December 28, 2022/United Capital Research
Macro Highlight and Outlook
According to data accessed from the Nigerian Upstream Petroleum Regulatory Commission and other international agencies, Nigeria’s oil earnings have improved significantly from Sep-2022 to Nov-2022. This is attributable to the concerted efforts by the Nigerian National Petroleum Company Limited and concerned security agencies in the fight against oil theft. For context, crude oil output for Nov-2022 was recorded at 1.2mbpd, 26.4% higher than 937.8kbpd recorded in Sep-2022.
Petroleum Marketers disclosed the Minister of State for Petroleum Resources’s affirmation on the commencement of operation of the Port Harcourt Refining Company before 2023. Marketers remain optimistic that this will warrant a drop in the cost of Premium Motor Spirit (PMS) popularly referred to as fuel. Furthermore, the President, of the Natural Oil and Gas Suppliers Association of Nigeria, Benneth Korie, told journalists in Abuja that the rehabilitation exercise at PHRC had reached an advanced stage, adding that the plant was set to pump out refined petroleum products.
Following increased pressure from concerned stakeholders, the Governor of the Central Bank of Nigeria, Godwin Emefiele, revised the recent cash withdrawal limit policy, reviewing upwards the maximum weekly limit for cash withdrawal across all channels by individuals and corporate organisations to N500,000 and N5.0m respectively.
Nigeria’s domestic debt rose to N22.57tn as the Federal Government on Wednesday proposed a last-minute supplementary budget for the 2022 fiscal year. The President, Major General Muhammadu Buhari (retd.), sought the approval of the National Assembly for N819.5bn supplementary budget to fix various infrastructure destroyed by floods across the various states in the country a few months ago. This proposed supplementary budget is scheduled to be financed through domestic borrowing.
According to media reports, a special joint arrangement by the Nigerian National Petroleum Company Limited and 30,000-member independent petroleum marketers is set to lead to mass supplies of Premium Motor Spirit (PMS), popularly called petrol in Lagos, Calabar, Port Harcourt, and Ogara beginning next month. The move is part of the arrangement by the government and stakeholders in the fuel supply chain to find a permanent solution to the lingering fuel scarcity in the country.
The Federal Government has proposed the suspension of tax relief and rebates being granted to companies established in locations lacking public infrastructure, that are providing electricity, water, and other amenities for themselves. This is contained in the Finance Bill 2022 under consideration by the National Assembly, the government has sought amendments to the Capital Gains Tax Act, among which seeks to end Reconstruction Investment Allowance and Rural Investment Allowance, among others.
Earlier in the week, the Federal Government initiated plans to introduce a 0.5% levy on imported goods to raise funds to meet its obligations to the African Development Bank, the World Bank, and other multilateral organisations.
In an effort to checkmate unethical practices amongst market operators, the apex regulator of the Nigerian capital market, the Securities and Exchange Commission, announced via a press statement the commencement of an annual renewal of registration for operators. The registration for 2023, which is expected to commence on January 1, 2023, will end on January 31.
Following the Federal Government’s intention for salary increments for civil servants and public officials due to the steady increase in the prices of consumer goods, a Presidential Committee on Salaries was charged with reviewing salaries with a plan to announce its decision in early 2023.
This week, we expect the broad macro space to be relatively quiet as festivities and related activities continue to take the forefront till year’s end.
Global Markets: Weaker than expected economic data dragged US stocks
Last week, the global equities market closed broadly bearish as investors digested the latest economic data for hints on the Federal Reserve’s monetary policy path for next year. According to the US Bureau of Economic Analysis, Core Personal Consumption Expenditure (PCE) price index, the Fed’s preferred inflation gauge slowed to 4.7% y/y in Nov-2022, from 5.0% in the previous month but remained above the Fed’s tolerance range. New home sales surged unexpectedly by 5.8% m/m to 640,000 in Nov-2022, fueling concerns the Fed will maintain its hawkish monetary policy tilt. Further concerns regarding the Fed’s hawkish tilt persisted after Q3-2022 GDP growth was revised higher (3.2% vs 2.9%). Meanwhile, durable goods orders shrank by 2.1% m/m in Nov-2022, the most in two years. It was the sharpest decrease since Apr-2020 compared to the 0.7% increase in the prior month. Lastly, cautious remarks from an influential hedge fund manager, David Tepper, projecting policy tightening stance by the Fed and other central banks affected investors’ sentiments. His comments resonated with market participants who recalled the hugely successful “Tepper Bottom” call he made in Mar-2009. That said, the NASDAQ Composite, and S&P 500 declined by 1.9% w/w and 0.2% w/w, respectively. On the other hand, the DIJA closed the week higher by 0.9%.
In Europe, we saw buy-interest across all major European indices primarily supported by robust economic data. Consumer confidence in the Euro Area rose by 170bps to -22.2pts in Dec-2022, continuing its recovery from an all-time low of -28.7pts in Sep-2022. In addition, Germany’s producer price index fell to 28.2% y/y in Nov-2022 from 34.5% y/y in Oct-2022, the lowest level since Feb-2022. Also, consumer confidence in Germany rose to -37.8pts, marking the third straight month of improvement in sentiment amid government’s energy measures. Meanwhile, updated figures showed the British economy shrank 0.3% y/y in Q3-2022, slightly above the preliminary estimate of a 0.2% drop. This is on the back of household spending and business investment falling significantly, increasing expectations that the UK economy is heading towards a prolonged recession. Notably, inflation fell to 10.7% y/y in Nov-2022, from a 41-year high of 11.1% y/y the previous month. At the end of the week, the Europe STOXX (+0.8%), UK FTSE (+1.9%), Germany DAX (+0.3%) and France CAC (+0.8% w/w) closed higher.
The Asian market closed bearish, weighed down by weak global sentiment fueled by concerns that the US Fed would tighten its policy rate further. The Bank of Japan unexpectedly raised the upper limit of its tolerance band on its 10-yr government bonds to 0.5% from 0.25%, which market participants see as the first sign that massive stimulus could be withdrawn amid a hawkish policy pivot. Investors also reacted to data showing Japan’s annual core inflation rate jumped 3.7% in Nov-2022, accelerating at the fastest pace since Dec-1981 and supporting a hawkish tilt from the Bank of Japan. Consequently, the Japanese NIKKIE declined by 4.7% w/w. Elsewhere in Asia, the People’s Bank of China (PBOC) injected a net of CNY704.0bn into the banking system, the largest weekly injection since Oct-2022. The move aims to maintain reasonable and sufficient liquidity in the banking system at the end of the year. However, the Shanghai Composite finished the week sharply lower, having faced heavy selling pressures due to a dramatic surge in infections. The rise in Covid-19 cases resulted from a swift reversal of Covid restrictions, thus hampering economic activities, with the supply chain for solar companies taking much of the brunt. On that note, the capitalisation-weighted Shanghai Composite Index fell by 3.9% w/w, while the Indian SENSEX lost 2.4% w/w.
Last week, crude oil prices rallied for the second consecutive week following Moscow’s announcement of a possible crude oil output cut in response to the $60.0/bbl price cap on Russian exports by the G7 nations. Notably, Russia may cut its oil output by 500,000bpd – 700,000bpd in early 2023. Overall, from a w/w perspective, oil prices closed higher, with Brent Crude gaining 6.3% w/w to print at $84.50/bbl.
In the last week of 2022, investors will be hopeful that the equities markets will stage the Santa Claus rally, bringing some respite to the markets. Housing data and regional PMI readings will take centre stage in the US. Also, Japan will release its retail sales, industrial production, and unemployment rate, while South Korea, Spain, and Russia will focus on inflation rate numbers.
Domestic Equities: Bullish momentum sustained…ASI is up 16.4% YTD
Last week, the local equities market continued its bullish run, marking the sixth 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 risk-on sentiments from investors. Notably, buy interests in banking stocks GTCO (+7.4% w/w), STANBIC (+8.6% w/w) and FBNH (+8.3%) in addition to bids for GEREGU (+9.0%) drove the local bourse northwards. As a result, the benchmark All Share Index (NGX-ASI) climbed by 0.8% w/w to print at 49,706.09 points. Hence, YTD return strengthened to 16.4%, while market capitalisation gained N158.6bn to print at N27.1tn. In addition, activity level climbed as average volume and average value expanded by 5.7% w/w and 33.3% w/w to 172.2mn units and N3.2bn, respectively. Investor sentiment strengthened to 3.0x from 1.1x last week, as 30 tickers appreciated while 10 depreciated.
Across sectors, overall w/w performance was mainly bullish as all of the five (5) sectors we cover closed green. Leading the gainers was the Banking sector (+2.0% w/w), which gained on account of price appreciation in ZENITHBA (+1.9% w/w), FIDELITY (+9.4% w/w) and ACCESSCO (+2.4% w/w). The Consumer goods sector (+1.0% w/w) closed green due to renewed buy interest in BUAFOODS (+2.5% w/w), CHAMPION (+14.6% w/w) and INTBREW (+2.3% w/w). The Insurance and Oil & Gas sectors climbed by 0.3% and 0.9% w/w following buying interest in ARDOVA (+12.6% w/w), MANSARD (+7.1% w/w), ETERNA (+3.0% w/w) and CHIPLC (+1.7% w/w), respectively. The Industrial goods sector (+4bps w/w) sector gained the least as gains due to bargain-hunting activities in WAPCO (+4.5%% w/w) offset losses from DANGCEM (-0.5% w/w).
This week, we anticipate market activity to slow significantly due to the holiday break. However, we expect bullish sentiments to continue. Also, portfolio rebalancing is another critical activity to continue to look out for from investors as the year rounds up.
Money Market Review: Excess liquidity places downward pressure on yields
The financial system opened liquid, with a balance of N202.9bn. In the absence of any primary market sales, system liquidity rose as high as N747.9bn and closed the week with a balance of N680.0bn. As a result, the Open Repo Rate (OPR) and Overnight Rate (OVN) both rose by 2.4ppts w/w and 2.3ppts w/w to close the week at 12.0% and 12.8%, respectively.
The secondary market for NT-Bills traded bullish for the 3rd consecutive week. As a result, the average yield on NT- bills fell 2.8ppts to close at 5.4%. Similarly, the secondary market for OMO bills saw renewed interest and the average yield on OMO bills declining by 5.8ppts w/w to close at 4.31%.
Looking forward, in line with our expectations for the month (Dec-2022), we anticipate the broad market liquidity will continue to place pressure on rates till the close of the year. This is expected to be reflected in the NT Bills auction this week, as the CBN rolls over bills worth N67.4bn.
Bond Market: Bullish sentiment in secondary market
The secondary market performance reflected overall investors’ sentiment in the fixed income market amid excess system liquidity. Thus, in line with expectations, average bond yields in the secondary market fell 40bps w/w to print at 13.1%. In the same vein, the average yield on corporate bonds declined by 72bps, to close at 13.7%. Inversely, Nigerian Eurobonds witnessed sell pressure. Average yields in the Nigerian Eurobonds market inched higher by 12bps 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 financial system liquidity outpaces bonds supply.
Currency Market: The Naira depreciated at the I&E window
Last week, the Naira depreciated by 111bps w/w at the Investors & Exporters (I&E) window to close at N456.50/$, from its previous close of N451.50/$. At the parallel market, we continue to find offer quotes in the N725.0/$- N750.0/$ range. Activities in the I&E window was relatively flat as average FX turnover declined by 1.2% w/w to $169.6mn. Also, most recent CBN data registers 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.
