February 20, 2023/United Capital Research

Macro Highlight and Outlook

Last week, the National Bureau of Statistics (NBS) released the country’s Jan-2023 CPI Inflation report. From the report, general prices of goods and services climbed 21.8% y/y, higher than overall market expectations. This print is 48bps higher than the 21.3% y/y printed in Dec-2022. The core inflation component remained the key driver of the y/y increase, amid the infamous petrol scarcity situation.

Last week, the apex court in an interim order restrained the Federal Government from suspending the acceptance of the old naira notes.

The President of the Federal Republic of Nigeria, against the wish of the apex court, declared that the old N200 note would remain legal tender for the next 60 days, till April 10, 2023, while urging Nigerians to deposit their old N500 and 1000 notes with the CBN.

The Central Bank of Nigeria opened a portal for the collection of old naira notes from people who still have the notes with them. On the portal, crs.cbn.gov.ng, depositors are required to fill in their Bank Verification Number, phone number, email address, bank details, address, the amount to be deposited as well as the denominations to be deposited, after which a reference number would be generated. With the reference number, the depositor could track the status of the deposit through the portal.

The Central Bank of Nigeria implored Nigerians to make use of the eNaira and Internet banking as alternatives to the current naira scarcity.

According to data from Nigeria Interbank Settlement System (NIBSS), Nigeria’s mobile banking usage surged by 230.7% y/y in Jan-2023. The leap in the use of banking apps and mobile gateways is traceable to the Central Bank of Nigeria’s decision to redesign the naira and the introduction of a new withdrawal limit policy, which made bank customers embrace mobile banking for their transactions.

The queues for Premium Motor Spirit, popularly called petrol, at filling stations in Abuja, Lagos and other states, cleared gradually at the start of the week, following the release of increased volumes of PMS by the Federal Government. Oil marketers confirmed that additional volumes of petrol had been released by the Federal Government through the Nigerian National Petroleum Company Limited.

The Managing Director, Financial Derivatives Company, Bismarck Rewane, stated that Nigeria has lost about $18.0bn in productivity due to the naira and fuel scarcity that has persisted in the country in the last two weeks.

Last week, the President, Major General Muhammadu Buhari (retd), approved the Business Facilitation (Miscellaneous Provisions) Bill 2022. The bill seeks to promote the ease of doing business in Nigeria.

According to the International Monetary Fund (IMF), the Federal Government is projected to spend 82.0% of its revenue on interest payments in 2023.

The Nigerian Midstream and Downstream Petroleum Regulatory Authority, Central Bank of Nigeria and other relevant agencies set out to establish reliable data required for determining the appropriate methodology for the transportation and bulk storage of crude oil and natural gas in Nigeria.

At the start of the week, the Securities and Exchange Commission expressed its readiness to partner with the Nigerian Agricultural Insurance Corporation (NAIC) to deepen the commodities trading ecosystem and boost forex earnings.

The Bank of Industry (BoI) and the French Development Agency have signed a grant agreement for €2.5m delegated by the Green Climate Fund to fight climate change in Nigeria.

The grant agreement sets up a technical assistance scheme for BoI. It is designed to build the capacity of BoI, providing tools for effective identification and development of eligible bankable climate-related projects, as well as improving the readiness of the bank’s customers to implement green practices in their operations.

In reaction to FG claims that special intervention has brought aviation fuel to N600/ltr., domestic airlines have denied being beneficiaries of Federal Government-subsidized aviation fuel regime, stating that they still buy at the open market price average of N800/ltr.

This week, we expect a flurry of macro- and micro-economic data. The key data expected would be the Nigeria’s GDP by output report (Q4-2022 and FY-2022) to be released by the National Bureau of Statistics (NBS).

Global Markets: Mixed investors’ sentiments following data releases

Last week, the global equities market closed mixed amid a flurry of economic data releases and renewed fears of possible tightening of the benchmark interest rate by the Federal Reserves. According to the US Bureau of Labour Statistics, headline inflation rate slowed to 6.4% y/y in Jan-2023 from 6.5% y/y in Dec-2022. This is the lowest since Oct-2021, supported by a slowing down in food prices. However, it remains more than three times above the Fed’s 2.0% target, indicating that the Fed may likely hike interest rates at its next meeting. This weighed on investors’ sentiment in the market as major US indices recorded selloffs. The bearish sentiment was short-lived following the release of the US retail sales numbers for Jan-2023, which spurred gains in the market. The data showed that retail sales climbed by 3.0% m/m, the biggest increase since Mar-2021, signalling robust consumer spending amid a strong labour market, wage growth and signs of easing inflationary pressures. However, the market reversed previous gains, reacting negatively to the Producer Price Index (PPI) numbers. According to the US Bureau of Labor Statistics (BLS), producer prices increased 0.7% m/m in Jan-2023, the most in seven months, reiterating the investors’ worries about further rate hikes. In addition, downbeat commentaries from some FOMC members fueled the bearish sentiments. That said, the US equities market closed mixed, as all the major indices recorded weekly losses except one. The NASDAQ Composite (+0.6% w/w) was the sole gainer, while the S&P 500 and DJIA fell by 0.3% w/w and 0.1% w/w, respectively.

In contrast, the European markets recorded w/w gains due to positive economic data releases and corporate earnings across the continent. According to the Office of National Statistics (ONS), UK’s headline inflation fell for the third consecutive month to 10.1% y/y in Jan-2023, the lowest since Sep-2022, from 10.5% y/y in Dec-2022. In addition, retail sales increased 0.5% m/m in Jan-2023, rebounding from an upwardly revised 1.2% drop in Dec-2022. Lastly, wages in the UK grew by 6.7% in Q4-2022 while the unemployment rate remained unchanged at 3.7%. In Germany, producer inflation eased to 17.8% y/y in Jan-2023 from 21.6% in the prior month. Despite France’s inflation numbers accelerating to 6.0% in the period under review from 5.9% in Dec-2022, it was not sufficient to drag the country’s index down as the France CAC gained 3.1% w/w. At the end of the week, the Europe STOXX (+1.4%), UK FTSE (+1.5%) and Germany DAX (+1.1%) closed higher.

The Asian market closed mixed, as hawkish remarks from the Fed members weighed on investors’ sentiments. Expectations about Fed’s further tightening raised concerns that the People’s Bank of China (PBOC) would delay more easing measures to avoid an even wider interest rate gap. In Japan, the Minister of Finance reported that the country’s trade deficit increased by 59.0% y/y in Jan-2022 to 3.5tn yen from 2.2tn yen in Jan-2022 due to weakening global demand and elevated import costs. This was the 18th straight month of a trade shortfall, raising concerns over the strength of the country’s economic recovery. Despite the Japanese economy growing by 0.6% y/y in Q4-2022 from a revised 1.0% contraction in the previous quarter, the Japanese NIKKEI closed lower, declining by 0.6% w/w. Overall, the capitalisation-weighted Shanghai Composite Index fell by 1.8% w/w, while the Indian SENSEX (+0.5% w/w) climbed the week higher due to continued buy-interest from foreign institutional investors in Indian equities.

Last week, crude oil prices fell as U.S. economic data heightened concerns that the Federal Reserve may further tighten monetary policy to tackle inflation, a move that could hurt fuel demand. In addition, the US government announced its plan to release more crude from its Strategic Petroleum Reserve (SPR) amid build-ups in its inventories. Overall, from a w/w perspective, oil prices closed lower, with Brent Crude losing 4.5% w/w to print at $82.51/bbl.

This week, the focus will be on the FOMC Meeting minutes and speeches by the Fed officials. In addition, we expect the Purchasing Managers’ Index (PMI) manufacturing and services data for major economies, including US, UK, France, Germany, and Japan. These data releases amid rate hike decisions and corporate earnings will determine the market’s direction.

Domestic Equities: Local bourse halts bullish run…ASI is down 1.0% w/w

Last week, in the local equities market the bears dominated the market ending the extended thirteen w/w rally due to profit taking activities particularly across the banking stocks. The NGX-ASI closed green in four out of the five trading sessions of the week. Notably, share price depreciation of large and mid-cap stocks, AIRTELAFRI (-6.0% w/w), FIDELITY (-14.7% w/w), and FBNH (-1.7% w/w), FCMB (+4.3% w/w), spearheaded the bourse’s southward close. As a result, the benchmark All Share Index (NGX-ASI) fell by 1.0% w/w to print at 53,804.46 points. Hence, YTD return weakened to 5.0%, while market capitalisation lost N386.2bn to print at N29.3tn. Activity level declined significantly in tandem with overall investor sentiment, as average volume and value traded fell by 20.4% w/w and 9.4% w/w to print at 150.4mn units and N4.1bn, respectively. Investor sentiment strengthened to 1.3x from 0.5x last week, as 36 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 Insurance (+1.2% w/w) sector led the gainers due to share price appreciation in WAPIC (+4.7% w/w), CHIPLC (+6.4% w/w) and LINKASSU (+7.1% w/w). This was followed by the Oil & Gas sector (+0.9% w/w) owing to increased bargain hunting across CONOIL (+11.1% w/w) and MRSOIL (+3.7% w/w). The Consumer goods (+0.7% w/w) and Industrial goods (+0.1% w/w) sectors trailed behind in ranks, owing to buy-pressure across GUINNESS (+7.1% w/w), NB (+1.2% w/w), FLOURMIL (+3.2% w/w), WAPCO (+1.0% w/w), TRIPPLEG (+45.3% w/w) and CUTIX (+2.4% w/w). On the flip side, the Banking sector (-1.3% w/w) was the sole loser due to losses in FIDELITY (-14.7% w/w), ZENITHBA (-0.8% w/w) and WEMABANK (-3.2% w/w).

Our long-time expectation for a trend reversal with the bears taking the center stage has come to fruition. Going into the week, we expect an extended bearish momentum across board, with post-election worries stimulating the bear market. We recommend that BUY-SIDE investors and fund managers sit on the sideline, in a bid “wait and observe” the market. Equity stakeholders can look to book profits off stocks that have crossed the overbought region as indicated by the RSI. However, we believe that this brief bearish momentum would present further opportunities for the BUY-SIDE to increase holdings (in the near-term) on fundamentally sound stocks with improved valuation and dividend performance.

Money Market Review: Lesser system liquidity drives funding rates higher

Last week, the financial system opened relatively liquid with a balance of N423.0bn. Liquidity remained elevated through to Wednesday, primarily due to inflows from the broader economy as directed by the Central Bank. However, following the President’s approval for the use of old N200 notes till 10-Apr as a measure to ease the cash crunch, inflows to the system moderated and withdrawals increased. Also, investors focused on the N360.0bn on offer at the FGN Bond auction. Consequently, the financial system closed the week less liquid with a balance of N156.6bn. Therefore, the Open Repo Rate (OPR) and Overnight Rate (OVN) rose by 6.5ppts w/w and 6.9ppts w/w to close at 17.1% and 17.8% respectively.

At the secondary market for NT bills, bearish sentiments returned particularly after the country’s inflation print for Jan-2023 was released. As a result, the average yield on NT bills climbed by 2.5ppts w/w to close at 4.03% (previously 1.5%).

Looking ahead, we reduce our previously ascribed weighting on the impact of the inflow from the old naira notes on the liquidity situation of the financial system. We note that over 70.0% of the N2.7tn currency in circulation has been mopped back into the financial system. This week, we expect N70.0bn OMO maturities to hit the system, adding to the existing liquidity in the system. The CBN will conduct the second NT bill auction for the month with a total offer size of N251.8bn. At the auction, we expect stop rates on the longer tenor bills to inch slightly higher driven by less buoyant system liquidity vs offer size. Overall, we expect NT-bill yields, FTD and money market rates to remain depressed this week (around current levels), as the financial system is expected to remain relatively liquid. Funding rates will most likely hover at current levels, to inch lower toward the end of the week.

Bond Market: DMO’s strategy drives marginal rates on longer tenor papers higher

Last week, the Debt Management Office (DMO) conducted a bond Auction, with N360.0bn worth of papers on offer across 2028s, 2032s, 2037s, and 2029s. At the auction, investors’ demand came in strong with overall bids summing up to N992.1bn implying a bid-to-cover ratio of 2.8x. The DMO opted to oversell the auction by an allotment rate of 1.8x, selling N662.6bn worth of papers across the tenors on offer. Notably, investors’ interest was mainly skewed toward longer tenors, as the bulk of investors bid to the tune of 52.6% (N522.1bn) of total bids came for the 2037s and 2049s. The marginal rate on the longer tenor papers (2037s and 2049s) climbed by c.10bps each, to settle at 15.9% and 16.0% respectively. The observed upward climb is largely down to the DMO’s decision to oversell the auction, as allotment-to-offer ratio for the 2037s and 2049s printed at 2.5x and 2.7x respectively, indicating the FG’s strategy of frontloading debt issuances and a likely reliance of domestic debt to fund budget deficit. The marginal rate on the 2032s remained unchanged at 14.9% and attracted the least interest from investors at the auction, as it was undersubscribed by 0.9x. However, the marginal rate on the 2028s declined by 1bp to settle at 13.99% from 14.0%. 

The secondary bonds market was broadly bearish last week, as the market began pricing in the potential impact of the higher-than-expected inflation print, particularly at the next MPC meeting. Overall, the average yield across sovereign bonds rose by 16bps w/w to close at 13.26% (previously 13.1%). In tandem, corporate bonds traded on a bearish note, as the average yield on corporate bonds rose 39bps w/w to 12.9% (previously 12.5%).

On the other hand, the Nigerian Eurobonds market witnessed bullish sentiment, driven by the $59.1mn coupon payment. Consequently, the average yields on Nigerian Eurobonds fell 6bps w/w to close at 12.3% (previously 12.4%).

This week, we expect the bearish sentiments to persist particularly at the long end of the curve. The strategy implication is for bond investors to shun long trading activities at the tail of the curve while short selling will be a preferred strategy, albeit with limited upside as yield curve volatility remains low. For obligated investors, minimizing duration exposure when picking bonds will be crucial to defending portfolios from further steepening of the yield curve. In the Eurobonds Market, we expect the return of bearish sentiments this week in the absence of any coupon payments. This will be in tandem with the observed abysmal investor interest toward SSA Eurobonds owing to the increasing debt sustainability risks in the region.

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

Last week, the Naira appreciated 5bps against the US Dollar in the Investors & Exporters (I&E) window to close the week at N461.25/$. At the parallel market, we continue to find offer quotes in the N745.0/$- N755.0/$ range. Activities in the I&E window improved as average FX turnover climbed by 47.3% w/w to $103.8mn. 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.