January 3, 2022/United Capital Research
Macro Highlight and Outlook
Last week, the National Assembly passed the 2023 Appropriation Bill. The budget was increased from the N20.5tn earlier proposed to parliament by the president to N21.8tn. Notably, capital expenditure was increased to N5.9tn from N5.4tn, while the allocation for debt servicing increased to N6.6tn from N6.3tn. Thus, the budget proposed a deficit of N10.8tn.
In addition, the Senate has approved and passed a 2022 supplementary budget of N819.0bn. The Federal Government noted that the additional funds would be used for capital expenditure owing to the devastation caused by the impact of the floods on farmlands and road infrastructure. Notably, the FG reiterated that the budget would be financed through domestic borrowing.
The Central Bank of Nigeria (CBN) “Money and Credit” statistics for Nov-2022 revealed that credit to the private sector increased to N41.6tn from N40.8tn in Oct-2022. This represents a 1.9% increase primarily driven by increased interventions by banks in the real sectors.
The House of Representatives has urged the Federal Government, through the Nigerian Petroleum Development Company (NPDC), to suspend the planned auction of Oil Mining Licence 11 for $250.0mn until relevant issues are resolved. This comes after bids to the tune of $1.0bn had already been tendered.
This week, we expect the macroeconomic space to be quiet in the absence of any major data releases.
Global Equities Market: YTD losses across major equity markets… a rollercoaster year
Last week, major global indices rounded up the year mostly lower in the second week of light holiday trading. In the US, We draw attention to the fact that there were few data releases or other macroeconomic events to influence investors’ sentiment during the week, forcing investors to pay close attention to the global implications of China’s easing of Covid containment regulations. Another concern for investors was renewed uptick in yields as the two-year and ten-year yields climbed by 10bps and 13bps w/w respectively. Additionally, lingering valuation concerns and tax loss harvesting by investors who bought supposedly “mega” stocks in 2021 further fed the bearish direction for the US equity market. Overall, major US equity indices closed the last trading week of the year lower, with the NASDAQ composite, DJIA, and S&P 500 declining w/w by 0.3%, 0.2%, and 0.1% respectively. It summed up a poor year for US equities as surging inflation and the Fed’s aggressive rate hikes in FY-2022 dampened investor sentiments through the year. In FY-2022, the NASDAQ Composite (-33.1% YTD) lost the most with the S&P 500 (-19.4% YTD) and DJIA (-8.8% YTD) following.
In Europe, equity market performance was broadly bearish. Concerns that the Bank of England may raise interest rates over a longer time to prevent inflation from becoming entrenched were raised in the UK due to the resurgence of potential strike actions, mostly among a list of workers in the public sector. During the week, further hawkish signs in the Euro region emerged. One of the most hawkish members of the European Central Bank’s (ECB) Governing Council, Governor Klass Knot of the Dutch central bank, reaffirmed in an interview with the Financial Times that the ECB would accomplish a respectable pace of tightening through half-percentage-point increases in the Bank’s deposit rate. In addition, Knot predicted that any recession would be “short and mild” and asserted that “the worst…may already be behind us” based on recent economic data from various Eurozone nations, including Germany. In local currency terms, the pan-European STOXX Europe 600 Index slipped 0.6% w/w. The UK FTSE (-0.3% w/w), Germany DAX (-0.1% w/w), and France CAC (-0.5% w/w) all ended the final trading week of the year lower, reflecting the somewhat subdued investor mood toward European stocks, closing the last trading week of the year lower. For the year, the UK FTSE (+0.9% YTD) outperformed all other listed European equities we track, with the Germany DAX (-12.4% YTD) and France CAC (-9.5% YTD) shedding value in FY-2022.
The last trading week of 2022 ended with mixed sentiments for listed stocks on the Asian market. Despite an increase in cases, Beijing kept easing regulations related to the coronavirus outbreak, which helped Chinese equities rise. The Shanghai Composite Index rose by 1.4% w/w after suffering losses for several weeks; FY-2022 YTD losses printed at 15.6%. Beginning January 8, 2023, the National Health Commission (NHC), China’s health watchdog, has lowered the management of the coronavirus from the highest to the second-highest level. According to a statement by the NHC in state-run media, China will relax practically all conventional limitations while continuing to focus on immunising the elderly, the availability of medical supplies, and tiered medical treatment. The modified strategy necessitates inbound travellers to provide a negative COVID-19 test result 48 hours before departure, while outbound travel will resume as scheduled. In other news, China’s Ministry of Finance (MOF) announced it would boost fiscal expenditure next year to support economic growth. In Japan, equities closed the week lower amid thin holiday trade, down by 0.5% w/w and 9.4% YTD (FY-2022). However, the Indian SENSEX gained 1.7% w/w, bringing YTD gains to 4.4%.
Last week, crude oil prices stayed strong above the $80.0/bbl mark. Participants in the market assessed their concerns on the recent spike of Covid-19 cases in China and its potential influence on the world’s demand for oil. The unexpected increase in U.S. weekly crude stockpiles also depressed investor sentiment. However, other hints that Covid’s regulations would be relaxed boosted market enthusiasm. Oil prices closed higher w/w, extending YTD gains due to improving demand outlook and OPEC’s propensity to sustain high oil prices through supply cuts. Brent Crude increased 1.7% w/w to finish the year at $85.91/bbl, posting 10.5% gains YTD.
Heading into the new year, investor sentiments will continue to be shaped by monetary policy decisions, inflation direction, labour market developments, economic growth/recession, and their subsequent impact on corporate profitability. In addition, we expect investors to review the current valuation of stocks in bid to ascertain if pricing is at a fair level. For us, we maintain that unless a clear part for declining inflation is established and fear of economic recession doused, a sustained rally is unlikely to be witnessed in the equities market.
Domestic Equities: Market sustains bullish run as activity level doubles …ASI up 20.0% YTD
Last week, the market was opened for three trading days as the Federal Government declared the 26th and 27th public holidays to mark Christmas celebrations. The local equities market continued its bullish run, marking the seventh consecutive week of positive momentum. We saw the NGX-ASI close green in all three trading sessions, signalling sustained risk-on sentiments from investors. In addition, we suspect some portfolio rebalancing activities must have taken place. Notably, buy interests in AIRTELAF (+9.9% w/w), NESTLE (+12.2% w/w), GEREGU (+29.0%) and NB (+9.0% w/w) drove the local bourse northwards while sales of FBNH (-7.6% w/w) put downward pressure on the index. As a result, the benchmark All Share Index (NGX-ASI) climbed by 3.1% w/w to print at 51,251.06 points. Hence, YTD return strengthened to 20.0%, while market capitalisation gained N841.0bn to print at N27.9tn. Also, equity turnover increased as average volume and average value traded rose by 263.9% w/w and 96.2% w/w to 626.6mn units and N6.3bn, respectively. Investor sentiment strengthened further to 2.8x from 2.4x last week, as 44 tickers appreciated in price during the week while 16 depreciated.
Across sectors, overall w/w performance was mainly bullish as four (4) of the five (5) sectors we cover closed in the green. Leading the gainers was the Consumer Goods index (+4.9% w/w), which gained on account of price appreciation in NESTLE (+12.2% w/w) and NB (+2.4% w/w). The Insurance index (+3.7% w/w) followed due to renewed buy interest in CORNERST (+20.0% w/w), AIICO (+7.3% w/w) and CHIPLC (+11.7% w/w). The Oil & Gas and Industrial Goods indexes climbed by 2.4% and 0.1% w/w following buying interest in SEPLAT (+4.8% w/w), ETERNA (+7.0% w/w) and WAPCO (+2.4% w/w), respectively. The Banking index was the only laggard (-1.3% w/w), reversing the previous week’s gains due to sell pressure in ZENITHBA (-2.2 w/w), FIDELITY (-6.5% w/w), ETI (-3.6% w/w) and ACCESSCO (-1.7% w/w) despite buy interest in WEMABANK (+21.1% w/w) and UBA (+1.3% w/w).
This week, we anticipate robust market activity and bullish sentiments to continue. The usual January momentum is likely to dominate particularly as the yield environment appears to be shifting downwards.
Money Market Review: Interbank rates trend lower on improved financial system liquidity
The financial system opened buoyant after the holiday break, with a balance of N343.3bn. Despite the apex bank’s attempt to mop up excess liquidity with OMO primary market sales to the tune of N30.0bn, system liquidity remained elevated throughout the week and closed the week with a balance of N584.7bn. As a result, the average Open Repo Rate (OPR) and Overnight Rate (OVN) declined by 1.3ppts w/w and 2.1ppts w/w, respectively to both close the week at 10.7%.
The CBN conducted the final Primary Market NT-bill Auction for the year, with a total of N67.4bn on offer across all tenors. The auction was met with strong investor interest as total subscriptions printed at N350.4bn implying a 5.2x bid-to-cover. The CBN decided to allot only the exact amount on offer. The stop rates declined across all tenors, with the 91-day, 182-day, and 364-day papers declining by 2.8ppts, 0.6ppts and 1.5ppts to print at 2.749%, 7.15% and 8.49%, respectively.
The secondary market for NT-Bills traded with mixed sentiments post-auction. However, at the close of the last trading session of the week, the average yield on NT- bills on a w/w basis remained unchanged closing at 5.4%. However, the secondary market for OMO bills saw renewed investor interest and the average yield on OMO bills declined by 1.3ppts w/w to close at 3.0%.
Looking forward, we anticipate the broad market liquidity will continue to place pressure on rates as we enter the new year. After the new year break, N20.0bn of OMO maturities will hit the system.
Bond Market: Bullish sentiment in the secondary market
The secondary markets were calm in the last trading days of 2022. The performance reflected overall investors’ sentiment in the fixed income markets despite excess system liquidity as few trades passed through. Thus, in line with expectations, average bond yields in the secondary market fell marginally by 3bps w/w to but maintained the 13.1% level. In the same vein, the average yield on corporate bonds declined marginally by 2bps to maintain the 13.7% level. Conversely, Nigerian Eurobonds witnessed sell pressure as average yields on Nigerian Eurobonds market inched higher by 7bps w/w to close at 11.9%.
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 1.1% w/w at the Investors & Exporters (I&E) window to close at N461.5/$, from its previous close of N456.5/$. At the parallel market, we continue to find offer quotes in the N735.0/$- N745.0/$ range. Activities in the I&E window improved, with average FX turnover gaining by 1.1% w/w to settle at $171.5mn. Similarly, Nigeria’s external reserves climbed by 33bps w/w, gaining $122.4mn to close at $37.1bn.
This week, we expect to witness continued pressure on the Naira across all market segments, given that FX pressures will continue as dollar earnings remain weak and demand outweighs supply.
