January 30, 2023/United Capital Research

Macro Highlight and Outlook
The Central Bank of Nigeria (CBN) has extended the deadline for the swapping of old naira notes with the redesigned ones from 31 Jan-2023 to 10 Feb-2023. Also, a grace period was declared by the CBN governor, which allows Nigerians to deposit their old notes directly with the CBN until 17 Feb-2023.

Last week, the Monetary Policy Committee (MPC) concluded its 289th meeting. At the press briefing, the committee’s Chairman, Godwin Emefiele, announced the committee’s decision to raise the Monetary Policy Rate (MPR) by 100bps, bringing it to 17.5%. The committee also voted to retain the asymmetric corridor at +100/-700bps around the MPR, the Cash Reserve Ratio (CRR) at 32.5% and the liquidity ratio at 30.0%.

Moody’s Investors Service has downgraded Nigeria’s long-term foreign currency, local currency issuer ratings and foreign currency senior unsecured debt ratings to Caa1 from B3, while the Outlook is set to stable. The rating agency noted that the downgrade resulted from the government’s deteriorating fiscal and debt position.

According to the National Pension Commission (NPC), Pension Fund Administrators (PFAs) exposure to the Nigerian equities market increased to N856.2bn in Nov-22 from N828.2bn in Oct-22. This represents a N23.0bn or 3.4% m/m increase following the drive to position in some fundamental stocks with low prices.

The Minister of Communications and Digital Economy, Isa Pantami, disclosed that the Federal Executive Council (FEC) had approved the Nigeria Data Protection Bill for transmission to the National Assembly. The bill, which seeks to give Nigerians full legal backing in protecting their data, will replace the current Nigeria Data Protection Regulation (NDPR).

The Central Bank of Nigeria (CBN) has directed deposit money banks, super agents, and mobile money operators to swap the old N200, N500 and N1,000 for the newly redesigned notes. They are expected to swap up to N10,000 per person, while amounts above N10,000 are to be treated as deposits. This is to speed up the permeation of the new Naira notes, particularly in the rural areas of the country. However, this cash swap programme excludes mobile money/Point of Sales agents in Abuja and Lagos.

The President, Major General Muhammadu Buhari (retd.), has unveiled the $1.5bn Lekki deep seaport and the Imota Rice Mill in Ikorodu, Lagos. The Lekki deep seaport has been described as one of the largest seaports in the country and one of the biggest in West Africa. It is projected to improve efficiency and serve as a major driver for economic growth in the region.

According to the Central Bank of Nigeria (CBN), the maximum lending rate in the banking sector hit 29.1%, while savings deposit rates printed at 4.1% at the end of Dec-2022. The prime lending rate closed at 13.9%, while the inter-bank call rate settled at 12.0%.

This week, we expect the National Bureau of Statistics (NBS) to release Nigeria’s Capital Importation Data for Q3-2022. Other than that, we expect the macroeconomic space to be relatively quiet.
 
Global Markets: Investors shift focus to central banks’ interest rate meetings
Last week, US equities markets closed broadly bullish despite starting the week with tempestuousness due to a lot of abnormal stock prices for several NYSE-listed stocks. The errors led almost instantly to volatility halts leaving market participants bewildered. The official explanation turned out to be an “exchange-related issue”, which got resolved quickly, and stocks soon returned to trading normally. At the tail end of the week, the market was barraged with economic data. The Commerce Department reported that the U.S. GDP grew by an annualised 2.9% in Q4-2022, above the consensus estimate of 2.8%, although slightly slower than the 3.2% increase in Q3-2022. Consumer spending, which accounts for about 68.0% of GDP, increased by 2.1% for the period, down slightly from 2.3% in the previous period. In addition, the market reacted to the positive inflation data in the December Personal Income and Spending Report. The Personal Consumption Expenditures (PCE) Price Index was up 0.1% m/m, while the core-PCE Price Index, which excludes food and energy, was up 0.3%—bringing the y/y print to 5.0% and 4.4%, respectively, from 5.5% y/y and 4.7% y/y in Nov-2022. Investors also combed through the latest batch of corporate earnings. Notably, the NASDAQ Composite index (+4.3% w/w) gained the most on the back of surging technology stocks as investors began an earnings-heavy week with renewed enthusiasm (buoyed by Tesla Inc’s earnings beat and improved sales forecast) for market-leading momentum stocks that were battered last year. The S&P 500 and DJIA rose by 2.5% w/w and 1.8% w/w, respectively.

In Europe, equity investors were broadly bullish despite mixed regional earnings. The easing inflation in the United States primarily drove the rally, bolstering sentiment ahead of a week of major central bank decisions. The positive investor sentiment was also supported by data released in the week showing improved business sentiment in Germany and an uptick in Eurozone services and manufacturing activity, prompting optimism that a recession in the region may be less probable.  At the end of the week, the Europe STOXX gained 0.7% w/w due to a rally in energy and consumer discretionary firms, while weakness in consumer staples stocks such as Diageo dampened gains on the index. Similarly, Germany’s DAX (+0.8% w/w) and France’s CAC (+1.4% w/w) closed higher.

The Asian market was relatively quiet due to the Chinese and Taiwanese stock markets’ closure for the Chinese New Year celebrations. In Japan, chip-making equipment maker Tokyo Electron rose 2.0% w/w to lift the Nikkei 225 the most (+1.0% w/w). The index posted the most significant weekly jump in more than two months, recovering all its losses since the Bank of Japan’s surprise policy pivot in Dec-2022. Important of note on Friday, India transitioned to a market-wide Transaction+1 (T+1) settlement system for equities from the previous T+2 cycle. The new system was first introduced by the market regulator, the Securities and Exchange Board of India (SEBI), in 2021 and has been implemented phase-wise, starting from the smallest companies by market capitalisation to larger ones. The Indian SENSEX (-2.5% w/w) fell last week.

Last week, crude oil prices declined because of reports of a glut of unexpected Russian supply headed for the market. Oil loadings from Russia’s Baltic ports were estimated to rise by 50.0% m/m. The surge comes as sellers try to meet strong demand in Asia and benefit from increasing global energy prices. All the above outweighed the 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 lower, with Brent crude losing 1.1% w/w to print at $86.66/bbl.

This week, we expect the interest rate decisions from the US Fed, ECB, and the BoE to drive the direction of the global markets.

Domestic Equities: Market sustained its northward trajectory …ASI up 12bps w/w.
Last week, the local equities market continued its bullish run, marking the eleventh consecutive week of positive momentum. Notably, buy interests in GEREGU (+15.3% w/w), DANGCEM (+0.7% w/w), STANBIC (+4.7% w/w) and OKOMU (+9.8% w/w) drove the local bourse northwards while sales of MTNN (-2.1% w/w) and NB (-9.7% w/w) put downward pressure on the index. As a result, the benchmark All Share Index (NGX-ASI) climbed by 12bps w/w to print at 52,594.7 points. Hence, YTD return strengthened to 2.7%, while market capitalisation gained N34.0bn to print at N28.7tn. However, equity turnover decreased as average volume and value traded fell by 39.0% w/w and 12.9% w/w to 151.4mn units and N2.7bn, respectively. Investor sentiment strengthened to 1.2x from 0.8x last week, as 44 tickers appreciated in price during the week while 39 depreciated.

Across sectors, overall w/w performance was mainly bullish as four (4) of the five (5) sectors we cover closed green. Leading the gainers was the Oil & Gas index (+1.7% w/w), which gained on account of price appreciation in TOTAL (+5.5% w/w) and ETERNA (+4.2% w/w). The Banking index (+1.7% w/w) followed due to renewed buy interests in ZENITHBA (+1.8% w/w), FIDELITY (+8.0% w/w) and UBN (+3.1% w/w). The Insurance and Industrial Goods indexes climbed by 0.8% w/w and 0.4% w/w following buying interests in MBENEFIT (+23.3% w/w), CHIPLC (+3.2% w/w) and DANGCEM (+0.7% w/w), respectively. The Consumer Goods index was the only laggard (-1.1% w/w) due to share depreciation in NB (-9.7% w/w) despite buy interest in UNILEVER (+16.2% w/w).

On corporate actions, the earnings season has kickstarted with a couple of companies releasing mixed results. GUINNESS grew its revenue marginally by 8.5% y/y to N118.5bn in  HY 2022/2023. However, increases in OPEX (+26.4% y/y) and Finance cost (+435.9% y/y) dragged the company’s Profit After Tax (PAT) lower by 54.4% y/y to N4.0bn. On the flip side, UNILEVER released impressive results, recording a 25.8% y/y revenue growth in FY-2022. Overall, the company’s PAT  rose by 75.8% y/y to N6.0bn. Lastly, CADBURY grew its revenue and PAT by 30.0% y/y and 23.0% y/y to N55.2bn and N1.4bn, respectively in FY-2022.

So far, the market has defied expectations by maintaining strength despite signs of overstretching. Over the medium term, we retain our positive outlook for Nigerian equities, supported by depressed yields in the money market space. However, we express caution that in the coming days, significant profit taking activities could see the market witness a pull back.

Money Market Review: Stop rates decline at PMA
Last week, the financial system opened relatively liquid with a balance of N88.3bn. 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 nearer. Banks were mandated by the apex bank to continue operations through the weekend (Saturday and Sunday) in a bid to encourage last-minute deposits. However, the aggressive 100bps hike by the Monetary Policy Committee (MPC) provided some buffer to keep lending rates elevated in double digits terrain, despite buoyant system liquidity. Also, the CBN deducted CRR debits from banks to the tune of N840.0bn. However, the financial system did not account for the debit with closing the week at N1.2tn. That said, average Open Repo Rate (OPR) and Overnight Rate (OVN) rose by 57bps w/w and 63bps w/w to 10.4% and 10.8%, respectively.

On details of last week’s primary market activity, the CBN conducted its second NT-Bills auction for the month, with a total offer size of N220.5bn across the 91-day, 182-day, and 364-day papers. Investors’ demand was overwhelmingly strong as total bids surpassed the total amount on offer, with a bid-to-cover ratio of 4.7x to print at N1.0tn. The strong interest was a by-product of elevated system liquidity as banks sought to invest funds before the hammer of CBN’s CRR debits. Overall, interest was skewed toward the longer end of the curve, with the bulk of total bids aimed at the 364-day bill, oversubscribed at a 4.0x bid-cover ratio. The apex bank opted to sell exactly what was on offer. Stop rates across all the bills declined 171bps, 253bps, and 252bps to print at 0.29%, 1.80%, and 4.78%.

Investors sentiment from PMA trickled into the secondary NT-bills market as they sought to fulfil unmet bids amid robust liquidity within the financial system. As a result, the average yield on NT-bills fell by 200bps w/w to close at 1.5% (previously 3.5%). The OMO bills segment was quiet, as the average yield on OMO bills was steady to print at 2.9%.

Looking ahead, we expect system liquidity and potential CRR debits to remain pivotal in guiding the direction of the market. That said, we see system liquidity at an extremely robust level, enough to keep money market rates depressed through Q1-2023. As a result, in the coming week, we continue to expected yields in the money market to stay depressed, despite the recent hawkish tone of the MPC.

Bond Market: System liquidity drives bullish sentiments
Last week, the secondary bonds market was broadly bullish, particularly driven by the surplus financial system. Overall, the average yield across sovereign bonds declined by 31bps w/w to close at 13.1% (previously 13.4%). In tandem, corporate bonds traded on a bullish note, as the average yield on corporate bonds shed 71bps w/w to 12.8% (previously 13.5%).

On the other hand, the Nigerian Eurobonds market was met with sell-pressure as the overall abysmal investors’ sentiments toward SSA Eurobonds resurfaced. Consequently, the average yields on Nigerian Eurobonds climbed 48bps w/w to close at 10.8% (previously 10.3%).

This week, we expect the DMO to approach the local debt market with total issuance of N360.0bn across the 2028s, 2032s, 2037s, and 2049s. We expect that the system’s surplus liquidity will place downward pressure on marginal rates across the board as investors’ grip over pricing has weakened. For the Eurobonds market, we anticipate a rout of Nigerian Eurobonds following Moody’s downgrade of Nigeria’s foreign currency issuer rating deeper into junk territory.

Currency Market: Naira depreciates at the I&E window
Last week, the Naira depreciated by 5bps w/w at the Investors & Exporters (I&E) window to close at N461.8/$, from its previous close of N461.5/$. At the parallel market, we continue to find offer quotes in the N742.0/$- N755.0/$ range. Activities in the I&E window weakened, with average FX turnover losing by 2.2% w/w to settle at $99.5mn. Similarly, Nigeria’s external reserves declined by 3bps w/w, losing $22.3mn 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.