February 27, 2023/United Capital Research

Macro Highlight and Outlook
According to the National Bureau of Statistics (NBS), Nigeria’s real Gross Domestic Product (GDP) grew by 3.5% y/y in Q4-2022, following a 2.3% y/y growth in the previous quarter. The increase was driven by the services sector, which recorded a growth of 5.7% y/y and contributed 56.3% to aggregate GDP. Overall, in FY-2022, the Nigerian economy slowed to 3.1% from the 3.4% growth recorded in 2021 as growth in the agriculture and industry sectors reduced in 2022.

The Federal Government (FG) has commenced the construction of an electricity substation with six feeders and stated that the project would help grow the country’s power transmission capacity to 25,000MW. Nigeria’s power transmission capacity currently hovers around 7,500MW and 8,000MW, though electricity generation on the national grid has fluctuated between 4,000MW and 5,000MW for several years.

The Nigerian National Petroleum Company Limited (NNPCL) stated that Nigeria’s oil production had increased to 1.6mbpd, still short of the 1.8mbpd quota allocated to Nigeria by the Organisation of Petroleum Exporting Countries (OPEC).

The Central Bank of Nigeria’s (CBN) money and credit statistics revealed that money supply (M3) in the economy increased to N53.3tn in Jan-2023, representing a 17.9% y/y increase from N45.2tn reported in Jan-2022. This is on the back of the federal government’s increased borrowing from the CBN.

According to the CBN, the total amount of currency-in-circulation in the Nigerian economy has tumbled from N3.3tn to N1.54tn, a 53.3% decline between Nov-2022 and Feb-2023.
 
This week, we expect the National Bureau of Statistics (NBS) to release Nigeria’s Company Income Tax Data for Q4-2022. Other than that, we expect the macroeconomic space to be relatively quiet.
 
Global Markets: The bears dominate the market
Last week the US equities market fell sharply following worrisome signs that inflation might have reversed course and accelerated again as the year began. A cascade of upside inflation and growth surprises pushed the S&P 500 Index to its worst weekly loss since early Dec-2022. At its close on Friday, the index had surrendered roughly 35% of the rally that began in October, but it remained up 3.4% YTD. The declines pushed the narrowly focused Dow Jones Industrial Average (DJIA) into negative territory for 2023. Communication services and consumer discretionary stocks performed worst within the S&P 500, but the declines were widespread, and growth stocks fell only modestly more than value shares. On Friday, the Commerce Department reported that its core (less food and energy) personal consumption expenditures (PCE) price index jumped 0.6% in Jan-2023, above expectations of an increase of 0.4% and its biggest rise since Aug-2022. Dec-2022’s figure was also revised higher, pushing the year-over-year increase (widely considered to be the Federal Reserve’s preferred inflation gauge) from 4.6% to 4.7%, the first pickup in pace since Sep-2022. Consensus expectations had been for another decline to around 4.3%. Along similar lines, personal spending rose a solid 1.8% in Jan-2023, the biggest increase in nearly two years and also well above expectations. Overall, the major U.S. stock indices closed the week in the red, with the NASDAQ Composite, DJIA, and S&P 500 shedding 3.3% w/w, 3.0% w/w, and 2.7% w/w, respectively.

Shares in Europe fell as better-than-expected economic data and corporate earnings raised the prospect that central banks might persist with interest rate increases. Inflation in the eurozone eased in Jan-2023 to an annual rate of 8.6% from 9.2% the previous month (Dec-2022). That was only marginally higher than the initial estimate, even after data from Germany showed that consumer price growth remained elevated in the bloc’s largest economy. According to PMI data from S&P Global/CIPS, business activity in the UK manufacturing and services sectors unexpectedly ticked up in Feb-2023. The survey indicated that prices charged by companies eased only fractionally during the month, and many firms mentioned the need to pass on higher wages, food costs, and energy bills. In local currency terms, the pan-European STOXX Europe 600 Index ended 1.4% lower w/w. Major country-based stock indexes also declined. Germany’s DAX Index lost 1.8% w/w, France’s CAC 40 Index slid 2.2% w/w, and Italy’s FTSE MIB Index dropped 2.8% w/w. The UK’s FTSE 100 Index gave up 1.6% w/w.

In Asia, equities markets closed mixed. Chinese stocks advanced after three weeks of losses as hopes for stepped-up regulatory support offset concerns about elevated U.S. tensions. The apitalization-weighted Shanghai Composite climbed 1.3% w/w. China’s yuan currency dropped to a seven-week low against the dollar after the release of unexpectedly strong U.S. inflation data on Friday signalling further interest rate hikes by the US Fed. Equities in Japan lost ground over the week, with the Nikkei Index falling 0.2% w/w. Comments perceived as dovish by incoming Bank of Japan (BoJ) Governor Kazuo Ueda lent some support to markets on Friday, but this was outweighed by general worries about the impact of further interest rate hikes by the U.S. Federal Reserve. Surging consumer prices added fresh pressure on the BoJ to start scaling back its massive stimulus program. India’s Sensex fell 2.5% w/w.

In the crude oil market, prices climbed at the beginning of the week buoyed by sustained optimism over Chinese demand, continued production curbs by significant producers, and Russia’s plans to rein in supply. Into the week, renewed concerns of another rate hike by US Fed triggered fears of lesser oil demand from the world’s largest economy. That said, oil prices remained around previous levels, with Brent Futures closing the week 19bps higher to print at $83.16/bbl as of Friday, 24-Feb-2023.

This week, we expect the possible upward reversal of the US inflation curve to continue to fuel investors’ bearish sentiments toward US equities. We expect the sentiment situation in the US to trickle down toward other major global indices, including the European markets. Lastly, we expect economic developments in China to remain key in the direction of oil price per barrel for the week.
 
Domestic Equities: ASI up 213bps w/w
Last week, in the local equities market closed bullish, up 2.1% w/w to close at 54,949.21pts, its highest print in 14 years. The NGX-ASI closed green in four out of the five trading sessions of the week. Notably, share price appreciation in AIRTELAFRI (+3.9% w/w), BUAFOODS (+15.6% w/w), and GEREGU (+13.8% w/w) spearheaded the bourse close. Hence, YTD return strenghtened to 7.2%, while market capitalisation grew to N29.9tn.

From a sectoral viewpoint, overall w/w performance was bullish as four (4) of the five (5) sectors we cover closed green. The Consumer Goods index (+6.3% w/w) sector led gainers due to share price appreciation in BUAFOODS (+15.6% w/w), NB (+1.2% w/w) and FLOURMILLS (+3.7% w/w). The Oil and Gas index (+2.7% w/w) sector follower due to share price appreciation in CONOIL (+20.9% w/w) and MRSOIL (+32.8% w/w). The Banking index (+2.2% w/w) sector gained due to share price appreciation in ZENITHBA (+3.0% w/w), ETI (+5.3% w/w), FIDELITY (+6.1% w/w) and UBA (+1.8% w/w). Also, The Industrial index (+0.3% w/w) sector gained due to share price appreciation in DANGCEM (+0.7% w/w) and TRIPPLEG (+31.7% w/w). However, the Insurance index remained unchanged as gains in MBENEFIT (+3.1% w/w) were erased by losses in WAPIC (-2.2% w/w).

This week, we expect the equities market to remain bullish despite post-election uncertainties. We foresee opportunities for the BUY-SIDE to increase holdings (in the near-term) on fundamentally sound stocks with improved valuation and dividend performance. Nonetheless, we still expect profit-booking activity for overbought stocks.

Money Market Review: Stop rates surge at the primary market
Last week, the financial system started the week in a deficit of N57.8bn as the influx of inflows due to the Naira redesign policy began to wane. However, within the week, the system became liquid on the back of OMO maturities of N70.0bn and FAAC inflows of N355.0bn that hit the financial system. Thus, the system closed the week with surplus liquidity of N662.6bn. Therefore, Interbank rates declined. The Open Repo Rate (OPR) and Overnight Rate (OVN) fell by 6.6ppts w/w and 7.0ppts w/w to close at 10.5% and 10.8%, respectively.

In the passing week, the CBN conducted an NT-bill primary market auction with N236.5bn worth of bills on offer across the 91-day, 182-day and 364-day papers. Demand from investors at the auction was strong, with total subscription printing at N296.8bn, implying a bid-to-cover ratio of 1.3x. The CBN opted to sell the exact amount on offer. The temporarily illiquid financial system pre-auction led investors to be more aggressive with bids. Thus, stop rates climbed significantly by 2.9ppt each for the 91-day and 182-day papers to settle at 3.0% and 3.2%, respectively, while the stop rate on the 364-day paper rose by 7.7ppt to 9.9%.

Bullish sentiment trickled into the secondary market after the PMA. The average yield on NT-bills fell by 5bps w/w to close at 4.0%.

Looking ahead, 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 due to inflows from maturities. Funding rates will most likely hover at current levels to inch lower toward the end of the week. This week, we expect N70.0bn OMO maturities to hit the system, adding to the existing liquidity in the system.

Bond Market: Investors bullish on Nigeria’s papers
The secondary bonds market was broadly bullish last week as investors sort to reinvest coupon inflows of worth c. N66.8bn that hit the system. Overall, the average yield across sovereign bonds fell by 12bps w/w to close at 13.1%. In tandem, corporate bonds traded on a bullish note, as the average yield on corporate bonds declined by 6bps w/w to 12.8%.

Similarly, the Nigerian Eurobonds market extended its bullish run as the average yields on Nigerian Eurobonds fell 30bps w/w to close at 12.0%.

This week, we expect the direction of the bonds market will largely be muted with the potential for an upward tilt.

Currency Market: Naira appreciated at the I&E window
Last week, the Naira appreciated marginally by 2bps w/w at the Investors & Exporters (I&E) window to close at N461.8/$, from its previous close of N461.3/$. At the parallel market, we continue to find offer quotes in the N750.0/$- N770.0/$ range. Activities in the I&E window weakened, with average FX turnover declining by 16.3% w/w to settle at $86.8mn. Similarly, Nigeria’s external reserves fell by 10bps w/w, losing $37.0mn to close at $36.7bn.

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.