January 9, 2023/United Capital Research

Macro Highlight and Outlook
According to the Central Bank of Nigeria (CBN), Nigeria’s external reserves fell by 8.5% y/y ($3.43bn) in 2022 to close the year at $37.1bn compared to $40.5bn as of Dec-2021. The decline can be attributed to the weakening of oil export despite rising global energy prices. In addition, oil theft and pipeline vandalism hampered output.

According to the Nigerian Communication Commission (NCC), the number of mobile subscriptions in Nigeria grew by 23.5mn between Jan – Nov 2022. This pushes the total number of mobile subscriptions in the country to 218.6mn. MTN remains the most significant contributor to mobile subscriptions with 86.4mn subscriptions, followed by Globacom with 56.0mn subscriptions.

According to the Payment Vision 2025 document released by the CBN, the apex bank noted that the country aspired to have a cashless and efficient electronic payment system infrastructure that would facilitate financial services in all sectors of the economy by 2025.

The European Union (EU) has approved a $3.4mn working capital facility under the ElectriFI Country Window for Nigeria for Okra Solar to use solar mesh grids to target 76,000 energy access beneficiaries by the end of 2025.

Stanbic IBTC Bank and S&P Global released the Purchasing Managers’ Index (PMI) for Nigeria’s entire economy in Dec-2022, printing at 54.6pts, from 54.3pts in Nov-2022. However, it declined y/y from the 56.4pts print recorded in Dec-2021. Output rose to 57.5pts vs 57.1pts in Nov-2022.

According to the Central Bank of Nigeria (CBN) money market indicators, the prime lending rate in the banking sector now stands at 13.2%, a 23-month high. Prime lending rate is the interest rate banks charge their most creditworthy customers, generally large corporations. Also, the maximum lending rate is 28.1%.

According to the World Bank, States’ debts are set to rise above 200.0% of revenue in 2023. Sub-national debt reports from the Debt Management Office (DMO) disclosed that sub-national debts accruing to 28 states totalled N5.8trn. Of this total, N4.4trn are domestic debts, while N1.4trn ($3.15bn) are external.

The Minister of State for Power, Goddy Jedy-Agba, yesterday denied knowledge of the indiscriminate electricity tariff imposed by the Nigerian Electricity Regulatory Commission (NERC) on consumers. Electricity distribution companies (DisCos) quietly increased tariffs by 18.5%, taking effect from 1-Dec-2022.

This week, we expect the macroeconomic space to be quiet without significant data releases.

Global Markets: Global equities open 2023 on a bullish note
The performance of the first trading week of 2023 indicated that the headwinds faced by equity markets last year remain. The S&P 500 was bearish from the start of the week, appearing to extend its 4-week losing streak. Strong data released this week about the labour market suggest that the labour market remains resilient.  The JOLTS job openings showed that the ratio of jobs to job seekers remained at 1.8x, the unemployment rate dropped to 3.5% from 3.7%, while the participation rate inched higher to 62.3% from 62.1%. Markets were moved by a deceleration in hourly earnings growth, up 0.3% m/m and 4.6% y/y, both below expectations. In addition, ISM (49.6) contracted following a steep drop in new orders. The employment component fell to 49.8 from 51.5. As such, yields fell sharply by 10 – 20bps across the yield curve. This propelled equity markets as investors looked at this as a favourable sign the Fed will adjust its monetary policy stance.

The Federal Open Market Committee (FOMC) released its December meeting minutes. The Fed interpreted easing wage pressures as evidence that the economy is decelerating. However, officials expect rates to remain elevated for longer, stating that the public’s perception of their reaction function toward easing financial conditions in the event of an economic slowdown while inflation remains high is unwarranted. However, Fed Bullard suggested that rates were approaching a restrictive level. Thus, U.S.  indexes closed the week bullish, with the NASDAQ Composite, S&P 500 and DJIA rising 1.0% w/w, 1.4% w/w, and 1.5% w/w, respectively.

European indices rallied last week. This was as country-level inflation data came in better than expected. This supports the narrative that inflation has peaked, casting doubts over the hawkish tone struck by the ECB. Also of note is that natural gas prices have fallen sharply in response to mild weather. Dutch TTF Natural Gas Futures fell 10.0% w/w, down 50.0% m/m and 80.0% from Oct-22, trading below levels before the Russian-Ukraine war. This will continue to ease inflation. Therefore, the pan-European STOXX 600 Index rose 4.6% w/w. The France CAC 40 Index rose by 6.0% w/w, Germany’s DAX 40 Index rose by 4.9% w/w, and the UK FTSE 100 by 3.3% w/w.

In Asia, the rollback of China’s stringent zero-Covid policy has resulted in a surge in cases with potential ramifications to aggregate demand and supply chains. On the other hand, the CCP has continued to provide support to the country’s property sector. In Japan, the Japanese Yen clawed back prior losses against the US Dollar, a beneficiary of the slump in crude oil prices. That said, the capitalisation-weighted Shanghai Composite rose 2.2% w/w, and the Hong Kong Hang Seng index, rose 6.1% w/w, up 40.0% since 31-Oct-22. The Japanese NIKKEI 225 index fell 0.5% w/w.

Finally, Crude oil prices declined last week due to concerns about a global recession. ICE Brent ended the week down 8.6% w/w at $78.52/bbl., while WTI Futures were down 8.4%, trading at $73.68/bbl. This is partly due to the rollback of Covid policies in China. The potential upside seems limited in the near term on fears of wanning demand.

This week will be centred on inflation. The critical catalyst will be Thursday’s (12-Jan) US CPI and Friday’s (13-Jan) Import/Export Prices. In Fixed Income, there will be $90.0bn Treasury auctions for 3yr., 10yr., and 30yr. Bonds. In the Asia-Pacific, Tokyo and Australia will release their CPI data. The week will end with the start of the Q4-2022 earnings season as significant companies, including JP Morgan, BAC Credomat, First Republic Bank, Delta Air, and United Health, release their results.

Domestic Equities: Bourse’s bullish steam wanes gradually…ASI down 6bps w/w
The Nigerian Exchange (NGX) opened for four (4) trading days last week as the Federal Government of Nigeria declared Monday 2nd January 2023 a public holiday to mark the New Year celebration. The bourse witnessed bullish momentum on three of the four trading days. However, profit taking on Thursday led to the single bearish day, enough to wipe out gains from the other three days combined. The index was weighed down mainly by the share price depreciation of AIRTELAFRI (-8.3% w/w). That said, the benchmark All Share Index (NGX-ASI) declined by 6bps w/w to print at 51,222.34 points, with YTD losses printing at -0.7%. Market capitalisation pared N15.0bn w/w to print at N27.9tn. Activity level was mixed as average value traded climbed 11.7% to settle at N6.2tn with average volume traded declining by 67.6% w/w to print at 182.1mn units, signifying a heavy large cap play during the trading week. Investor sentiment deteriorated to 2.2x from 2.8x last week, as 38 tickers appreciated while 17 depreciated, reflective of the waning bullish momentum, although it remains very strong.

When looking at performance from a sectoral viewpoint, overall performance was bullish, as four (4) out of the five (5) sectors we cover closed in green, with one closing in red. The Consumer goods (+6.4% w/w) sector led the gainers owing to observed buy pressure across BUAFOODS (+14.6% w/w), and NB (+14.6% w/w). Trailing were the Banking (+4.3% w/w), Insurance (+2.7% w/w), and Oil & Gas sectors, owing to share appreciation across ACCESSCO (+5.9% w/w), UBN (+8.6% w/w), ZENITHBA (+1.9% w/w), AIICO (+8.5% w/w), MANSARD (+6.5% w/w), WAPIC (+7.5% w/w), and ETERNA (+7.6% w/w). On the flip side, the Industrial sector (-0.6% w/w) shed some value owing to sell pressure in BUACEMEN (-1.8%). This clarifies last week’s drop was mainly influenced by profit taking in AIRTELAFRI, as broad market momentum remains strong.

Looking into the week, we expect the bears to resume activities across counters, as we anticipate further spread across other sectors as investors book profits from the extended rally. The CBN’s recent CRR debits in the money market will likely discourage investors from sustaining investment in equities in the short-term as they hope for improvement in money market yields. However, we see any downturn as a short-term buying opportunity as we expect investors’ risk-on sentiments will linger through Q1-2023, favouring the equities market, as the prevailing downward pressure interest rates will persist through the quarter.

Money Market Review: Rates fall even as CBN resumes CRR debits
Last week, the financial system opened liquid with a balance of N1.0tn. The financial system was further bolstered by inflows from OMO maturities to the tune of N20.0bn, weighing down interbank lending rates to the single-digit region. System liquidity was very elevated through the week but dipped on the final trading day of the week as the CBN implemented a N995.2bn CRR debit to bring closing system liquidity to N351.0bn. Interbank rates rose on Friday as a result of this but average interbank rates remained soft w/w due to the heavy liquidity from Tuesday to Friday opening. Consequently, average Open Repo Rate (OPR) declined by 29bps to 10.4%, while the average Overnight Rate (OVN) climbed by 33bps to close the week at 11.0%.

In the secondary NT-bills market, we observed strong buy-interest as investors sought to deploy the excess liquidity on their hands. As a result, the average yield on NT-bills declined by 198bps w/w to close at 3.4% (previously 5.4%). Similarly, the average yield on OMO bills fell marginally by 1bp w/w to print at 3.4%.

We expect the CBN to roll over N56.9bn worth of maturing NT bills this week. At the auction, we expect stop rates to decline, as seen previous auction, given the buoyant liquidity. In addition, we anticipate a total of N10.0bn worth of OMO maturities to hit the system.

Bond Market: Buy-interest dominate the market
Last week, in the secondary bonds market, we observed a bullish sentiment across the markets. Overall, the average yield across sovereign bonds declined by 36bps w/w to close at 12.7% (previously 13.4%). In tandem, corporate bonds traded on a bullish note, albeit with a steeper movement along the yield curve, as the average yield on corporate bonds fell by 80bps w/w to 12.9% (previously 13.7%).

Similarly, buy pressures dominated the Nigerian Eurobonds market as the investors continued to hedge against the depreciating naira. Thus, we saw bullish sentiments across the market, and average yields declined by 43bps w/w to close at 11.5% (previously 11.9%).

This week, we expect the bonds market to be relatively quiet as investors’ focus will be fixed on the PMA at the NT-bills market.

Currency Market: The Naira depreciated at the I&E window            
Last week, the Naira depreciated marginally at the Investors & Exporters (I&E) window to close at N461.7/$, from its previous close of N461.5/$. We continue to find offer quotes in the N727.0/$- N740.0/$ range at the parallel market. Activities in the I&E window weakened, with average FX turnover declining by 46.1% w/w to settle at $92.5mn. Similarly, Nigeria’s external reserves climbed by 19bps w/w as of Thursday last week to close at $37.2bn.   

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.