January 16, 2023/United Capital Research

Macro Highlight and Outlook

Last week, the World Bank Group has once again lowered its growth projection for Nigeria’s economy, citing a weakened oil sector as its primary reason. According to the projection, Nigeria’s economy will further decelerate to 2.9% in 2023 and is not expected to record any growth in 2024.

At the resumption of the ministerial scorecard series (2015-2023), the Minister of State for Petroleum Resources revealed that it had acquired shares in four private refineries including the Dangote Refinery in Lagos (650,000bpd capacity), Azikel Modular Refinery in Bayelsa (12,000bpd capacity), the Waltersmith Modular Refinery in Imo (5,000bpd capacity), and the Duport Modular Refinery in Edo (2,500bpd).

According to the Federal Ministry of Petroleum Resources, the Federal Government has disbursed about N173.2bn for equalising over 11.6bn litres of Premium Motor Spirit (PMS), popularly called petrol, between 2019 and 2022. PMS price equalisation is done by the government through the Nigerian Midstream and Downstream Petroleum Regulatory Authority (NMDPRA) to ensure price uniformity of petroleum products via the reimbursement of marketers for trucking products to filling stations anywhere in Nigeria.

Airtel Africa Plc disclosed that the company has completed payment for its Fifth Generation (5G) network license in Nigeria. The firm paid $316.7mn for the 5G license and 4G spectrum to the Federal Government through the Nigerian Communications Commission (NCC).

This week, we expect the Nigerian Bureau of Statistics to publish the Dec-2022 CPI report.

Global Markets: Global equities extend year start rally        
Last week, the US equity market extended its start of the year rally as positive macroeconomic data spurred investors to take bigger bets on stocks. The week started at a slow pace as investors awaited Jerome Powell’s speech as well as the December CPI report. First, the Fed Chair, Jerome Powell’s speech did not significantly dampen investor optimism. In addition, the December CPI report showed continued disinflation as December inflation printed at 6.5%, compared to 7.1% in November. As a result, investors were persuaded that the Fed will pause its rate hike faster than expected. For context, the CME FedWatch Tool now predict a 67.0% probability (from 55.2% a week ago) that the Fed Funds rate will peak at the 4.75% – 5.00% range in May. Thus, US equity indexes closed the week bullish, with the NASDAQ Composite, S&P 500 and DJIA rising 4.8% w/w, 2.7% w/w, and 2.0% w/w, respectively.

Last week, European equities extended their rally after US inflation showed a moderate deceleration in December, bolstering expectations that the Federal Reserve will reduce the size of rate hikes in its next meeting. However, the narrative appears to be different in Europe where mid-week, the European Central Bank (ECB) Governing Council member Pablo Hernandez De Cos reiterated that the ECB would deliver significant increases in borrowing costs at its upcoming meetings. However, investors have not given this much attention. Also, the clement winter has supported the rally thus far, which eased investors’ worries over the region’s energy crisis and the sudden reopening of China. In addition, the strengthening of the EUR and GBP against the USD further supported the rally. Therefore, the pan-European STOXX 600 Index rose 1.8% w/w. The France CAC 40 Index rose by 2.4% w/w, Germany’s DAX 40 Index rose by 3.3% w/w, and the UK FTSE 100 by 1.9% w/w.

The bullish sentiments in the US and Europe filtered into Asian markets as equities sustained uptrend. The continued rollback of China’s stringent zero-Covid policy, the reopening of the economy, and a weakening dollar attracted investors back into the region. Furthermore, a rally in tech stocks after statements from Guo Shuqing, Communist Party secretary of the People’s Bank of China (PBOC), highlighting that the unique campaign to rectify 14 internet platform companies’ financial businesses is complete with few remaining issues to resolve, which investors took as a sign that China’s more than two-year clampdown on its sprawling internet sector is coming to an end. However, the more recent hawkish tilt from the Bank of Japan (BOJ) continued to weigh on Japanese equities. That said, the capitalisation-weighted Shanghai Composite rose 1.2% w/w, and the Japanese NIKKEI 225 index rose 0.6% w/w. India’s SENSEX declined 0.2% w/w.

Finally, Crude oil prices inched north last week primarily due to renewed optimism about increased demand. ICE Brent ended the week up 8.5% w/w at $85.28/bbl., while WTI Futures were up 8.7%, trading at $80.08/bbl. This is partly due to figures showing that U.S. consumer prices unexpectedly fell in December and optimism over China’s demand outlook. In addition, the US government forecast global petroleum consumption to print at 102.2mbpd in 2024, driven primarily by growth in India and China.

This week, the markets would be primarily driven by the release of China’s Q4-2022 GDP numbers, the UK and Eurozone Dec-2022 Consumer Price reports and the published account of the ECB’s monetary policy meeting. While we do not rule out the possibility of profit taking this week, we are now cautiously optimistic on global equities (particularly US and European equities). We reckon that the Fed’s aggressive position on policy tightening will likely be relaxed over the next two quarters as inflation continues to moderate. That said, we recommend gradual shift from cash and fixed income dominant portfolios to an equity-focused tilt.

Domestic Equities: Bullish sentiments resume…ASI up 2.5%

Last week, the local equities market rebounded from the previous week’s loss. We saw the NGX-ASI close green in four out of the five trading sessions of the week, thus, signalling investors’ bargain-hunting activities. Notably, buy interests in large-cap stock, MTNN (+6.9% w/w), drove the local bourse northwards. As a result, the benchmark All Share Index (NGX-ASI) climbed by 2.5% w/w to print at 52,512.5 points. Hence, YTD return strengthened to 2.5%, while market capitalisation gained N702.7bn to print at N28.6tn. Activity level closed mixed as average value traded fell by 12.7% w/w to N5.9bn while average volume traded climbed by 11.6% w/w to 257.1mn units. Investor sentiment weakened to 1.9x from 2.2x last week, as 51 tickers appreciated while 27 depreciated.

Across sectors, overall w/w performance was mainly bullish as four (4) of the five (5) sectors we cover closed green. The Banking sector (+3.5% w/w) sector led the gainers due to bargain-hunting activities in STERLNBANK (+10.7% w/w) and FIDELITY (+7.4% w/w). This was followed closely by the Industrial sector (+3.3% w/w), and the Oil & Gas sector (+3.2% w/w) gaining on account of price appreciation in WAPCO (+5.4% w/w) and ARDOVA (+6.1% w/w). The Consumer goods sector climbed by 0.7% following buy pressures in INTBREW (+7.5% w/w). On the flip side, the Insurance sector (-1.6% w/w) was the sole loser due to losses in NEM (-10.0% w/w) and AIICO (-1.6% w/w).

On corporate actions, Airtel Nigeria has completed payment for its Fifth Generation (5G) license. The firm paid $316.7mn for the 5G license and 4G spectrum to the Nigerian Communications Commission (NCC). 

This week, we anticipate sustained bullish sentiment in the market as investors take positions ahead of the FY-2022 earnings season.

Money Market Review: Stop rates continue to taper at PMA

Last week, the financial system opened liquid with a balance of N401.3bn. Overall, the financial system remained liquid all week, in line with our expectations, largely owing to the sustained inflow from the broad economy, which was triggered by the CBN’s naira note redesign policy. In addition, the CBN refunded a few banks the sum of N280.0bn for being over-debited at the last round of CRR debits. Furthermore, N10.0bn worth of OMO maturities that hit the system but was broadly inconsequential in the scheme of events. On liquidity mop ups, the CBN continue to leave the system liquid as it continues to ignore OMO auctions. That said, the financial system wrapped up the week liquid to close at N433.3bn. Consequently, funding rates between banks witnessed an extended downward pressure, with the average Open Repo Rate (OPR) and Overnight Rate (OVN) declining by 82bps and 111bps to print at 9.6% and 9.9%, respectively. We observed that funding rates may have likely been capped with strong support at 9.50% and 9.83% respectively, as both metrics have failed to go below this point since the year’s start, despite excess system liquidity.

At the NT-bills Primary Market Auction, the CBN offered a total of N56.9bn worth of maturing bills. Investor’s demand was strong owing to the buoyant liquidity in the system. Thus, the auction was oversubscribed by 6.8x with total subscription printing at N389.0bn. Notably, the CBN opted to sell just the amount on offer. Consequently, the stop rate across the 91-day, 182-day and 364-day bills declined by 75bps, 285bps and 119bps to settle at 2.0%, 4.3% and 7.3%, respectively.

In the secondary NT-bills market, we observed mild buy-interest as investors demand trickled from the primary market outcomes, as they sought to deploy the excess liquidity on their hands. As a result, the average yield on NT-bills declined by 9bps w/w to close at 3.3% (previously 3.4%). However, the average yield on OMO bills closed flat to print at 3.4%.

Looking ahead, we remain firm on our expectations of sustained downward pressure on yields on government securities, particularly supported by the buoyant system liquidity. We expect the system to remain particularly buoyant through Q1-2022 as total maturities will continue to outpace sovereign debt market activities. In addition, last minute deposits due to the looming deadline of the CBN’s Naira redesign take-off will likely be another driver.

Bond Market: Uncertainties on anticipated Q1-2023 bonds calendar fuels bearish sentiments

Last week, in the secondary bonds market, we observed bearish sentiment from investors, particularly skewed towards the mid and tail-end of the curve. We observed sell-pressure particularly across the 2034s and 2037s. We note that the observed selloffs rode on uncertainties surrounding the Q1-2023 bond calendar release. Overall, the average yield across sovereign bonds climbed by 10bps w/w to close at 12.8% (previously 12.7%). In tandem, corporate bonds traded on a bearish note, as the average yield on corporate bonds climbed by 13bps w/w to 13.0% (previously 12.9%).

On the other hand, buy pressures dominated the Nigerian Eurobonds market as the investors continued to hedge against the depreciating naira amid the surplus system liquidity and the upcoming CBN deadline on old naira notes. Thus, we saw bullish sentiments across the market, and average yields declined by 114bps w/w to close at 10.3% (previously 11.5%).

This week, we expect the bonds market to trade mildly bearish as the market anticipates the release of the Q1-2023 bonds calendar by DMO. We believe that the market will need a reassessment after the calendar is released. However, we expect coupon payments to the tune of N131.5bn to stimulate a brief buy sentiment, as investors will look to reinvest funds back into the market. For the Eurobonds, we expect bullish sentiments to remain sustained, as total Eurobond coupon payment to the tune of $78.4mn is expected to hit the system at the tail-end of the week bolstering existing buy-sentiments.

Currency Market: The Naira depreciated at the I&E window

Last week, the Naira fell by 9bps w/w against the US Dollar at the Investors & Exporters (I&E) window to close at N461.90/$, from its previous close of N461.50/$. At the parallel market, we continue to find offer quotes in the N730.0/$- N740.0/$ range. Activities in the I&E window improved as average FX turnover rose by 3.2% w/w to $95.4mn. Also, most recent CBN data register Nigeria’s external reserves at $37.2bn.

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.