February 13, 2023/United Capital Report

Macro Highlight and Outlook

Last week, the Supreme Court due to a lawsuit, restrained the CBN from maintaining the deadline on the use of old Naira notes pending the determination of the suit. The order will be for an initial period of seven days until the motion of notice is heard on 14-Feb.

According to the Minister of Finance, Budget, and National Planning, the Federal Government (FG) has spent N612.7bn raised through Sovereign Sukuk between 2017 and 2021 for the construction and rehabilitation of 77 roads and 23 bridges.

According to a Reuters survey of economic activities, Nigeria’s oil production which began rebounding in Nov-2022 after a prolonged lull, stayed stagnant in Jan-2023. According to the survey, Nigeria’s oil production did not increase from the 1.2mbpd recorded in Dec-2022.

According to the report released by the Nigerian Electricity Regulatory Commission (NERC), Discos were to pay about N206.0bn as generation costs; N165.0bn and N41.0bn for transmission & administrative services respectively for Q1-2022.

The NERC also revealed poor remittance was a direct consequence of the Discos recording higher than allowed Aggregate Technical, Commercial and Collection loss. The loss estimated at 48.0% in the sector for Q1-2022 comprises technical and commercial loss of 23.0% and a collection loss of 31.0%. The ATC&C loss increased by 0.9% compared to 47.0% recorded in Q4-2021.

This week, we expect data releases from the National Bureau of Statistics, including the Jan-2023 CPI report, and the Kerosine and Petrol price watch. We also expect a decision from the Supreme court on the lawsuit brought before it concerning the return of old Naira notes.

Global Markets: The bears dominate the market

Last week the US equities market was broadly bearish with major stock indices tracking lower week-on-week, despite pockets of bullish sentiments during the week due to positive earnings results. At the start of the week, investors awaited the outcome of Fed Chair Powell’s “Conversation with David Rubenstein” at the Economic Club of Washington after a much stronger-than-expected January employment report came in the week prior. After the conversation, although the Fed chair said nothing surprising, only reiterating that the Fed will react to the incoming data and do more rate hikes if the data suggest that it is necessary, we saw the market respond with some volatile price action, nonetheless. By the end of the week, the bears dominated the market as investors anticipated the release of the inflation numbers this week. Thus, major U.S. stock indices closed the week in the red, with the S&P 500 down 1.1% w/w, the NASDAQ Composite declining 2.4% w/w, and the DJIA falling 0.2% w/w, respectively.

Last week European equities declined. This was despite European stocks within the week reaching the highest in almost a year, as investors weighed a slew of corporate earnings and greeted a slowdown in
German inflation. Data showed that German inflation slowed in January to the lowest level in five
months, with consumer-price growth easing to 9.2% y/y in Jan-2022, from 9.6% y/y in Dec-2022.  However, towards the end of the trading week, European stocks dropped the most in three weeks as investors got a mixed bag of earnings and increased fears that central banks would stay hawkish for longer, dulling the outlook for economic growth. The cumulation of the above factors erased gains recorded earlier in the week. Retail, travel & leisure and mining stocks were among the biggest decliners. At the same time, energy outperformed as oil climbed after Russia followed through on threats to reduce production in response to western energy sanctions. In addition, bearish sentiments in Europe strengthened as stocks approached overbought territory. Therefore, the pan-European STOXX 600 Index fell 0.6% w/w. The France CAC 40 Index fell by 1.4% w/w, Germany’s DAX 40 Index fell by 1.1% w/w, and the UK FTSE 100 declined by 0.2% w/w.

In Asia, equities markets closed bearish. At the start of the week, there were sell pressures on Chinese equities as investors anticipated retaliation from the US following tensions from the shot down “spy balloon”.  However, the primary driver for bearish sentiments in the markets was investor worries about a more hawkish and aggressive US Fed. In addition, the tailwinds from the optimism of the reopening of China began to dissipate as investors have started to price in prospective higher interest rates following the positive US jobs report the prior week. However, Japanese equities rose as investors weighed positive earnings in the local chip sector. That said, the capitalisation-weighted Shanghai Composite fell 0.1% w/w, and the Hong Kong, Hang Seng index fell 2.2% w/w. The Japanese NIKKEI 225 index rose 0.6% w/w. India’s Sensex fell 0.3% w/w.

In the crude oil market, prices rose at the beginning of the week due to continued optimism from the reopening of China and the expected increase in demand. The price rally was further supported by supply worries following the earthquake in Turkey that damaged oil export terminals. Toward the end of the week, although oil markets remained broadly bullish, primarily bolstered by the weakening of the US dollar, sentiments began to wane due to U.S. crude stockpiles rising in line with market expectations and for a seventh straight week, reaching their highest in 20 months. U.S. oil inventories rose by 2.4mn barrels during the week ended 1-Feb, according to the Energy Information Administration (EIA). In addition, Turkey resumed crude-oil flows to the Mediterranean export terminal of Ceyhan after the earthquakes. On Friday, however, prices rose significantly as Russia hit back at the G7’s price caps by announcing production cuts and its minimum price structure. Russia will cut oil production by 500,000 bpd. Hence, ICE Brent ended the week up 8.4% w/w to settle at $86.39/bbl., while WTI Futures rose by 8.9% w/w, trading at $79.75/bbl.

This week, the markets will primarily be driven by the release of China’s, US’s’ and UK’s Inflation numbers for the month of January, as that might indicate the direction major central banks would take at their next interest rate meetings. In addition, Japan will release its Q4-2022 GDP report, and the EIA’s US crude oil inventory numbers will essentially steer the direction of oil markets this week.

Domestic Equities: The bulls remain resilient…ASI up 0.2%

Last week, the local equities market closed bullish, maintaining the positive momentum in the market for the thirteenth consecutive week. Despite profit-taking activities on three out of the five trading days of the week, it was not sufficient to drag the NGX-ASI down. Notably, buy interests in large-cap stocks, MTNN (+1.7% w/w), and DANGCEM (+1.2% w/w) drove the local bourse northwards. A flattish close for MTNN and DANGCEM will have seen the equities market close lower. That said, the benchmark All Share Index (NGX-ASI) climbed by 0.2% w/w to print at 54,327.3 points. Hence, YTD return strengthened to 6.1%, while market apitalization gained N62.2bn to print at N29.6tn. Activity level declined as average value and volume traded fell by 17.4% w/w and 75.1% w/w to N4.5bn and 188.9mn units. Investor sentiment weakened to 0.5x from 2.0x last week, as 24 tickers appreciated while 45 depreciated.

Across sectors, overall w/w performance was mainly bearish as only two (2) of the five (5) sectors we cover closed green. The Industrial goods sector (+0.7% w/w) led the gainers due to bargain-hunting in DANGCEM (+1.2% w/w) and WAPCO (+1.4% w/w). Trailing was the Oil & Gas sector (+0.6% w/w) on account of price appreciation in CONOIL (+20.9% w/w). On the flip side, the Insurance sector (-3.3% w/w) sector led the losers due to losses in AIICO (-4.8% w/w), MBENEFIT (-11.1% w/w) and PRESTIGE (-13.0% w/w). This was followed by the Banking (-0.9% w/w) and Consumer goods (-0.6% w/w) sectors, following selloffs in FIDELITY (-7.0% w/w), ACCESSCO (-1.1% w/w), NB (-3.1% w/w) and CHAMPION (-8.2% w/w).

On corporate actions, Presco Plc released its FY-2022 results with revenue climbing by 75.1% y/y to N83.0bn from N47.4bn. Despite a 204.1% y/y increase in finance cost, Profit After Tax (PAT) grew by 11.1% y/y to N21.5bn from N19.3bn.

This week, we expect the depressed interest rate environment to continue to favour the equities market in line with our expectations for Q1-2023. We note that the profit-taking activities seen during the week serve as a caution to market participants as the bears may fully resume.

Money Market Review: Stop rates decline at PMA

Last week, the financial system opened relatively liquid with a balance of N280.1bn. In line with our expectations, system liquidity continued to flourish through the week, consequent to the last-minute deposits from CBN’s campaign to return old banknotes. Funding rates between banks hovered around the 10.5% and 10.8% support. Despite the liquid financial system, the CBN has not conducted any OMO auctions since the start of the year, confirming our prognosis that the CRR debit will remain the apex bank’s most favoured mop-up mechanism.  Despite the CBN overselling the NT-bill auction at the PMA, the financial system closed the week liquid with a balance of N400.6bn. That said, the average Open Repo Rate (OPR) and Overnight Rate (OVN) declined slightly by 3bps w/w and 6bps w/w to close at 10.6% and 10.9% respectively.

On details of last week’s primary market activity, the CBN conducted an NT-bill auction with N217.1bn worth of bills on offer across the 91-day, 182-day and 364-day papers. The auction was met with overwhelming demand from investors amid the liquid financial system, with total subscription printing at N1.1tn, implying a bid-to-cover ratio of 4.5x with the 364-day bill oversubscribed by 4.8x. The CBN opted to oversell, with a total allotment of N417.1bn. Therefore, stop rates fell 19bps, 150bps and 254bps to close at 0.1%, 0.3%, and 2.24% across the 91-day, 182-day and 364-day papers respectively.

Investors sentiment from PMA trickled into the secondary NT-bills market, albeit mild, as they sought to fulfill unmet bids amid surplus financial system. As a result, the average yield on NT-bills fell by 10bps w/w to close at 1.5% (previously 1.6%). Similarly, the OMO bills segment was met with bullish sentiments from investors as the average yield on OMO bills declined 68bps to print at 1.3% (previously 2.0%).

Looking ahead into the week, we expect system liquidity to remain pivotal in the direction NT-bill yields, FTD and money market rates. On a broader scope, we expect funding rates between banks to be relatively stable this week, as it appears to have been capped with a 10.5% and 10.8% support, OPR and OVN respectively. Rates will remain depressed around the short end of the curve, supported by the liquid financial system.

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 16bps w/w to close at 13.1% (previously 13.2%). In tandem, corporate bonds traded on a bullish note, as the average yield on corporate bonds shed 36bps w/w to 12.5% (previously 12.8%).

On the other hand, the Nigerian Eurobonds market was met with sell-pressure as the overall abysmal investors’ sentiments toward Nigerian Eurobonds prevailed. Consequently, the average yields on Nigerian Eurobonds climbed 37bps w/w to close at 12.4% (previously 12.0%).

This week, we expect the liquidity position of the financial system to play a significant role in investors’ sentiment toward fixed-income instruments. We expect yields from the mid-to-long end of the curve to remain around current levels, supported by the recent MPR hike and the limited coupon inflow for Feb-2023. For the Eurobonds Market, we expect to see pockets of bullish sentiment from investors, driven by the expected $59.1mn Eurobond coupon payment, as investors will be poised to take advantage of the higher market yields.

Currency Market: The Naira closed flat at the I&E window.

Last week, the Naira closed flat against the US Dollar in the Investors & Exporters (I&E) window at N461.50/$. At the parallel market, we continue to find offer quotes in the N750.0/$- N755.0/$ range. Activities in the I&E window fell as average FX turnover fell by 32.6% w/w to $73.2mn. 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.