMO bills was calm with average yield on OMO bills declining by a 2bps w/w to print at 10.2%.

In line with our expectations of a continued uptick in the yield environment for the rest of the year, average funding rates strolled back into double-digit terrain. We believe money market rates (NT-Bills and FTDs) are likely to climb even higher as system liquidity is expected to tighten even further as we approach December. We believe that the outcome of the highly anticipated MPC meeting will strongly influence the direction of the yield curve going forward.

Bond Market: Marginal rates crawl higher at primary market

Last week, the DMO conducted its November bond auction, with a total offer size of N225.0bn across the 2029s, 2032s, and 2037s. Investors’ demand was decent as total bids recorded surpassed the total amount on offer, with a bid-to-cover ratio of 1.5x. Overall interest was skewed toward the longer-end of the curve, with the bulk of total bids aimed at the 2037s, oversubscribed at 3.6x bid-cover ratio. The CBN opted to oversell the auction (N269.2bn) with an allotment rate of 1.2x. Marginal rates crawled higher at the auction, with stop rates across the bond offerings printing at 14.75%, 15.20%, and 16.20%, up by 25bps, 20bps, and 20bps, respectively.

The secondary market for bonds was met with bullish sentiments from investors, as they sought to fulfill their unmet bids from the PMA. As a result, average bond yields declined 8bps w/w to print at 14.4%. On the flip side, the corporate bonds segment traded bearish as the average yield on corporate bonds climbed 9bps w/w to close at 16.1%.

The Nigerian Eurobonds market traded bearish in the period under review, as average yields climbed 49bps w/w to close at 11.6% (previously 11.4%).

Looking forward, we expect bond yields to continue to trend higher for the rest of the year, largely attributable to the limited expected coupon payment (N15.0bn) scheduled for the rest of the year. We encourage a standoffish approach toward the bonds market, as the supply of bonds is poised to remain elevated due to the FG’s continued reliance on the domestic debt market. We expect a total Eurobond coupon payment of $99.8mn to hit the system this week.

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

Last week, the Naira appreciated by 6bps w/w at the Investors & Exporters (I&E) window to close at N445.67/$, from its previous close of N445.75/$. At the parallel market, we found offer quotes in the N780.0/$- N800.0/$ as the Naira reversed course from the N680/$ – N730/$ range that it ended the prior week. Activities in the I&E window improved, with average FX turnover rising by 190.4% w/w to settle at $2.8mn. On the other hand, Nigeria’s external reserves declined by 4bps w/w, shedding $14.0mn to close at $37.2bn.

This week, we expect to witness continued pressure on the Naira across all market segments, given that FX pressures will return as electioneering activities continue to unfold.