December 19, 2022/United Capital Research
Macro Highlight and Outlook
Last week, the National Bureau of Statistics (NBS) released the inflation report for November. Nigeria’s Inflation rose to 21.47% y/y and 1.39% m/m in November from the 21.09% y/y and 1.24% m/m increase recorded in October.
According to the Minister of Finance, Budget, and National Planning, Zainab Ahmed, the Federal Government was owed approximately N5.2 trillion in debts; by companies and individuals.
Media reports revealed that Nigeria’s debt in the ongoing case against Process and Industrial Developments Limited for a failed gas contract has risen to N5.0tn. The owed damages have been accruing on a pre and post-judgment interest of 7.0% since 2013 and have increased from an initial $6.6bn to $11.0bn (c. N5.0tn).
Data from the World Bank International Debt Report revealed that Nigeria’s Foreign Direct Investments (FDI) declined from $6.0bn in 2010 to $2.4bn in 2021. Capital inflows remain suppressed thus far in 2022. We await the release of the Q3-2022 Capital Importation report by the NBS. The World Bank also projected that debt servicing would gulp 123.4% of the FG’s revenue in 2023.
This week, we expect the release of the Q3-2022 Terms of Trade Report, Federal Account Allocation Committee (FAAC) Nov-2022 Disbursement, and Q3-2022 Selected Banking Sector Data (including Sectoral Breakdown of Credit and ePayment Channels).
Global Markets: Bearish sentiments in Global Stock Markets
At the beginning of last week, the US stock markets were broadly bullish supported by the November Consumer Price Index (CPI) which came in cooler-than-expected on Tuesday. However, market sentiment flipped after the results from the Fed meeting which revealed the FOMC unanimously decided to raise the target range for the fed funds rate by 50 basis points to 4.25-4.50% and the indication in the summary of economic projections that the median estimate for the terminal rate in 2023 had been raised to 5.10% versus the September projection of 4.60%. In addition, the Fed chair stated it will take substantially more evidence to give confidence that inflation is on a sustained downward path. Also, at the end of the week the release of disappointing US retail sales (-0.6% m/m) and industrial production data (U.S manufacturing PMI was 46.2 vs previous print of 47.7 & U.S services PMI was 44.4 vs its previous print of 46.2) further drove bearish sentiments in the US equity markets. As a result, all indexes closed in the red, with the NASDAQ Composite and S&P 500 falling 2.7% w/w and 2.1% w/w, respectively, while the DJIA was down 1.7% w/w.
In Europe, stocks fell due to renewed recessionary fears indicated by the release of continued contractionary economic activity data and the continued central bank monetary tightening. The Bank of England on Thursday raised interest rates by 50 basis points (bps) to 3.5%, in its ninth straight increase. The ECB and the Swiss National Bank also elected to hike their interest by 50bps. Reports also revealed that U.K retail sales fell 0.4% m/m in November. In addition, French S&P Global Composite Purchasing Managers Index (PMI) fell to 48.0 from 48.7. This resulted in major indices posting week-on-week losses. The pan-European STOXX 600 Index fell 3.3% w/w. The France CAC 40 Index fell by 3.4% w/w, and Germany’s DAX 30 Index fell by 3.3% w/w. The UK FTSE 100 lost 1.9% w/w closing southwards.
In Asia, despite the Chinese government’s additional measures to ease its restrictive COVID-19 policies. Asian equities took a downturn this week following the continued hawkish stance by global central banks which brewed fresh recessionary fears. Furthermore, Chinese stocks sank as the U.S. government added 22 major Chinese firms to a trade blacklist on Thursday, widening its crackdown on China’s semiconductor industry in addition to rising COVID-19 cases in the country heightened concerns over a delayed economic reopening. Japanese manufacturing activity contracted more than expected in December, as weakening demand further dented productivity, while activity in the services sector improved on a recovery in tourism. The au Jibun Bank’s Flash Manufacturing PMI fell to 48.8 in early December from 49.0 in the prior month. That said, the capitalisation-weighted Shanghai Composite fell 1.2% w/w while the Japanese NIKKEI 225 and Indian SENSEX both lost 1.3% and 1.4% respectively.
In the crude oil market, Brent crude prices rallied at the start of the week due to increased optimism by market participants anticipating major central banks and the federal reserve to be less aggressive at their final interest rate policy meetings with brent futures peaking on Wednesday at $82.7/bbl. However, Crude oil prices moderated on Thursday and Friday after the Keystone US-Canada pipeline reopened from closure (indicating improved supply) and as global recession risks increased (expectation of reduced demand) after a wave of central banks delivered another intense round of tightening. In addition, the market participants estimate that oil demand will pick up in China; however, the gains will not be felt in the short run. Despite the stall in this week’s rally ICE Brent gained 3.7% w/w to close at $79.04/bbl.
This week, we expect a slowdown in trading activity in preparations for the holiday break. Employment data from the U.S Initial Jobless claims report, housing data from the U.S November New & Existing Home sales reports and data form the US Crude Oil Inventories report will set the market tone.
Domestic Equities: Bullish momentum sustained…ASI up 0.9%
Last week, the local equities market continued its bullish run, marking the fifth consecutive week of positive momentum. We saw the NGX-ASI close green in four out of the five trading sessions of the week, thus, signalling sustained bargain-hunting activities from investors. Notably, buy interests in large-cap stock, BUACEMENT (+6.6% w/w), and major tier-1 banking stock, ZENITHBA (+9.0% w/w), drove the local bourse northwards. As a result, the benchmark All Share Index (NGX-ASI) climbed by 0.9% w/w to print at 49,316.3 points. Hence, YTD return strengthened to 15.5%, while market capitalisation gained N236.5bn to print at N26.9tn. However, activity level declined as average volume and average value fell by 33.5% w/w and 19.9% w/w to 162.8mn units and N2.4bn, respectively. Investor sentiment weakened to 1.1x from 1.2x last week, as 32 tickers appreciated while 28 depreciated.
Across sectors, overall w/w performance was mainly bullish as four of the five (5) sectors we cover closed green. The Industrial goods sector (+3.4% w/w) sector led the gainers due to bargain-hunting activities in BUACEMEN (+6.6% w/w) and WAPCO (+3.0% w/w). Trailing was the Banking sector (+2.9% w/w) which gained on account of price appreciation in ZENITHBA (+9.0% w/w) and FIDELITY (+2.4% w/w). The Insurance and Oil & Gas sectors climbed by 0.5% and 0.4% following buying interest in WAPIC (+10.8% w/w), CORNERST (+13.0% w/w) and ARDOVA (+9.5% w/w), respectively. On the flip side, the Consumer goods sector (-0.2% w/w) was the sole loser due to losses in DANGSUGA (-4.3% w/w) and INTBREW (-1.1% w/w).
This week, we anticipate profit booking activities from short-term investors as they seek to close out positions in strong-performing stocks in the past weeks as bullish momentum shows signs of stuttering. Also, portfolio rebalancing is another key activity to watch out for from investors as we approach the end of the year.
Money Market Review: Stop rates trend lower across all offerings at PMA
The financial system opened liquid, with a balance of N169.5bn. Despite primary market activities and settlements, the financial system closed the week relatively liquid with a balance of N106.9bn. Nevertheless, average funding rates stayed strong in the double-digit terrain. For context, average Open Repo Rate (OPR) and Overnight Rate (OVN) significantly climbed w/w gaining by 2.2ppts and 2.3ppts to close the week at 13.6% and 14.1%, respectively.
The CBN conducted its penultimate auction for the year offering to sell N13.6bn worth of bills across the 91-day, 182-day, and 364-day papers. Investors’ demand was overwhelming with total bids summing up to N446.1bn implying a bid-to-cover ratio of 32.8x. The majority of the bids were directed at the 364-day bill, which had a 105.0x oversubscription rate, reflecting investors’ preference for the longer end of the curve as investors attempt to lock-in rates as the yield curve show signs of a downward shift. Investors’ interest was notably influenced by the need to lock up funds at prevailing rates to avoid falling into the zero-interest trap from CRR debit. The CBN opted to sell exactly what was on offer. As a result of the surplus investor demand and the constrained supply of bills, the apex bank gained control over pricing. Stop rates across the offerings declined by 99bps, 70bps, and 316bps to print at 5.5%, 7.3%, and 9.9%, respectively.
The secondary market for NT-Bills traded bullish last week. This is attributable to investors’ demand trickling down from the primary market, directed toward fulfilling unmet bids at PMA. As a result, the average yield on NT- bills fell 24bps to close at 8.2%. Meanwhile, the secondary market for OMO bills remained relatively quiet with the average yield on OMO bills declining by a 2bps margin to close at 10.1%.
Looking forward, in line with our comments last week, we anticipate the broad market liquidity will continue to place pressure on rates for the rest of the year. In addition, downward pressure on the yield curve is likely the scenario to play out in the mid-term (Q1-2023).
Bond Market: Marginal rates trend lower at bond auction
On Monday, the Debt Management Office (DMO) conducted its December FGN bond auction in the primary market, with an offer of N225.0bn across three tenors, MAR 2029, APR 2032 and APR 2037. At the auction, investors’ demand came in strong with overall bids summing up to N532.2bn implying a bid-to-cover ratio of 2.4x. The DMO opted to oversell the auction by an allotment rate of 1.2x, selling N265.5bn worth of papers across the tenors on offer. Notably, investors’ interest was mainly skewed toward the 2037s, as it was oversubscribed by 5.0x.
In line with expectations in our weekly investment views for 12th – 16th December, marginal rates across all the offerings declined at the auction. This is attributable to the sustained improvement in investors’ demand in synchrony with available liquidity versus the supply of bonds for December. Marginal rates on the 2029s, 2032s, and 2037s declined c.15bps, 45bps, and 40bps, to print at 14.6%, 14.75% and 15.8% respectively. The secondary market was reflective of investors’ overwhelming demand for government securities, as investors sought to fulfill unmet bids from PMA. That said, average bond yields in the secondary market fell 62bps to print at 13.5%. In the same vein, the average yield on corporate bonds declined significantly by 81bps, to close at 14.4%.
The Nigerian Eurobonds market was in a lull last week. Notably, investors’ interest in SSA Eurobonds improved barely after Ghana reached a staff-level deal with IMF over the $3.0bn loan bailout. Overall, average yields in the Nigerian Eurobonds market inched higher by 4bps w/w to close at 11.7%.
Following the synchronised decline in stop rates at recent NT-bills and sovereign bond auctions, we expect bullish sentiments in the secondary bonds market to persist over the coming weeks as investors look to fulfill unmet bids and financial system liquidity outpaces bonds supply.
Currency Market: The Naira depreciated at the I&E window
Last week, the Naira depreciated by 101bps w/w at the Investors & Exporters (I&E) window to close at N451.50/$, from its previous close of N446.50/$. At the parallel market, we continue to find offer quotes in the N745.0/$- N780.0/$ range. Activities in the I&E window improved as average FX turnover rose by 12.7% w/w to $171.6mn. Also, most recent CBN data register Nigeria’s external reserves at $37.0bn.
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.
