March 27, 2023/United Capital

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Macro Highlight and Outlook
The Monetary Policy Committee (MPC, or the Committee) on Tuesday, 21-Mar-23, announced the Committee’s decision to raise the Monetary Policy Rate (MPR) by 50bps, bringing it from 17.5% to 18.0%. The Committee also voted to retain the asymmetric corridor at +100/-700 basis points around the MPR and the Cash Reserve Ratio (CRR) at 32.5%, while retaining the liquidity ratio at 30.0%.

According to the Nigeria Inter-Bank Settlement System (NIBSS), the value of electronic utility payments fell by 44.9% to N90.9bn in February 2023 from N164.9bn in January 2023 despite the Central Bank of Nigeria’s (CBN) Naira redesign policy aimed at growing cashless transactions.

Domestic investors purchased N2.6tn worth of FGN Bonds in Q1-2023 out of which N1.9tn was eventually allotted amid yield on 10-Year Bond falling below the inflation rate of 21.91%. The latest statistics released by the Debt Management Office (DMO) revealed that a total sum of N1.1tn was offered in the period under review as the Federal Government intensified borrowing from local investors to bridge the budget deficit.

The Minister of Communications and Digital Economy, Isa Pantami, disclosed that The Federal Government had announced the removal of its proposed 5.0% excise duty on telecommunication services, in line with the recommendations of the Presidential Review Committee on Excise Duty in the Digital Economy Sector.

According to the National Insurance Commission (NAICOM), Nigeria’s insurance industry recorded a 36.3% rise in gross premium income to print at N726.2bn at the end of Q4-2022. The industry also paid N318.2bn claims to its customers, while its total assets stood at N2.3tn in the period under review.

The Minister for Economic and Commercial Affairs, Embassy of the Republic of China in Nigeria, Wang Yingqi, has blamed the Covid-19 pandemic for the drop in Chinese’s trade volume to Nigeria from $ 300.0mn in 2021 to $ 290.0mn in 2022.
 
This week, we expect the National Bureau of Statistics (NBS) to release Nigeria’s Domestic and Foreign Debt Data for Q4-2022.
 
Global Markets: Major Stocks Round Up the Week on a Positive Note
US Markets: Positive Economic Data and Hints of a Pause in Rate Hikes Fueled Investors’ Sentiments
Major benchmark results last week differed significantly as concerns about the banking sector and the recession woes weighed on value stocks and small-caps. Large-cap growth companies benefited from declining interest rates. The Nasdaq Composite, which focuses on technology, outperformed the Russell 2000 Index for small-cap stocks by 828 basis points (8.28 percentage points). As a result of concerns about how the strains in the regional banking system might affect the commercial real estate market, where regional banks are the key lenders, financials underperformed for a third straight week, and the small real estate sector also suffered.

The Federal Reserve raised short-term rates by 25 basis points and the “dot plot” indicated that officials expected to stop raising rates after one more hike in May. While acknowledging that tensions in the banking system have tightened credit conditions, Powell in his post-meeting statement warned that it was too soon to tell how monetary policy should respond. The week’s economic data showed that the economy was resilient, with jobless claims near five-decade lows and S&P Global’s Composite Index of current services and manufacturing activity rising to 53.3, indicating the fastest pace of private sector growth since last year May. Overall, positive economic data and hints of a pause in rate hikes led to the positive close of the US equities market, as all the major indices recorded weekly gains. The NASDAQ composite (+1.7% w/w) led the gainers. The S&P 500 (+1.4% w/w) and DIJA (+1.2% w/w) indices trailed.
 
European Markets: Favourable Economic Data Buoyed Investors’ Sentiments
Shares in Europe gained ground, despite weakness in bank stocks. In local currency terms, the pan-European STOXX Europe 600 Index ended 0.9% higher. Major stock indices advanced as well. Italy’s FTSE MIB climbed 1.6%, France’s CAC 40 Index gained 1.3%, and Germany’s DAX advanced 1.3%. The UK’s FTSE 100 Index climbed 1.0%. Bank stocks in the STOXX Europe 600 Index resumed their sharp decline at the end of the week on renewed worries over the health of the financial sector. The slide undid earlier gains following the announcement that UBS Group had agreed to acquire Credit Suisse in a deal mediated by the Swiss government.

The Bank of England (BoE) raised interest rates to 4.25% from 4.00%, the 11th consecutive increase, due to robust capital and liquidity positions and rising inflation. Financial markets appear to expect rates to increase again amid no signs of a letup in inflation. On a year-over-year basis, consumer prices rose to 10.4% in February—well above the consensus expectation. The UK economy is expected to return to growth in the first quarter of 2023, with S&P’s PMI survey for March 2023 showing an expansion in business activity and retail sales volumes rising 1.2% in February, the largest monthly gain since October.
 
Asian Markets: Investors Registered Mixed Sentiments
Chinese stocks rose on hopes that the country’s central bank will maintain an accommodative stance amid the global banking turmoil. The Shanghai Stock Exchange Index gained 0.5% and the blue-chip CSI 300 added 1.72% in local currency terms. In Hong Kong, the benchmark Hang Seng Index added 2.03%. The People’s Bank of China (PBOC) left its benchmark one-year and five-year loan prime rates (LPR) at 3.65% and 4.3%, respectively, for the seventh consecutive month. Japan’s stock markets saw mixed returns, with the Nikkei 225 Index gaining 0.2% and the TOPIX down 0.2%. Following the latest developments in the global banking sector, investor concerns eased somewhat as six major central banks, including the Bank of Japan (BoJ), announced coordinated action on March 19 to enhance the provision of liquidity and ease strains in global funding markets. The yen strengthened after the Fed raised interest rates but indicated a pause in hikes. The yen finished the week at around JPY 130.6 against the U.S. dollar from about JPY 131.8 the prior week.

Crude Oil Market: Oil Longs Utilised a Brief Bearish Breather to Keep Prices Afloat…
At the start of the week, a slowdown in the intensity of the banking storm enabled oil prices rise to $73.79/bbl. after a 15-month low of $72.97/bbl. that followed through with last week’s brutal 13.0% loss. The Federal Reserve’s most recent decision on interest rates, coupled with the U.S. government’s mid-week estimate of a larger-than-expected drawdown from fuel stockpiles, helped keep crude oil prices high, advancing three days in a row. The three-day recovery in crude oil prices ended on Thursday, with prices tumbling by as much as 2.0%, partly due to the impression that oil longs were disappointed that OPEC+ might not announce a wider production cut in the wake of last week’s 15-month low in prices. As worries about Deutsche Bank revived echoes of another banking crisis, crude prices fell for the second day in a row on Friday, taming their recovery from last week’s plunge. Overall, oil prices closed higher, with Brent Crude gaining 2.8% w/w to print at $74.99/bbl.

Looking ahead, we expect a tighter lending environment in the US to strain the country’s real sector and potentially harm the earnings performance of US corporates (particularly small-cap stocks). The Fed would eventually need to find a balance between attempts to strengthen the liquidity condition of the banking sector and control rising inflation. We anticipate slower rate increases in the near future across the board (in the US and Europe), as central banks work to regain investors’ faith in the banking industry, which will undoubtedly take some time.

Domestic Equities: Bearish Sentiment Continues …ASI down 4bps w/w
Last week, the domestic equities market closed bearish, signaling risk-off sentiments from investors. Notably, sell-offs in BUACEMENT (-1.6% w/w), STANBIC (-5.8% w/w) and NB (-4.5% w/w) drove the local bourse southwards. As a result, the benchmark All Share Index (NGX-ASI) fell by 4bps w/w to print at 54,892.53 points. Hence, YTD return weakened to 7.1% from 7.2% in the previous week, while market capitalisation lost N13.0bn to print at N29.9tn. The average volume traded rose by 97.8% w/w to 337.8mn units while the average value traded fell by 6.5% w/w to N2.2bn. Investor sentiment strengthened to 1.0x from 0.4x last week, as 28 tickers appreciated during the week while 27 depreciated.

Across sectors, overall w/w performance was mainly bearish as three (3) of the five (5) sectors we cover closed lower. The lone gainer was the Banking sector (+0.9% w/w) due to price appreciations in ZENITH (+1.4% w/w) and ACCESSCOR (+3.0% w/w). The Consumer goods sector (-0.7% w/w) led the losers on the back of losses in NB (-4.5% w/w) and INTBREW (-6.5% w/w). The Insurance and Industrial goods sectors fell by 0.5% w/w a piece due to sell-offs in MANSARD (-4.5% w/w), WAPIC (-4.8% w/w) and BUACEMENT (-1.6% w/w). Lastly, the Oil and Gas index remained unchanged.

On corporate actions, Access Holdings Plc announced that Access Bank Zambia Limited, a subsidiary of Access Bank Plc, has received final regulatory approval from the Central Bank of Zambia for the acquisition and merger of Africa Banking Corporation Zambia Limited (Atlas Mara Zambia) into its existing operations. The transaction is expected to be completed in Q3-2023.

Looking ahead, we expect risk-on sentiments to be sustained in the equities markets even 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: System Liquidity Closed Tight
Last week, the financial system opened relatively liquid with a balance of N59.8bn. For the first time in recent weeks, the financial system closed in a deficit of N406.6bn following CRR debits and the absence of any OMO maturities. As a result, interbank funding rates climbed w/w with the average Open Repo Rate (OPR) and Overnight Rate (OVN) rising by 4.9ppts w/w and 5.9pptss w/w to close at 16.9% and 17.4%, respectively.

In the secondary market, we observed that bearish sentiments among investors persisted as the average yield on NT-bills climbed by 44bps w/w to close at 5.8%. Similarly, the average yields on OMO bills rose by 92bps w/w to 4.0% (previously, 3.0%).

This week the CBN will conduct an NT-bill primary market auction (PMA) offering c.N145.5bn. System liquidity will remain pivotal in the direction of NT-bill yields, FTD and money market rates. We envisage liquidity levels would be higher on account of FAAC inflows and N40.0bn worth of maturing OMO bills. Thus, we expect interbank rates to decline. At the PMA, we do not envisage a significant jump in stop rates despite the recent 50bps hike in MPR, as liquidity persists.

Bond Market: Strong Investor Demand at Primary Market Auction
The Debt Management Office conducted the FGN bond auction for March 2023 offering N360.0bn across the 2028, 2032, 2037, and 2049 papers. Investors’ demand came in strong, with total subscriptions printing at N808.6bn, representing a bid-to-cover ratio of 2.2x. The DMO oversold the auction allotting a total of N563.4bn worth of papers. The marginal rate across the 2032s, 2037s and 2049s declined by 15bps, 70bps and 25bps to 14.75%, 15.20% and 15.75% respectively. On the other hand, the marginal rate on the 2028s paper remained unchanged to settle at 14.00%.

Last week, the secondary bonds market was mildly bullish. The average yield across sovereign bonds declined by 8bps w/w to close at 13.2%. Conversely, corporate bonds traded on a bearish note, as the average yield on corporate bonds climbed by 5bps w/w to 13.4%.

The Nigerian Eurobonds market saw a marginal drop in the yield curve, the average yields on Nigerian Eurobonds fell  4bps w/w to close at 13.6%.

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 c.37.2% (N131.2bn) of the total N351.9bn coupon payments for Mar-2023 to hit the system this week. This would stimulate mild bullish sentiments in the bonds market, as investors would most likely opt to re-invest their funds. However, we expect yields from the mid-to-long end of the curve to remain around current levels, supported by the recent MPR hike. For the Eurobonds Market, we expect to also see bullish sentiments on the back of the reinvestment of the expected $138.6mn coupon payments.

Currency Market: Naira Appreciated at the I&E Window
Last week, the Naira appreciated by 11bps w/w at the Investors & Exporters (I&E) window to close at N461.3/$, from its previous close of N461.8/$. At the parallel market, we continue to find offer quotes in the N750.0/$- N770.0/$ range. Activities in the I&E window strengthened, with average FX turnover climbing by 78.9% w/w to settle at $188.3mn. Similarly, Nigeria’s external reserves rose by 1.9% w/w, losing $689.2mn 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.