December 5, 2022/United Capital Research

Macro Highlight and Outlook
According to the Debt Management Office (DMO), the Federal Government has borrowed N6.3tn from the CBN through the Ways and Means advances in the first ten (10) months of 2022, increasing total borrowings from the CBN by 36.1% y/y to N23.8tn. This figure is excluded from the country’s public debt stock which stood at N42.8tn as of Jun-2022.

According to Nigeria’s Minister of State for Petroleum Products, Nigeria is expected to cease the importation of petroleum products in Q3-2023. This, he says, is possible due to the ongoing refurbishment of the Port Harcourt, Warri, and Kaduna refineries. All refineries are expected to be operational by Dec-2023. Additionally, the Minister of State said that Nigeria is expected to meet her OPEC quota by May-2023.

According to the Nigerian Bureau of Statistics (NBS) Price watch, the average retail price of Automotive Gas Oil (Diesel) paid by consumers in Oct-2022 was N801.09/ltr., a 215.3% y/y increase from the corresponding month in 2021. Similarly, Premium Motor Spirit (Petrol) was N195.29/ltr. (+17.9% y/y), and the average retail price for refilling a 5.0kg cylinder of Liquified Petroleum Gas (cooking gas) was N4,474.48 (+70.6% y/y).

The Federal Government is set to develop an automated energy trading platform in 2023 for power generation, distribution and transmission companies, gas suppliers, and consumers to conduct electricity transactions. The platform is set to facilitate an automated and transparent marketplace that would serve as a system for the consummation of bilateral contracts for energy using standard template contracts.

This week, we expect the National Bureau of Statistics to release Nigeria’s Capital Importation data and Foreign Trade Statistics for Q3-2022.
 
Global Markets: Global equities sustain bullish momentum on policy expectations
Last week, global equities maintained a northward trajectory, supported by a possible Fed pivot from aggressive policy tightening as well as positive economic data. The major US equities ended the week higher, buoyed by the possibility that the Fed may slow the pace of its interest rate hikes after comments from Fed Chair, Jerome Powell, signalled smaller interest rate hikes going forward. The Fed Chair reiterated the need for labour demand to soften as the central bank seeks to bring inflation under control. Data from the Bureau of Labor Statistics showed that the number of job openings declined by about 353,000 to 10.3mn, a level that was slightly below a consensus estimate for 10.4mn available positions. Non-farm payroll data showed that the U.S. economy added 263,000 jobs in Nov-2022, exceeding a consensus estimate that had called for the pace to slow to about 200,000. Consumer spending increased by 0.8%, or 0.5% on an inflation-adjusted basis, sequentially in Oct-2022. That said, the NASDAQ Composite (+2.1% w/w) posted solid gains. Growth stocks outperformed their value counterparts in the S&P 500 Index (+1.1% w/w). Lastly, the “traditional economy” DJIA (+0.2% w/w) took a bit of a breather at the tail end of the week but still ended modestly higher.

European stocks climbed for the seventh consecutive week as positive economic data spurred hopes that central banks could slow the pace of monetary policy tightening. Inflation in the eurozone slowed in Nov-2022 for the first time in 17 months. Smaller increases in energy and services costs helped push consumer price growth down more than expected to 10.0% from a record high of 10.6% in Oct-2022. Inflation decelerated in 14 of the 19 eurozone member states. Nevertheless, central bank policymakers continued to indicate that interest rates are likely to rise further. Prior to the release of the latest data on consumer prices, European Central Bank (ECB) President, Christine Lagarde, told the European Parliament that inflation in the euro area had not yet peaked and could even accelerate in coming months. Lastly, according to the Bank of England (BoE), mortgage approval in the UK fell more than expected in Oct-2022, to the lowest level since the pandemic lockdown in Jun-2020 as borrowing rates surged. In local currency terms, the pan-European STOXX Europe 600 index ended the week 0.6% higher. Major country stock indexes were mixed. The UK’s FTSE 100 (+0.9% w/w) and France’s CAC 40 (+0.4% w/w) indices closed the week higher, while Germany’s DAX Index lost 0.1% w/w.

The Asian market closed mixed despite rising hopes of slower rate hikes going forward. Chinese stocks rose amid signs that the Fed would slow the pace of interest rate hikes and that Beijing was moving closer to fully reopening the economy after months of pandemic controls. However, returns in the Japanese equity market were negative for the week as exporters suffered amid the yen’s strength. Investors’ focus was on COVID-related developments in China, where authorities indicated that a slight easing of strict coronavirus containment measures could be in the cards. Investor’s sentiment was also shaped by growing expectations that the U.S. central bank would slow the pace at which it raises interest rates. On the economic data front, Japan’s industrial production fell 2.6% m/m in Oct-2022. This decline, which was more than expected, stemmed from decreases across the production machinery, electronic parts & devices, and chemicals industries. The Ministry of Economy, Trade and Industry expects production to increase in Nov-2022 and Dec-2022. However, unemployment in Oct-2022 stood at 2.6%, unchanged from the prior month. That said, the capitalisation-weighted Shanghai Composite (+1.8% w/w) and Indian SENSEX (+0.9% w/w) indices closed the week higher. However, the Japanese NIKKEI 225 declined 1.8% w/w.

At the start of the week, oil prices fell to an 11-month low due to increased fears of slower crude demand caused by the Covid-19 lockdown measures in China and a potential aggressive interest rate decision by the US Fed in Dec-2022. Oil prices regained upward thrust mid-week, bolstered by indications of slower hikes by the Fed and renewed hopes on Covid-related developments in China. Overall, from a w/w perspective, oil prices closed higher, with Brent Crude gaining 2.3% w/w to print at $85.57/bbl.

Looking forward, we expect global equities to be broadly influenced by monetary policy decisions across major policymakers in US and Europe. In the US, we acknowledge the possibility of the US Fed opting to slow the pace of rate hikes but admonish investors not to get carried away as current inflation estimates remain out of the Fed’s target range while the labour market continues to remain strong.
 
Domestic Equities: Bullish sentiment sustained…ASI up 1.3% w/w
Last week, the local equities market opened on a bearish note but closed with a healthy three-day rally. Amid the high yield environment, buy interests in AIRTELAF (+2.6% w/w) and MTNN (+4.8% w/w) continued to drive the bourse northward, while price depreciation in BUACEMEN (-2.5% w/w) caused downward pressure. As a result, the benchmark All Share Index (NGX-ASI) climbed by 1.3% w/w to print at 48,154.65 points. Hence, YTD return strengthened to 12.7%, while market capitalisation gained N327.0bn w/w to print at N26.2tn. Activity level was mixed as average volume traded rose by 18.0% w/w to 168.0mn units while average value traded fell 19.0% w/w to N2.5bn. Investor sentiment dampened to 1.5x from 2.6x last week, as 37 tickers appreciated while 25 depreciated.

Across sectors, overall w/w performance was mixed as three (3) of the five (5) sectors we cover closed green. The Banking sector (+1.2% w/w) led the gainers due to bargain-hunting activities in ZENITHBA (+3.4% w/w), ACCESSCO (+2.4% w/w), WEMABANK (+10.7% w/w), FIDELITY (+2.0% w/w) and UNITYBNK (+7.6% w/w). Following behind, the Insurance (+1.1% w/w) and Oil &Gas (+0.4% w/w) sectors gained due to price appreciations in NEM (+9.2% w/w), WAPIC (+5.7% w/w), PRESTIGE (+5.0% w/w), ARDOVA (+9.7% w/w) and ETERNA (+3.9% w/w) respectively. On the other hand, sell pressures in BUACEMEN (-2.5% w/w) resulted in the Industrial sector (-1.2% w/w) closing in the red, while losses in NESTLE (-10.0% w/w) and NB (-6.3% w/w) pushed the Consumer goods index southward (-0.6% w/w).

This week, we anticipate potential market gains to be moderated as investors book profits, switch asset classes, and turn their attention towards the fixed-income markets following the MPC’s recent 100bps MPR hike decision.

Money Market Review: Interbank rates decline w/w
The financial system opened with modest liquidity, with a balance of N43.2bn. Liquidity was bolstered during the week by OMO maturities amounting to N25.0bn. The financial system closed the week liquid with a balance of N221.7bn. Hence, the average Open Repo Rate (OPR) and Overnight Rate (OVN) significantly declined by 2.6ppts and 2.0ppts w/w to print at 11.9% and 12.7%, respectively.

The secondary market for NT-Bills traded bearish last week, spurred on by the MPC’s hawkish decision, despite robust system liquidity. As a result, the average yield on NT- bills climbed by 32bps to close at 11.0%. However, the secondary market for OMO bills was relatively flat, with the average yields declining marginally by 2bps to print at 10.1%.

Looking forward, the CBN is set to roll over N54.4bn worth of maturing NT-bills this week. Also, 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 liquidity dry up owing to limited maturities for the rest of the year stands as another upside supporting our expectations. 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 across the markets
The secondary bond market was bullish last week due to renewed demand across the curve, with investors showing buy interest at the short end of the curve. Hence, average bond yields declined 10bps to print at 14.3%. In tandem, the average yield on corporate bonds declined 27bps to close at 15.8%.

The Nigerian Eurobonds market also closed bullish during the week, owing to increased buy-pressure from investors after the release of the US jobs report at the end of the week. As a result, average yields in the Nigerian Eurobonds market declined by 8bps w/w to close at 11.6%.

Looking forward, we expect the bonds market to be broadly quiet as investors look forward to the December auction. In addition, we note that traders will be reluctant to be aggressive in the final month of the year in an attempt to keep stable books till the end of the year.

Currency Market: The Naira appreciated at the I&E window
Last week, the Naira appreciated by 22bps w/w at the Investors & Exporters (I&E) window to close at N445.3/$, from its previous close of N446.3/$. At the parallel market, we found offer quotes in the N740.0/$- N775.0/$. Activities in the I&E window improved, with average FX turnover rising by 14.3% w/w to settle at $123.9mn. On the other hand, Nigeria’s external reserves declined by 16bps w/w, shedding $60.0mn to close at $37.1bn.

This week, we expect to witness continued pressure on the Naira across all market segments.