March 6, 2023/United Capital Research

Macroeconomic Highlights and Outlook

The Supreme Court nullified the ban on using the old N200, N500 and N1000 banknotes as legal tenders. In a unanimous decision by a seven-member panel of Justices, the apex court held that the old banknotes should remain valid legal tenders until 31 December 2023.

According to the National Bureau of Statistics (NBS), data from the Transport Fare Watch January 2023 report, average domestic airfare passengers pay increased by 94.8% in the past 12 months. The development came amid reports of various challenges facing the local aviation industry.

The Monetary Policy Committee (MPC) indicated in its communiqué No. 146 that Deposit Money Banks (DMBs) offered 130,854 new credits valued at N947.5bn to their customers in December 2022.

The Central Bank of Nigeria (CBN) revealed that the country’s external reserves fell by $317.0mn in February 2023 to settle at $36.7bn at the end of the month from the $37.0bn balance as of 31 January 2023. This reflects the exchange rate pressure accentuated by heightened demand and slow reserve accretion.

According to Reuters’ survey on Nigeria’s oil output for February 2023, Nigeria’s earnings from oil export rose marginally in February 2023 as oil output increased by 100,000bpd. A breakdown of the statistics showed that a rise in crude oil production by 100,000bpd translates to a 2.8 million output in February. Nigeria’s crude grade, Bonny Light, was sold for $84.0/bbl in February 2023, translating to total earnings of about N1.4tn.

The International Monetary Fund (IMF) stated in its report  “Nigeria select issues” that only 24.0% of loans disbursed under the Anchor Borrowers’ Programme (ABP) of the CBN) has been repaid. In addition, banks’ credit to the private sector rose to N42.3tn at the end of January 2023 from N35.2tn recorded in the corresponding period of 2022. This represents a 20.1% y/y increase as banks continue to aim at stimulating production and productivity across the real sector.

The CBN also indicated that the country’s total currency-in-circulation dropped by 58.1% to N1.4tn as of January 2023 from N3.3tn as of the end of October 2022 as a result of the naira redesign policy.

This week, we expect the Macroeconomic space to be relatively quiet. The NBS will release the Foreign Trade in Goods Statistics (Q4 2022 and Full Year 2022) report.

Global Markets: Markets Remain Resilient

The S&P500 began the week after three consecutive weeks of negative showing, pulling back 6.0% from January 2023 highs. This theme continued into the week. The price component of the ISM Manufacturing moved back into expansionary territory (51.3 from 44.5), a significant spike following ten straight months of decline. It suggests a halt to goods disinflation. US markets also reacted to the EU CPI print, which came in above expectations, and the large revision to the US Q4-2022 Productivity report in which unit labour costs settled at 3.1% from 1.1% reported exceeding expectations.  However, there were some upside for markets following the EU PPI, which printed well below expectations, breaking the string of negative data. Therefore, markets rallied to end the week higher. The S&P500, DJIA and NASDAQ closed 1.9% w/w, 1.7% w/w and 2.5% w/w respectively.

In Europe, financial markets remained resilient despite deep concerns regarding aggressive monetary policy tightening by the European Central Bank (ECB) following elevated inflation data. Eurozone inflation moderated to 8.5% y/y in February 2023 (vs 8.6% y/y in January 2023). However, Core inflation rose to 5.6% y/y from 5.3% y/y in the prior month. ECB’s President indicated that a further 50bps hike is probable in its 16 March 2023 meeting, hence, driving the bond yields northwards—the yield on Italian 10-yr. Government bonds hit new 2023 highs, while German Sovereign Bonds of the same maturity rose above 2.7%. Stock indexes advanced as investors focused on the region’s improved economic outlook. Similarly, the pan-European STOXX Europe 600 Index gained 1.43% w/w, Germany’s DAX Index rose 2.4% w/w, France’s CAC 40 Index gained 2.2% w/w, and Italy’s FTSE MIB Index climbed 3.1% w/w. The UK’s FTSE 100 rose 0.9% w/w.

In Asia, Japan’s stock market made gains as the Bank of Japan (BoJ) Governor emphasised monetary policy continuity, defending the merits of accommodative monetary policy. Markets also responded positively to signs that the Chinese economy is recovering from COVID lockdowns. Japan, in turn, is easing entry requirements for arrivals from mainland China. The Nikkei rose 1.7% w/w, and the broader TOPIX index rose 1.6% w/w. In China, stocks rose for the second consecutive week ahead of the National People’s Congress (NPC) meeting, even as strong data (including manufacturing and nonmanufacturing PMI) indicate the economy is expanding. Also, the Governor of the People’s Bank of China (PBOC) signaled that the PBOC could cut the reserve requirement ratio for banks to support the economy. Consequently, The Shanghai Stock Exchange Index increased by 1.9% w/w.

The economically sensitive oil market experienced an intense week on the back of China data. ICE Brent was volatile at the week’s close following a Wall Street Journal report which suggested the UAE was considering leaving OPEC amid discord with Saudi Arabia. However, the story was refuted, and oil rebounded. Thus, Brent Crude was up 3.6% w/w.

This week, the focus will return to macroeconomic data as markets move past the earnings season. Central Banks will be in focus as Japan, Canada, and Australia make decisions on their respective benchmark interest rates. February’s BLS Employment Report, JOLTS Job Openings, and ADP Employment change data will be released in the US. This is as Fed Chair; Powell holds a 2-day testimony to the House Financial Services Committee in Congress. Also, given recent repricing in Treasury markets, the upcoming $90.0bn 3yr., 10yr., and 30yr. auctions will be closely observed. In Asia, China’s National People’s Congress began its annual meeting over the weekend.

Domestic Equities: The Bulls Remain Resilient… ASI up 106bps w/w

Last week, the bulls remained resilient amid underlying post-election uncertainties. The local equities market closed on a positive note, notably owing to the share price appreciation across GEREGU (+31.4% w/w), BUAFOODS (+10.5% w/w), DANGCEM (+2.2% w/w), and STANBIC (+18.8% w/w). The NGX-ASI closed green in three of the five weekly trading sessions; climbing 106bps w/w to settle at 55,529.2pts, its highest print in 14 years. Hence, YTD return strengthened to 8.3%, while market capitalisation grew to N30.4tn. Activity level was mixed, as the average volume of shares traded climbed 49.7% w/w to print at 201.4mn, while the value of shares traded declined by 5.2% w/w to print at N3.2bn. Investor sentiment strengthened to 2.5x from 1.8x last week, as 53 tickers appreciated while 21 depreciated.

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 (+5.6% w/w) sector led gainers due to share price appreciation in BUAFOODS (+10.5% w/w) and DANGSUGA (+11.6% w/w). The Industrial goods (+1.4% w/w), Banking (+1.2% w/w) and Insurance (+0.9% w/w) sectors trailed, owing to increased buy-interest across DANGCEM (+2.2% w/w), WAPCO (+5.5% w/w), ZENITHBA (+3.3% w/w), ACCESSCO (+1.6% w/w), WEMABANK (+8.7% w/w), CORNERST (+8.3% w/w), SUNUASSU (+18.9% w/w) and VERITASK (+10.0% w/w). Conversely, the Oil & Gas sector closed red last week on the back of share price depreciation in SEPLAT (-9.4% w/w).

On corporate actions, SEPLAT recorded a decent 29.8% y/y increase in its revenue in FY-2022, closing the year strong with a 72.8% y/y upsurge in gross profit (Naira terms). PAT dipped by 5.3% y/y in FY-2022 (Naira terms). Announced final dividend of $0.15 (including special dividend), up by 50.0% vs US10 cents in FY-2021. NASCON recorded a decent 76.7% y/y increase in its revenue base in FY-2022. PAT improved by 85.2% y/y in FY-2022. Announced final dividend of N1.00k per share. DANGSUGA recorded a decent 46.1% y/y appreciation in revenue in FY-2022. PAT accelerated by 147.5% y/y in FY-2022. NESTLE recorded a decent 27.0% y/y increase in revenue, and its PAT improved by 22.0% y/y in FY-2022. NESTLE went ahead to announce a final dividend of N36.50k per 50 kobo ordinary share. DANGCEM announced a proposed dividend of N20.0 per share. LAFARGE recorded a decent 27.3% y/y increase in revenue as its PAT improved by 5.1% y/y in FY-2022, however, limited by a 314.3% y/y upsurge in finance costs for the period (with foreign exchange losses printing at N13.1bn from N0.0bn in FY-2021). LAFARGE also announced a proposed dividend of N2.0 per share.

This week, we expect the overall bullish sentiments in the equities market to linger. This is hinged on the view that investors’ bullish sentiments will prevail amid post-election uncertainties and a depressed interest rate environment, particularly at the short end of the curve. We foresee opportunities for BUY-SIDE investors to increase holdings (in the near term) on fundamentally sound stocks with improved valuation and dividend yield. Nonetheless, we still expect profit-booking activities on stocks that have crossed the overbought region, as indicated by the RSI.

Money Market Review: System Liquidity Remains Elevated

Last week, the financial system opened liquid with a balance of N717.6bn. Inflows further bolstered the system from OMO maturities of N70.0bn. Overall, system liquidity closed the week buoyant with a balance of N985.5bn as the residual from last week’s FAAC inflow remained in the system. Consequently, the average Open Repo Rate (OPR) and Overnight Rate (OVN) declined by 253bps w/w and 266bps w/w to close the week at 10.8% and 11.1%, respectively.

In the secondary NT-bills market, we observed mild selloffs as investors were weary of the uncertainties of the general elections. As a result, the average yield on NT bills climbed by 4bps w/w to close at 4.0%. On the other hand, the average yield on OMO bills fell by 75bps w/w to print at 3.0%.

This week, we expect the CBN to roll over N224.5bn worth of maturing NT-bills. At the auction, we expect stop rates to settle lower compared to the previous auction, given the buoyant liquidity. In addition, we anticipate a total of N50.0bn worth of OMO maturities to hit the system.

Bond Market: Bearish Sentiments Resume Across the Market

Last week, we observed bearish sentiments across the secondary bonds markets. Overall, the average yield across sovereign bonds rose by 11bps w/w to close at 13.3%. In tandem, corporate bonds traded on a bearish note, albeit steeper, as the average yield on corporate bonds rose by 35bps w/w to 13.2%.

Similarly, sell pressures dominated the Nigerian Eurobonds market as investors resumed disposing of their bond holdings. Thus, average yields increased by 23bps w/w to close at 12.3%.

Looking forward, we expect a relatively quiet market as investors shift their focus to the activities in the NT-bills auction in the primary market. In the Eurobonds market, the sell pressures in the market will continue to be driven by risk-on investor sentiment.

Currency Market: The Naira Appreciated at the I&E Window.

Last week, the Naira appreciated 10bps against the US Dollar in the Investors & Exporters (I&E) window to close the week at N461.3/$. We find offer quotes in the N745.0/$ – N755.0/$ range at the parallel market. Activities in the I&E window worsened as average FX turnover declined by 16.0% w/w to $73.0mn. Also, the most recent CBN data register Nigeria’s external reserves at $36.6bn.

Going forward, we expect continued pressure on the Naira across all market segments, given sustained expectations of weak FX earnings and inflows amid unabated FX demand pressures.

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