November 28, 2022/United Capital Research
Macro Highlights and Outlook
The last MPC meeting for the year was held this week. In line with our expectations, the chairman announced a 100bps hike in the country’s Monetary Policy Rate (MPR), the fourth consecutive hike in 2022, bringing total rate hikes for the year to +500bps and the MPR at 16.5%. The MPC also voted to retain Cash Reserve Ratio (CRR), Asymmetric corridor, and liquidity ratio at 32.5%, +100/-700 basis points around the MPR, and 30.0%, respectively.
According to the National Bureau of Statistics (NBS), the Nigerian real Gross Domestic Product (GDP) grew by 2.3% y/y in Q3-2022 compared to the 4.0% growth in Q3-2021. The slower economic growth can be attributed to the high base effect from the previous year. Notably, oil GDP contracted by 22.7% y/y in Q3-2022, contributing just 5.7% to the GDP. On the other hand, the non-oil GDP grew by 4.3% y/y in the period under review and contributed 94.3% to the GDP.
The IMF, in its report titled ‘How Fiscal Restraint Can Help Fight Inflation’ urged the CBN to slow the pace of its MPR hikes, instead, advising better fiscal policy through investments in infrastructure, health care, and education to place the economy on a sound long-term trajectory.
The CBN Governor stated during the MPC meeting that the Bank and the Federal Government would utilise its strategic rice and grain reserves, built up over three years, to moderate prices to combat the adverse effect of this year’s flooding.
The President, Major General Muhammadu Buhari (retd.), on Wednesday morning unveiled the redesigned naira notes across the N200, N500, and N1,000 denominations. At the press briefing, Emefiele added that the amount of money that can be withdrawn from the counter would be reduced drastically, adding that bulk withdrawal would require several procedures and security checks to track its use.
The National Institute of Credit Administration (NICA) is set to launch fully before year-end, according to a statement from its chairman, following the President’s signing of the National Institute of Credit Administration (Establishment) Act in Aug-2022. The NCIA will boost the Federal Government’s economic growth plans and the country’s credit system.
The FG has urged credit institutions to support the National Institute of Credit Administration (NICA) on its mandate for the development of a robust credit-based economy and to enrich professionalism and ethical conduct in the management of credit for the growth and development of the country.
According to a statement from the NCC, within the week, the Federal Government will award several contracts to boost broadband infrastructure deployment across the country. This aligns with the National Broadband Plan (NBP 2020-2025) in which the country aims to achieve 70.0% broadband penetration by 2025. The contracts include providing broadband infrastructure for Micro, Small, and Medium Enterprises (MSME) and tertiary institutions within the country.
The commissioner for Energy and Mineral resources in Oyo State, Temilolu Seun Ashamu, revealed that the construction of the Oyo State gas infrastructure development and distribution project has begun, and the project will be completed in 2024. The project is an Oyo State government and Shell Nigeria Gas Limited collaborative opportunity to build a new gas distribution infrastructure network in the state.
The Independent Petroleum Marketers Association of Nigeria blamed the recently observed queues and hike of petrol pump prices on the depots and the increasing difficulty in accessing petroleum products.
This week, we expect the Nigerian Bureau of Statistics (NBS) to release the country’s Capital Importation data for Q3-2022.
Global Markets: Better than expected economic data boosts positive investor sentiments
Last week, the global equities market was dominated by bullish sentiments, reversing the previous week’s loss, following the release of better-than-expected economic data. Extracts from the minutes of the FOMC meeting revealed that a substantial majority of Fed officials agreed that slowing the pace of rate hikes would be appropriate, as it would allow the committee to assess progress towards its goals of maximum employment and price stability. This implies that the Fed officials are seeing a case for slower interest rate hikes, while recognising that recession risks are rising, with recent softness in US economic data supporting the case for more moderate moves. Investors reacted positively on the back of the committee’s decision as the US equities market rallied after the news release. On economic data releases, the University of Michigan consumer sentiment for the US was revised higher to 56.8pts in Nov-2022 from a preliminary of 54.7pts, higher than market expectations of 55.0pts. According to the US Census Bureau, new home sales rose by 7.5% to a seasonally adjusted annualised rate of 632,000 in Oct-2022, beating market expectations of 570,000 sales and defying the recent drawdown in housing demand. That said, the NASDAQ Composite, S&P 500, and DJIA increased by 0.7% w/w, 1.5% w/w, and 1.8% w/w, respectively in the Thanksgiving holiday week.
In Europe, market activities mirrored the US equities market despite inflation concerns and a possible aggressive monetary policy stance. Minutes from the European Central Bank’s (ECB) last meeting showed that policymakers remained committed to normalising and tightening monetary policy to combat high inflation, even in the event of a shallow recession. In UK, the UK FTSE hovered around a three-month high of 7,500pts, as gains among energy and utilities offset losses in real estate. Notably, the finance minister, Jeremy Hunt, announced tax rises and spending cuts to fix the country’s public finance and restore credibility following the former Prime Minister Liz Truss’s controversial mini budget. On data front, UK business activity contracted for a fourth straight month in Nov-2022, confirming recession worries. Although the data pointed to a continuing downturn in business activity, the reading for both services and manufacturing came better than the market expected. Thus, the UK FTSE climbed by 1.4% w/w. Elsewhere in Europe, Germany’s economic growth was revised higher to 0.4% in Q3-2022 from the initial 0.3% estimate. Also, consumer confidence in the country improved for the second consecutive month in Nov-2022 due to stabilisation in sentiments amid government energy measures, improved economic conditions and increasing income expectations. Notably, Euro STOXX 600 (+1.7% w/w), Germany DAX (+0.8% w/w) and France CAC (1.0% w/w) closed the week higher.
The Asian market closed bullish despite concerns about rising Covid-19 cases and renewed lockdown in China. The People’s Bank of China cut the Reserve Requirement Ratio (RRR) for banks by 25bps to shore up growth in an economy battered by persistent coronavirus-induced restrictions and real estate crisis. The cut will take effect from the 5th of Dec, thus releasing CNY500.0bn in long term liquidity to boost economic recovery. In addition, the apex bank kept its benchmark lending rates unchanged for the third straight month at its Nov-2022 meeting. Lastly, the China’s largest banks have pledged at least $162.0bn in new loans to property developers in a move to boost economic recovery in the ailing real estate sector. On that note, the capitalisation-weighted Shanghai Composite Index climbed by 0.1% w/w, while the Indian SENSEX and the Japanese NIKKIE gained 1.0% w/w and 1.4% w/w, respectively.
Last week, crude oil prices weakened following increases in daily Covid-19 infection cases in China. This stoked fears that the Chinese authorities would adopt tighter restrictions that could negatively affect the economy and dampen crude oil demand. Despite speculations of a production cut by OPEC in the short term, investors’ sentiment in the oil market declined given the bigger-than-expected build in US inventories. Overall, from a w/w perspective, oil prices closed lower, with Brent Crude losing 4.6% w/w to print at $83.63/bbl.
Looking forward, we anticipate a flurry of economic data releases to determine the direction of the global market. We expect the US to release its Q3-2022 report, as well as its Nov-2022 unemployment rate, PCE price index, and PMI data. In the Eurozone, we anticipate Nov-2022 inflation data for the Euroarea, France, and Germany. Finally, Japan’s unemployment rate and retail sales for Oct-2022 will drive sentiments in the Asian market.
Domestic Equities: Bulls dominate the equities market…ASI up 6.9% w/w
Last week, the local equities market was dominated by the bulls closing green on all trading sessions within the week extending into a six-day rally. 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. A number of positive corporate actions (such as the NB bonus issue announcement) and investors attempting to exploit attractive valuations in the equities market spurred the surge in prices during the week. Notably, buy interests in large-cap stocks, AIRTELAF (+14.2% w/w), DANGCEM (+10.0% w/w), BUACEMEN (+9.7% w/w), and MTNN (+6.6% w/w) drove the local bourse northwards. As a result, the benchmark All Share Index (NGX-ASI) climbed by 6.9% w/w to print at 47,554.3 points. Hence, YTD return strengthened to 11.3%, while market capitalisation gained N1.7tn w/w to print at N25.9tn. In line with the bullish performance, activity level improved as average volume and value traded rose by 2.5% w/w and 77.0% w/w to 142.3mn units and N3.1bn, respectively. Investor sentiment improved to 2.6x from 0.9x last week, as 49 tickers appreciated while 19 depreciated.
Across sectors, overall w/w performance was mainly bullish as four (4) of the five (5) sectors we cover closed in the green. The Industrial sector (+9.4% w/w) sector led the gainers due to bargain-hunting activities in DANGCEM (+10.0% w/w), BUACEMEN (+9.7% w/w), and WAPCO (+5.0% w/w). Following behind, the Insurance (+5.1% w/w) and Banking (+3.1% w/w) sectors gained due to price appreciations in NEM (+9.9% w/w), MANSARD (+11.0% w/w), CORNERST (+15.9% w/w), ACCESSCO (+6.2% w/w), ZENITHBA (+2.6% w/w), and ETI (+6.5% w/w) respectively. Finally, buy pressure in NB (+19.7% w/w), BUAFOODS (+11.2% w/w) and GUINNESS (+4.1% w/w) led to marginal gains in the Consumer Goods Sector (+0.1% w/w), as they countered losses in NESTLE (-20.7% w/w). On the other end, sell pressures in SEPLAT (-3.6% w/w) resulted in the Oil and Gas sector (-1.3% w/w) closing in the red.
This week, we expect the impact of the recent 100bps MPR hike to surface in the local bourse, as investors will look to book profits from the recent rally. We expect money market yields to continue to respond to the MPC’s persistent policy tightening, driving renewed interest from investors. In addition, technical signals (RSI & MACD) indicate the market is due a breather following the extended rally.
Money Market Review: Stop rates on 364-day paper climbs at PMA
The financial system opened with modest liquidity, with a balance of N74.5bn. Liquidity was bolstered during the week after OMO maturities, and FAAC inflow to the tune of N40.0bn and N348.7bn hit the financial system. Consequently, funding rates between banks declined, although remaining elevated in the double-digit terrain, supported by higher rates expectations after the recent 100bps MPR hike. That said, the financial system closed the week liquid with a balance of N308.3bn. In further context, the average Open Repo Rate (OPR) and Overnight Rate (OVN) significantly shed w/w falling by 1.6ppts and 1.7ppts to close the week at 14.5% and 14.7%, respectively.
On details of last week’s primary market activity, the CBN conducted its last auction for the month, with a total offer size of N213.4bn across the 91-day, 182-day, and 364-day papers. Investors’ demand was decent as total bids surpassed the total amount on offer, with a bid-to-cover ratio of 1.7x and total bid of N360.3bn. Overall, interest was skewed toward the longer end of the curve, with the bulk of total bids aimed at the 364-day bill, oversubscribed at a 2.5x bid-cover ratio. The apex bank opted to sell exactly what was on offer. Stop rates across the 91-day, and the 182-day bills remained unchanged to print at 6.5% and 8.1%, while stop rates on the 364-day climbed 85bps to settle at 14.8%.
The secondary market for NT-Bills traded bearish last week, spurred on by the MPC’s hawkish decision and results of the PMA, despite robust system liquidity. As a result, the average yield on NT- bills climbed by 5bps to close at 10.7%. Similarly, the secondary market for OMO bills was calm with the average yield on OMO bills printing at 10.2%.
Looking forward, we remain firm on our higher rates expectations for the rest of the year, hinged on the recent hawkish move by the MPC in its last meeting for the year. Also, we note that the potential illiquidity of the system owing to limited maturities for the rest of the year stands as another upside supporting our expectations. That said, we believe money market rates (NT-Bills and FTDs) are poised to climb even higher, as investors continue to price in higher rates.
Bond Market: Bullish sentiments in the Eurobonds market
The secondary market for bonds was quiet last week, as investors retained standoffish sentiments toward the bonds market, with investors focusing on activities in the money market amidst lack of desire for duration exposure in the current interest rate environment. That said, average bond yields climbed 1bp to print at 14.4%. The average yield on corporate bonds remained unchanged, to close at 16.1%.
The Nigerian Eurobonds market traded bullish during the week, owing to increased buy-pressure from investors, as they sought to reinvest received coupon inflows. As a result, average yields in the Nigerian Eurobonds market declined by a significant 28bps w/w to close at 11.6%.
Looking forward, we expect bond yields to continue to trend higher for the rest of the year, largely attributable to the limited expected coupon payments (N15.0bn) scheduled for the rest of the year. Also, we note that the recent 100bps rate hike by the system will further fuel investors’ appetite for higher rates. As a result, we encourage a retained 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.
Currency Market: The Naira depreciates at the I&E window
Last week, the Naira depreciated against the dollar by 15bps w/w at the Investors & Exporters (I&E) window to close at N446.3/$, from its previous week’s close of N445.7/$. At the parallel market, we found offer quotes in the N725.0/$ – N750.0/$. Activities in the I&E window improved, as average FX turnover climbed by 19.1% w/w to settle at $108.3mn. On the other hand, Nigeria’s external reserve lost $11.0mn to close last week at $37.2bn (as of Thursday, 24-Nov).
Going forward, we expect to witness continued pressure on the Naira across all market segments, given sustained expectations of weak FX earnings and inflows amid unabating FX demand pressures.
