January 23, 2023/United Capital Research
Macro Highlight and Outlook
The National Bureau of Statistics (NBS) released the Consumer Price Index (CPI) data for Dec-2022. According to the report, Nigeria’s headline inflation slowed to 21.34% y/y, for the first time in ten months, from 21.47% y/y in Nov-2022. On a monthly basis, consumer prices inched up by 1.71% m/m, the most in four months, after a 1.39% increase in the previous month. The m/m rise is due to a sharp increase in food demand, usually experienced during the festive season.
The Central Bank of Nigeria (CBN) has injected $15.3bn into the economy between Jan to Oct-2022 to stabilise the value of the naira. This was obtained in the banking sector regulator’s monthly and quarterly economic reports on foreign exchange market developments. The reports noted that $4.86bn, $4.81bn and $4.18bn were injected into the economy during the first, second and third quarters, respectively, while $1.46bn was injected in October.
The Senate President, Ahmad Lawan, has declared the Senate is ready to approve the N23.7tn debt restructuring request made by the President Muhammadu Buhari in Dec-2022.
According to data compiled from the budget implementation reports of 2016 to 2022, The Federal Government has recorded a revenue shortfall of N14.28tn under the regime of the President Muhammadu Buhari.
The Director of the Legal Services Department of the Central Bank of Nigeria, Mr. Kofo Salam-Alada, has said the apex bank would begin sanctioning banks that continue to fill their ATMs with old naira notes as the deadline to phase out the notes nears.
This week, we expect the NBS to release the country’s Q3-2022 Capital Importation Data. Also, the Monetary Policy Committee (MPC) will be meeting this week and would consequently announce its interest rate decision on 24-Jan.
Global Markets: Rate hike concerns fuels selloffs across major indices
Last week, the global equities market closed broadly bearish as investors were wary of the market following headlines of recession fears at the just concluded World Economic Forum in Davos, Switzerland. At the start of the week, the US market reacted positively to the release of the Producer Price Index (PPI) numbers indicating a slowing down in inflation. According to the US Bureau of Labor Statistics (BLS), producer prices fell by 0.5% m/m in Dec-2022, following a revised 0.2% m/m increase in Nov-2022. This is the largest monthly decline since Apr-2020, signalling inflationary pressures were cooling in the US. However, the gains in the market were overturned upon the release of the retail sales data for Dec-2022. According to the US Census Bureau, retail sales declined by 1.1% m/m following a 1.0% drop in Nov-2022. This implies that consumer spending on holiday shopping was weak due to the high inflation and interest rates in the economy. In addition, concerns that the Federal Reserve may continue to be aggressive in its rate hikes following commentaries from FOMC’s members fueled the bearish sentiment. Lastly, weaker-than-expected earnings estimates from Goldman Sachs provided further fuel for selloffs in the market. Overall, the US equities market closed mixed, as all the major indices recorded weekly losses except one. Notably, the NASDAQ Composite (+0.6% w/w) was the sole gainer on account of impressive earnings result from Netflix, which spurred renewed sentiment in the tech space. On the other hand, the S&P 500 and DJIA fell by 0.7% w/w and 2.7% w/w, respectively.
In Europe, we saw selloffs across all major European markets primarily due to hints of continued aggressive rate hikes by central banks amid mixed economic data releases across the continent. In the UK, despite headline inflation slowing for the second consecutive month to 10.5% in Dec-2022, it was not enough to spur bullish sentiment in the market. Data from the GfK Group showed that consumer confidence in the UK fell to -45.0pts in Jan-2023, the first in three months, from -42.0pts in Dec-2022 as concerns around high inflation and soaring energy bills persist. Lastly, the Office for National Statistics (ONS) reported that retail sales in the UK sank 1.0% m/m in Dec-2022, following a 0.5% drop in Nov-2022. Elsewhere in Europe, headline inflation for the Euro area slowed to 9.2% y/y in Dec-2022 from Nov’s 10.1% print. However, extracts of the minutes of the European Central Bank’s (ECB) policy meeting revealed that the apex bank would continue raising rates at a sustained pace as combatting inflation remains the key focus. At the end of the week, the Europe STOXX (-0.1% w/w), UK FTSE (-0.9% w/w), Germany DAX (-0.4% w/w) and France CAC (-0.4% w/w) closed lower.
The Asian market closed bullish, as economic optimism stemming from China’s reopening outweighed concerns about a looming slowdown and the prospect of further monetary tightening in advanced economies. According to the National Bureau of Statistics of China, the economy expanded by 2.9% y/y in Q4-2022, easing from a 3.9% growth in Q3-2022, while FY-2022’s economic growth estimate printed at 3.0%. On monetary policy, the People’s Bank of China (PBoC) left its key lending rates unchanged for the fifth straight month as authorities aimed to boost market confidence and support the economy. Vice Premier Liu He, China’s top economic official, said at the World Economic Forum that China’s economy would likely rebound to its pre-pandemic growth this year as Covid infections had passed their peak and consumption-related activities had returned to normal. This spurred bullish sentiments in the market as investors were optimistic about the performance of the market in 2023. In Japan, despite headline inflation rising to a 41-year high of 4.0% y/y in Dec-2022, the Bank of Japan (BoJ) opted to keep all its policy rates unchanged at current levels. Lastly, Foreign Direct Investments (FDIs) into China grew by 6.3%y/y to CNY1.3tn in 2022, as reported by the Ministry of Commerce. That said, the capitalisation-weighted Shanghai Composite Index rose by 2.2% w/w, while the Indian SENSEX (+0.6% w/w) and Japanese NIKKEI 225 (+1.7% w/w) closed the week higher.
Last week, crude oil prices rallied on the back of growing optimism over China’s economic recovery and improvement in energy demand from the world’s largest crude importer. Overall, from a w/w perspective, oil prices closed higher, with Brent crude gaining 2.8% w/w to print at $87.63/bbl.
This week, we expect the Jan-2022 Purchasing Managers’ Index (PMI) for the US, UK, Germany, France, and the Euro Area. In addition, the Bureau of Economic Analysis will release the Q4-2022 GDP growth rate for the US. These economic data releases will define investors’ sentiment and the direction of the global market.
Domestic Equities: Bullish sentiments continue but with signs of waning momentum
Last week, the local equities market sustained its northward trajectory as the NGX-ASI closed green on only two out of the five trading sessions of the week. Notably, buy interests in large-cap stock AIRTELAFRI (+3.9% w/w) drove the local bourse northwards. Clearly, the market was characterised by waning momentum despite the bullish close as investors’ sentiments weakened, activity level declined, and sell pressures picked up. Nevertheless, the benchmark NGX-All Share Index (NGX-ASI) climbed by 0.2% w/w to print at 52,594.7 points. Hence, YTD return strengthened to 2.6%, while market capitalisation gained N44.8bn to print at N28.6tn. However, activity level declined as average volume and value traded fell by 3.5% w/w and 46.9% w/w to 248.2mn units and N3.1bn, respectively. Investor sentiment weakened to 1.3x from 1.9x last week, as 39 tickers appreciated while 30 depreciated.
Across sectors, overall w/w performance was mainly bearish as three (3) of the five (5) sectors we cover closed in red. The Banking sector (-2.6% w/w) sector led the losers due to sell-offs in ZENITHBANK (-4.3% w/w), ACCESSCORP (-2.7% w/w) and UBA (-3.0% w/w). This was followed closely by the Industrial sector (-1.1% w/w) and Consumer goods sector (-0.4% w/w) losing on account of price depreciation in DANGCEM (-1.8% w/w), WAPCO (-2.6% w/w), INTBREW (-7.0% w/w) and NB (-1.2% w/w). On the flipside, the Insurance sector (+1.8% w/w) was the best-performing sector due to gains in CORNEST (+9.1% w/w), AIICO (+3.2% w/w) and WAPIC (+7.1% w/w). The Oil & Gas sector (+0.4% w/w) climbed following buy interests in MRSOIL (+13.5% w/w) and ETERNA (+2.6% w/w).
At current levels, we caution investors that the equities market is due a breather and thus we anticipate some of the profit taking that started last week will continue into this week’s sessions. Nevertheless, we view this as an opportunity to buy attractive stocks on dips as we retain the view that depressed interest rate levels will sustain the fuel for an equity market uptrend in Q1-2023.
Money Market Review: Interbank rates climb higher
Last week, the financial system opened liquid with a balance of N258.1bn. In line with our expectations, system liquidity increased through the week, consequent of the CBN’s campaign to return old bank notes following its currency redesign as the 31-Jan deadline draws near. However, by Friday close, the CBN conducted a CRR debit due to elevated system liquidity. As a result, the Open Repo Rate (OPR) and Overnight Rate (OVN) rose by 133bps w/w and 150bps w/w to 11.0% and 11.5% respectively.
In the secondary NT-bills market, we observed mild sell-pressure. As a result, the average yield on NT-bills rose by 16bps w/w to close at 3.5% (previously 3.3%). Contrarily, the average yield on OMO bills fell 48bps to print at 2.9%.
Looking ahead, we have unchanged expectations for Q1-2023 of sustained downward pressure on yields on government securities due to the buoyant system liquidity. Also, total maturities in the quarter is expected to exceed sovereign debt market issuances. However, with the deadline nine-days away, last minute deposits of old bank notes will likely be the main boost to liquidity. Finally, barring an unlikely benchmark rate hike, we do not expect the MPC’s decision to reinvigorate the money market.
Bond Market: Bearish sentiments dominate bonds market
Last week, we observed bearish sentiment from investors in the secondary bonds market. We note that the observed selloffs followed the release of the Q1-2023 bond calendar. According to the calendar, the DMO plans to re-open the 2028, 2032, 2037 and 2049 bonds, with N80 – 100bn on offer for each bond. The MAR-2027 (+166bps), FEB-2028 (+112bps) and MAR-2036 (+121bps) saw the highest weekly increases. Overall, the average yield across sovereign bonds climbed by 64bps w/w to close at 13.42% (previously 12.78%). In tandem, corporate bonds traded on a bearish note, as the average yield on corporate bonds climbed by 51bps w/w to 13.49% (previously 12.98%).
On the other hand, buy-interest slowed in the Nigerian Eurobonds market, despite coupon payments totaling $78.4mn hitting the system. Thus, the average yields declined by 3bps w/w to close at 10.3% (previously 10.3%).
This week, we expect the bonds market to trade mildly bearish, and we expect buy-sentiments to resume in the Eurobond market.
Currency Market: The Naira appreciated at the I&E window
Last week, the Naira gained by 9bps w/w against the US Dollar at the Investors & Exporters (I&E) window to close at N461.50/$, from its previous close of N461.90/$. At the parallel market, we continue to find offer quotes in the N740.0/$- N755.0/$ range. Activities in the I&E window improved as average FX turnover rose by 30.8% w/w to $124.9mn. Also, most recent CBN data registers 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.
