March 20, 2023/United Capital
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Macro Highlight and Outlook
The National Bureau of Statistics (NBS) released the country’s February 2023 Consumer Price Index (CPI) report on Wednesday, 15 March 2023. Extracts from the report revealed that, Inflation rose by 9bps in February 2023 to settle at 21.91% y/y compared to 21.82% reported in January 2023. The rise in inflation rate was partly buoyed by Naira crisis across the country and uncertainties arising from the just concluded presidential election. On a m/m basis, headline Inflation climbed 1.7% in February as against 1.9% recorded in January.
The food inflation component, which increased 1.9% m/m in February compared to 2.1% m/m in January, was the main driver of inflation. The NBS stated that increases in the costs of fish, fruits, meat, vegetables, bread & cereals, potatoes, yams, and other tubers caused the rise in food inflation in February.
On the other hand, the core inflation component increased by 1.1% m/m compared to 1.8% m/m in January. The most significant price rises were seen in gas, air travel, liquid fuel, fuel & lubricants for personal transport equipment, vehicle parts, and solid fuel, etc.
The Organisation of Petroleum Exporting Countries (OPEC) in its most recent monthly oil market report revealed that, Nigeria produced 1.3mbpd in Feb-2023. This figure essentially surpassed the output of peers like Angola and Algeria, thus retaining its status as the continent’s largest producer of crude oil.
The Nigerian National Petroleum Company (NNPC) Limited disclosed that consumption of premium motor spirit (petrol) has risen to about 80.0mn litres daily. Consequently, the increased consumption of premium motor spirit has pushed subsidy on the commodity upward to an estimated N484.0bn monthly.
The Nigerian Communication Commission (NCC) has announced uniform short codes for the nation’s mobile networks. Henceforth, users of MTN, Airtel, Glo, and 9mobile will be able to recharge, check account balances, and access other services using the short codes.
The NCC also announced plans to introduce measures to curb data depletion and ensure that telecom subscribers get value for their money. Similarly, the NCC noted that the issue of data depletion is one of the most prevalent complaints received from telecom customers.
Deposit Money Banks (DMBs) have slashed the amount of Personal Travel Allowance (PTA) for customers seeking to travel out of the country. Subsequently, some DMBs have slashed the PTA from $4,000 to $2,000 for travelers, whilst school fee was slashed from $15,000 to $7,500 per semester for students schooling abroad. According to the DMBs, the slash was buoyed by the worsening foreign exchange crisis.
At the end of the week, President Muhammadu Buhari approved a constitutional amendment that gives states the authority to grant electricity generation, transmission, and distribution licenses. The aim of the policy is to draw more private investments into the energy sector as well as bolster the generation, transmission and distribution of electricity in the country.
Furthermore, states’ legislature and judicial systems were granted financial autonomy. This gesture is considered as a significant development in Nigeria’s governance structure, and this may lead to improvement in states’ legislature and judicial systems.
The Monetary Policy Committee (MPC, or the Committee) is expected to make a significant decision this week on Tuesday, 21 March 2023. Although we believe that the Committee will most likely retain monetary policy rate (MPR) at 17.5%, the elevated inflation rate would be a compelling argument for a modest hike. However, our prognosis (for a retain decision) is on the view that, additional hikes may further depress the economy, given the effect of the current cash crunch (caused by Naira redesign policy as well as cashless policy) on productivity.
Global Markets: Mixed Investors’ Sentiments Following the Crisis in the Banking Sector
Last week, the global equities market closed mixed amid concerns on global financial system and monetary policy tightening measures. In the US, banking worries that began the previous week weighed on investors’ sentiments. Thus, the US Treasury, Federal Reserve (the Fed), and Federal Deposit Insurance Corporation (FDIC) assured that all depositors’ funds at Silicon Valley Bank (SVB) and Signature Bank would be fully protected and paid in full. In addition, the Fed introduced a Bank Term Funding Program (BTFP) that will help banks avert selling long-term securities at a loss. The core feature of the BTFP is the provision of short-term loans to eligible financial institutions in exchange for specific long-term securities pledged as collateral. These measures were designed to shore up confidence in the banking industry, conversely, price depreciation in banking stocks suggested otherwise.
In the same vein, a group of large US banks announced a $30.0bn package to rescue San Francisco-based First Republic Bank (FRC), to prevent it from becoming the fourth bank to fail in less than two weeks. FRC recorded large losses after announcing the suspension of its dividend payment and stated that, its borrowings from the Federal Reserve within the week varied from $20.0bn to $109.0bn. Due to investors lack of confidence in the banking industry, the global market witnessed massive buy interests in non-banking mega-cap stocks with strong fundamentals. This was evidenced in the performances of stocks in the communication services and information technology sectors. Consequently, the US equities market closed mixed, as all the major indices recorded weekly gains except one. The DIJA (-0.1% w/w) was the sole loser, while the S&P 500 and NASDAQ composite gained 1.4% w/w and 4.4% w/w, respectively.
In contrast, the European markets recorded w/w losses as concerns on banking industry worsened as investors expressed fears that the current issues in the global banking space may lead to recession. As a result, during the week, the share price of Credit Suisse Bank (the Bank) slumped more than 25.0% after the top shareholder (Saudi National Bank) ruled out further provision of funds to the Bank. This liquidity crisis made Credit Suisse Bank announce its plans to borrow as much as CHF50.0bn (£45.0bn) liquidity facility from a Swiss National Bank. This further raised concerns about the health of the global financial system, hence, rattling investors and increasing selloffs in the market.
Elsewhere, the British Finance Minister, Jeremy Hunt, pledged to halve inflation, grow the economy, and reduce debts in his Spring Budget. Thus, inflation is projected to fall to 2.9% by the end of 2023 from 10.7% in 2022. Based on the foregoing, investors interpreted this as a possibility of further rate hikes during the year. Hence, the UK FTSE lost 5.3% w/w. Lastly, the European Central Bank (ECB) hiked its benchmark interest rate by 50bps to 3.0%, despite the recent turmoil in the banking sector, reiterating its strong fight against rising inflationary pressures in the region. At the end of the week, the Europe STOXX (-3.8% w/w), France CAC (-4.1% w/w) and Germany DAX (-4.3% w/w) closed lower.
The Asian market closed mixed as global banking fears weighed on investors’ sentiments. In China, Foreign Direct Investments (FDIs) rose by 6.1% y/y to CNY268.4bn in February 2023. FDI into the services sector increased by 10.1%, while inflows into high-tech industries soared by 32.0% y/y. On the policy front, the People’s Bank of China cut the reserve requirement ratio for financial institutions by 25bps in an attempt to stimulate the economy. This is the first rate cut in banks’ reserve ratio since December 2022. Overall, the capitalisation-weighted Shanghai Composite Index climbed by 0.6% w/w. In Japan, the foreign trade deficit increased by 26.2% y/y in February 2023 as exports rose by 6.5% y/y while imports climbed significantly by 8.3% y/y in the period under review. As a result, the Japanese NIKKEI lost 2.9% w/w, while the Indian SENSEX (-1.9% w/w) closed the week lower due to sell pressures on the Indian financial sector.
In the oil market, crude oil prices declined as the collapse of the Silicon Valley Bank (SVB) and Signature Bank rattled equities markets and sparked fear about a fresh financial crisis. In addition, concern over Credit Suisse’s liquidity crisis shook global markets and countered expectations of a revival in Chinese oil demand. Overall, from a w/w perspective, oil prices closed lower, with Brent Crude losing 11.9% w/w to print at $72.97/bbl.
This week, the focus will be on monetary policy decisions from major Central Banks, including the Federal Reserves and Bank of England (BoE). In addition, we expect the Purchasing Managers’ Index (PMI) data for major economies, including the US, UK, France, Germany, and Japan to be released within the week. Lastly, we envisage inflation figures for Japan and the UK to be in the spotlight. These data releases amid rate hike decisions and the situation in the banking sector will determine the direction of the market.
Domestic Equities: The Bears Resume Activities… ASI Down by 1.5% w/w
Last week, the local equities market closed bearish as Investors’ sentiments continued to weaken. The continued decline in the equities market could be attributed to fears emanating from a weakened US banking sector, gubernatorial pre-election jitters and elevated CPI print of 21.91% y/y. Consequently, share price depreciation across the banking sector and large-cap stocks (MTNN (-5.0% w/w), GEREGU (-6.5% w/w), GTCO (-7.2% w/w), and ZENITHBA (-4.7% w/w)), significantly drove the bourse to a southward close. That said, the benchmark All Share Index (NGX-ASI) shed 1.5% w/w of its value, to close the week at 54,915.39 points. Similarly, YTD returns weakened to 7.2%, while market capitalisation lost N479.0bn to print at N29.9tn. Activity level dropped as average value declined by 41.4% w/w to N2.4bn, and average volume traded fell by 16.6% w/w to 170.7mn units. Investors sentiment weakened to 0.4x from 0.5x last week, as 19 tickers appreciated while 47 depreciated.
Across sectors, overall w/w performance was mainly bearish as only one (1) of the five (5) sectors we cover closed green. The sole gainer was the Consumer goods sector (+1.4% w/w), which is experiencing week-on-week gains due to bullish sentiment towards BUAFOODS (+4.2% w/w) and UNILEVER (+3.7% w/w). The Oil and Gas sector (0.0%) closed flat. On the other hand, the Banking Sector (-4.6% w/w) led the losers for the week as investors fears in the banking space upsurge. The week saw selloff’s in almost all the banking stocks except STERLNGBA (+0.7% w/w) and UNITYBNK (+1.9% w/w). Prices of Insurance stocks also declined as the Insurance sector depleted by -2.5% w/w due to price deceleration in AIICO(-6.6% w/w), MANSARD (-4.8% w/w), LINKASSU (-10.9% w/w) and NEM (-2.4% w/w). Finally, the Industrial goods sector (-0.3% w/w) had losses due to selloffs in WAPCO (-4.9% w/w).
On corporate actions, Nigerian Breweries announced that the Securities and Exchange Commission had registered the two billion, fifty-five million, two hundred and twenty-six thousand, four hundred and seventy-six (2,055,226,476) bonus shares approved at the Extra-Ordinary General Meeting (EGM) of 08 December 2022.
Looking ahead, we expect risk-on sentiments to return to the equities markets as the depressed interest rate environment will continue to favour the local bourse in line with our expectations for Q1-2023. Taking positions in stocks with solid valuations and dividend yields ahead of the dividend-paying season remains the choice strategy. However, we see room for extended profit-taking activities.
Money Market Review: Stop Rates on 182- and 364- Day Bills Decline at PMA
Last week, the financial system opened relatively liquid with a balance of N223.7bn. In the week, the financial system remained in the surplus zone, bolstered by N185.8bn in coupon payments that hit the system during the week. The elevated liquidity was apparent in the week’s primary market activity, which was underpinned by strong investors demand at the NT-Bill auction. However, as the excess demand was largely unmet, the financial system closed the week liquid. However, average funding rates trended higher w/w with the average Open Repo Rate (OPR) and Overnight Rate (OVN) climbing by 48bps w/w and 50bps w/w to close at 11.13% and 11.53% respectively.
On details of last week’s primary market activity, the CBN conducted an NT-bill auction with N161.9bn worth of bills on offer across the 91-day, 182-day, and 364-day papers. Investors submitted total bids to the tune of N1.0trn, implying bid-to-cover ratio of 6.4x compared to 4.0x at the previous week’s auction. The CBN opted to allot the amount on offer. Consequently, the stop rate on the 182-day and 364-day papers fell 100bps and 52bps respectively to settle at 5.0% and 9.5%. Conversely, the stop rate for the 91-day paper rose 111bps to close at 2.6%.
The secondary market for NT-bills was met with bearish sentiments from investors as inflation continues to bite down the real returns of investors, hence, the demand for higher rates began to outweigh the liquidity fundamentals of the financial system. Also, at the end of last week, investors began to look forward to this week’s DMO bond auction. Consequently, the average yield on NT-bills gained 173bps w/w to close at 5.6% (previously 3.6%).
Looking ahead into the week, we believe investors will most likely maintain bearish sentiments toward the short-end of the curve, in a bid to increase the real returns on investments, as inflation begins to bite hard. However, on a broader scope, we remain firm with our forecast that rates (Money Market, FTD, and NT-Bill yields) will remain suppressed in the single-digit terrain, particularly till the end of March. System liquidity will remain pivotal in the activities of the money market, keeping rates depressed.
Bond Market: Bearish Sentiment Prevails
Last week, the secondary bonds market was mostly bearish. Toward the end of last week, investors began to look forward to this week’s bond auction. Yields on the 2028s, 2037s, and 2049s rose 39bps, 5bps and 28bps, to settle at 14.0%, 15.4% and 15.75% respectively. Overall, the average yield across sovereign bonds declined by 18bps w/w to close at 13.3% (previously 13.1%). In tandem with the above, the corporate bonds market closed the week on a bearish note, as the average yield on corporate bonds climbed 41bps w/w to 13.4% (previously 12.9%).
At the Nigerian Eurobonds market, investors were mostly bearish, as the broad market was underpinned by significant sell pressure. The unabated debt sustainability risks remained the key catalyst to investors’ bearish sentiments toward Nigerian Eurobonds. Consequently, the average yields on Nigerian Eurobonds climbed 115bps w/w to close at 13.7% (previously 12.5%).
This week, the DMO will conduct its March 2023 debt issuance, with a total of N360.0bn on offer across the 2028s, 2032s, 2037s, and 2049s. At the auction, we expect marginal rates to trend higher at the short and long ends of the curve. Also, we expect the outcome of the MPC meeting to play a key role in investors’ sentiments toward the bonds market. For the Eurobonds Market, we expect to see mostly bearish sentiments prevail. The bearish sentiments will be stimulated by investors’ weak appetite for Sub-Saharan African (SSA) Eurobonds, as the region’s debt sustainability risks and FX pressures remain unabated. We see pockets of bullish sentiments toward the end of the week, catalysed by the expected coupon payment to the tune of $52.3mn.
Currency Market: The Naira Depreciated at the I&E Window
Last week, the Naira depreciated by 7bps w/w against the US Dollar at the Investors & Exporters (I&E) window to close at N461.83/$, from its previous close of N461.50/$. At the parallel market, we continue to find offer quotes in the N740.0/$- N755.0/$ range. Activities in the I&E window declined as average FX turnover fell 6.3% w/w to $103.8mn. Also, most recent CBN data register Nigeria’s external reserves at $36.1bn.
This week, we expect continued pressure on the local currency, as witnessed in other SSA economies. This is due to the prevailing conditions – unrelenting FX demand as against available supply, and suboptimal FX earnings, which continue to weigh on the value of the Naira.
