February 6, 2023/United Capital Research
Macro Highlight and Outlook
Bloomberg reports revealed Nigeria’s sovereign-risk premium jumped the most in three months earlier in the week. The extra yield investors demand to own the West African country’s dollar debt rather than US Treasuries widened from 49bps to 780bps, according to JPMorgan Chase & Co. data.
The House of Representatives yesterday partly approved the requests made by the President, Major General Muhammadu Buhari (retd.), on Ways and Means Advances from the Central Bank of Nigeria. The House dropped the request for the securitisation of the N22.7tn overdraft from the CBN while it approved disbursing and restructuring of a new N1.0tn overdraft to fund the 2022 supplementary budget.
The Governor of the Central Bank of Nigeria (CBN), Mr Godwin Emefiele, announced that holders of the old N200, N500 and N1000 banknotes would still have the opportunity to redeem the face value of their cash only at central bank offices nationwide after the 10-Feb deadline, when the currencies would have lost its legal tender status, in line with the provision of Section 20(3) of the CBN Act.
Data from the National Oil Spill Detection and Response Agency showed that from Jan- to Nov-2022, Nigeria flared an estimated 5.6bn standard cubic meters of gas valued at $685.0mn. Between 2012 and 2022, Nigeria flared an estimated 80.0bn standard cubic meters of gas worth about N9.0tn as part of its oil production process.
According to the National Bureau of Statistics (NBS) in its Nigerian Domestic & Foreign Debt Q3-2022 report, Nigeria’s public debt stock, which includes external and domestic debt, stood at N44.1tn ($101.9 bn) from N42.8tn ($103.3 bn) in Q2-22.
According to the International Monetary Fund (IMF), growth in the Nigerian economy is expected to improve from 3.0% in 2022 to 3.2% in 2023 due to measures made to address production issues in the oil sector. The IMF noted that growth across sub-Saharan Africa would moderate to 3.8% in 2023 amid the prolonged fallout from the Covid-19 pandemic.
The Central Bank of Nigeria (CBN) has recovered N1.9tn worth of currency outside the banking system in two months following its naira notes redesign and cash swap policy. Thus, the apex bank has been able to reduce the money outside the banking system to N900.0bn from N2.7tn earlier announced.
The President has inaugurated the 10-megawatt Kano Solar Power Project funded by the Nigeria Sovereign Investment Authority (NSIA) with $16.0mn. The project will catalyse growth in the power sector and build Nigeria’s credentials in the fight against climate change, supporting the achievement of a net zero carbon emission by 2060.
This week, we expect the National Bureau of Statistics (NBS) to release the Telecoms Data: Active Voice and Internet per State, Porting and Tariff Information (Q3 & Q4 2022). Other than that, we expect the macroeconomic space to be relatively quiet as electioneering dominates discourse.
Global Markets: Markets were resilient.
The week saw a flurry of earnings, central bank rate decisions and economic data. In the US, following the S&P500 2.5% rally last week, there was a caution at the start of the week as amidst concern over the likely outcome of the Fed decision later in the week, prompting investors to take some profits off the market. However, on Wednesday, the Fed unanimously raised rates by 25bps to 4.5% – 4.75%, as expected. Jerome Powell, in his message, stated that “our focus is not on short-term moves but on sustained changes to broader financial conditions”. Furthermore, he suggested that the FOMC was approaching a sufficiently restrictive policy rate, acknowledging that the disinflationary process had begun. Despite a rally in growth/tech stocks, particularly Meta, underwhelming earnings from Apple, Amazon and Alphabet led to a pullback. On economic data, the significant catalyst was the BLS Employment Report. Amidst a steady stream of layoff announcements, Non-Farm Payrolls (NFP) rose to 517,000, double the pace of Dec-2022 (260,000) with job growth across industries. The unemployment rate fell to 3.4%, its lowest since 1973, and the labour participation rate rose 0.1ppt to 62.4%. However, average hourly earnings rose 4.4% y/y (vs 4.6% y/y in Dec-2022). Thus, U.S. indexes closed the week bullish, with the S&P 500 up 1.6% w/w (+7.7% YTD), the NASDAQ Composite rising 3.3% w/w, and the DJIA falling 0.2% w/w, respectively.
European indices rallied last week on optimism that central banks were approaching the restrictive phase of monetary policy tightening. The European Central Bank (ECB) raised the deposit rate by 50bps to 2.5%, stating it will subsequently raise rates in its Mar-2023 meeting due to underlying inflation. However, early estimates of the Harmonised Index of Consumer Prices (HICP) forecast Euro area annual inflation at 8.5% in Jan-2023 (vs 9.2% in Dec-2022). In the UK, Bank of England (BoE) policymakers voted to raise the key interest rate by 50bps to 4.0%, expecting CPI to slow to 3.0% by Q1-2024. Notably, the IMF predicts that the UK economy would contract by 0.6% this year, expected to be the worst performer of advanced economies, including sanction-hit Russia. Therefore, the pan-European STOXX 600 Index rose 1.2% w/w. The France CAC 40 Index rose by 1.9% w/w, Germany’s DAX 40 Index rose by 2.2% w/w, and the UK FTSE 100 at 1.8% w/w.
In Asia, the Bank of Japan (BoJ) stated it will remain steadfast in its commitment to a loose monetary policy. The yield on the 10-yr government bond (JGB) rose 2bps w/w, even as the BoJ’s purchases of JGB was a record high in Jan-2023. On economic data, Japanese factories cut output as industrial output fell 2.8% y/y in Dec-2022 (vs +0.9% y/y in Nov-2022), while retail sales expanded for the 10th consecutive month to 3.8% y/y. In China, equities fell following the weeklong Lunar New Year holiday due to profit-booking activity by investors. Also, the IMF raised its annual growth forecast for China, projecting the economy to grow 5.2% in 2023 (the previous forecast was 4.4%) and 4.5% in 2024. That said, the capitalisation-weighted Shanghai Composite fell 0.1% w/w, and the Hong Kong Hang Seng index, fell 4.5% w/w, though it has risen 9.5% YTD. The Japanese NIKKEI 225 index rose 0.5% w/w.
In the crude oil market, prices declined last week as a flurry of rate hikes by major monetary policymakers depressed sentiments. In addition, the US Energy Information Administration (EIA) reported a crude oil inventory build of 4.1mn barrels while reports emerged US crude exports have been replacing Russian crude in European markets. Also, at the OPEC+ meeting last week, the JMMC recommended keeping the current agreement in place till year-end, remaining cautiously optimistic about a recovery in Chinese demand. Overall, ICE Brent ended the week down 7.7% w/w to settle at $79.73/bbl., while WTI Futures were down 7.2%, trading at $73.20/bbl.
This week, the earnings season will continue to be busy. The Central Banks of India, Australia and Mexico will make rate decisions. Crucially, we expect economic data on China’s CPI/PPI. for the equities market, we expect investors to further digest recent data releases which could lead to some profit-taking, but a flurry of positive earnings release could be enough to change that.
Domestic Equities: Local bourse continues bullish run…ASI up 3.0% w/w
Last week, the local equities market continued its bullish run as investors’ risk-on sentiments prevailed. The NGX-ASI closed green in all the trading sessions of the week, underpinned by increased bargain-hunting activities. Decent earnings performances across the board provided a significant boost to investors’ sentiments. Notably, share price appreciation of large-cap stocks, MTNN (+5.7% w/w), AIRTELAFRI (+3.1% w/w), GEREGU (+36.9% w/w), and SEPLAT (+20.5% w/w) spearheaded the bourse’s northward close. As a result, the benchmark All Share Index (NGX-ASI) climbed by 3.0% w/w to print at 54,213.1 points. Hence, YTD return strengthened to 5.8%, while market capitalisation gained N847.5bn to print at N29.5tn. Activity level improved significantly in tandem with overall investor sentiment, as average volume and value traded climbed by 402.3% w/w and 102.4% w/w to print at 756.4mn units and N5.5bn, respectively. Investor sentiment strengthened to 2.0x from 1.5x last week, as 55 tickers appreciated while 27 depreciated.
From a sectoral viewpoint, overall w/w performance was mostly bullish as four (4) of the five (5) sectors we cover closed green. The Oil & Gas sector (+9.2% w/w) sector led the gainers due to share price appreciation in SEPLAT (+20.5% w/w). This was followed by the Banking sector (+2.5% w/w) owing to increased bargain hunting across FIDELITY (+11.1% w/w), UBA (+3.7% w/w), and ZENITHBA (+1.2% w/w), and ACCESSCO (+2.2% w/w). The Insurance (+0.3% w/w) and Industrial goods (+0.1% w/w) sectors trailed in ranks, owing to buy-pressure across CORNERST (+6.8% w/w), SOVRENIN (+15.4% w/w), and WAPCO (+2.2% w/w). On the flip side, the Consumer goods (-0.4% w/w) sector was the sole loser due to losses in GUINNESS (-10.0% w/w), FLOURMIL (-3.1% w/w) and NB (-0.4% w/w).
Despite the challenging global and macroeconomic environment, underpinned by intensified inflationary pressure, most Nigerian corporates posted decent FY-2022 earnings. For corporates who released their unaudited earnings report in the Consumer goods sector, UNILEVER and CADBURY posted strong earnings, with PAT of both firms climbing by 75.8% y/y and 110.4% y/y after recording a significant 25.8% y/y and 30.3% y/y growth in revenue. For the Brewers, GUINNESS recorded a decline in profitability, as the firm’s PAT declined by a notable 54.4% y/y, owing significantly to the +757.7% y/y climb in the net finance costs incurred for the period.
Among the Food processors, OKOMU and PRESCO recorded decent earnings performances, growing PAT for the period by 50.4% y/y and 11.4% y/y, following significant 69.2% y/y and 75.3% y/y growth in their revenues. We note that government incentives supported the observed growth in the sector, while higher Crude Palm Oil (CPO) prices provided the biggest support. BUA FOODS recorded a decent 29.5% y/y climb in PAT for the period after recording a significant 25.4% y/y growth in revenue. On the other hand, UACN posted a loss in FY-2022, with the firm’s PAT declining by 281.7% y/y to print at -N4.7bn from N2.6mn recorded in FY-2021.
For the Banking sector, listed banks whose unaudited financials were released recorded decent growth in overall profitability amid increased overall interest expense. STANBIC, FCMB, FIDELITY, WEMABANK and STERLING grew their PAT for the period FY-2022, by 42.3% y/y, 55.8% y/y, 32.6% y/y, 41.6% y/y, and 37.9% y/y, after recording a significant 39.3% y/y, 32.9% y/y, 33.9% y/y, 38.1% y/y and 17.3% y/y growth in gross earnings.
For the telecommunications sector, only MTNN had released their FY-2022 audited financials. The leading telco posted a decent earnings performance, growing PAT by 20.2% y/y, following the significant 21.6% y/y growth in its total revenue. The telco disclosed a proposed final dividend of N10.0 per share.
For the Oil & Gas sector, only TOTAL and ARDOVA had released their FY-2022 unaudited financial statement. The downstream oil firm posted a 3.1% y/y decline in its PAT, mainly owing to the 247.2% y/y climb in net financing costs incurred for the period. ARDOVA extended losses in the period, with the company’s loss opposition degenerating further by 97.7% y/y to print at -N7.6bn from -N3.8bn recorded in FY-2021. This loss stemmed largely from operations, as the firm’s operating loss recorded at -N2.5bn, 417.6% lesser than FY-2021’s N785.7mn print.
Lastly, for the power sector, GEREGU released its audited FY-2022 financials. The upstream power company posted a decline in its PAT (-50.5% y/y) and Revenue (-33.0% y/y) for the period. However, the company announced a proposed dividend payment of N8.0/s.
This week, we expect the bourse’s broad-based bullish run to continue as investors’ risk-on sentiments continue to prevail amid decent earnings performance and a depressed yield environment in the money market. We see room for pockets of bearish sentiments owing to profit-taking activities. We recommend that fund managers cherry-pick stocks with attractive prices, solid valuations, and dividend performance to take advantage of an extension of the current bullish run.
Money Market Review: System liquidity remains elevated
Last week, the financial system opened liquid with a balance of N581.3bn. The system was further bolstered by inflows from the return of old 200, 500 and 1,000 bank notes following the deadline extension. System liquidity closed the week buoyant, with a balance of N958.2bn. Nevertheless, the average Open Repo Rate (OPR) and Overnight Rate (OVN) still climbed by 18bps w/w and 10bps w/w to close the week at 10.6% and 10.9%, respectively following the CRR debit by the Central Bank of Nigeria (CBN).
In the secondary NT-bills market, we observed mild selloffs as investors shifted their focus to the PMA in the bond market. As a result, the average yield on NT bills climbed by 11bps w/w to close at 1.6% (previously 1.5%). On the other hand, the average yield on OMO bills fell by 90bps w/w to print at 2.0% (previously 2.9%).
Looking ahead, we expect the CBN to roll over N217.1bn worth of maturing NT-bills this week. At the auction, we expect downward pressures on stop rates, as seen in the previous auction, given the buoyant liquidity. In addition, we anticipate a total of N40.0bn worth of OMO maturities to hit the system.
Bond Market: “Bumper sale” at the Jan-2023 Bonds PMA
Last week, the Debt Management Office (DMO) conducted its first FGN bond Auction for 2023, with N360.0bn worth of papers on offer across 2028s, 2032s, 2037s, and 2029s. At the auction, investors’ demand was strong, supported by the buoyant liquidity in the system, with appetite skewed towards the longer-tenured instruments. Thus, the auction was oversubscribed, with total subscription printing at N805.2bn and a bid-to-cover ratio of 2.2x. The DMO oversold the auction, allotting a total of N662.6bn vs N360.0bn on offer signalling the government’s strong reliance on the domestic debt market. Also, we perceive an attempt by the government to frontload 2023 borrowings with a focus on longer-term debt. The marginal rate on the 2032s climbed by c.15bps to settle at 14.9%, while the 2037s remained unchanged at 15.8%. Lastly, marginal rates on the re-issued 2028 and 2049 papers printed at 14.0% and 15.9%, respectively.
In the secondary bonds market, we observed a bearish sentiment across the markets. Overall, the average yield across sovereign bonds climbed by 13bps w/w to close at 13.2% (previously 13.1%). In tandem, corporate bonds traded on a bearish note, albeit marginally, as the average yield on corporate bonds rose by 4bps w/w to 12.8%.
Similarly, we saw sell pressures dominate the Nigerian Eurobonds market as the investors continued to dispose of their bond holdings following the downgrade of Nigeria’s rating by Moody’s Investor Service. Thus, we saw bearish sentiments across the market, albeit a steeper movement along the curve, as average yields increased by 121bps w/w to close at 12.0% (previously 10.8%).
Looking forward, we expect renewed buy-interests in the secondary bonds market supported by the excess system liquidity. In the Eurobonds market, the sell pressures in the market will continue to be driven by risk-on investor sentiment.
Currency Market: Naira appreciates at the I&E window
Last week, the Naira appreciated 9bps w/w at the Investors & Exporters (I&E) window to close at N461.5/$. We continue to find offer quotes in the N750.0/$- N755.0/$ range at the parallel market. Activities in the I&E window weakened, with average FX turnover gaining 16.5% w/w to settle at $115.9mn. Nigeria’s external reserves declined by 6bps w/w, losing $20.5mn to close at $37.0bn.
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.
