April 11, 2023/United Capital Update
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Macro Highlight and Outlook
According to statistics released by the Nigerian Communications Commission (NCC), Nigeria’s broadband subscriptions reached 92.6mn in Feb-23, up from 92.0mn in Jan-23, maintaining its steady growth rate.
According to figures from the Central Bank of Nigeria, the country’s external reserves fell by $1.46bn between January and March. The reserves stood at $36.7bn on 23-Feb.
The Director General of the Nigerian Maritime Administration and Safety Agency (NIMASA), Dr Bashir Jamoh, said the agency is driving the $2.5tn blue economy market by disbursing $720.0mn Cabotage Vessel Financing Fund (CVFF).
The federal government has disclosed that it has secured a World Bank facility worth $800.0mn to attend to a segment of post-petroleum subsidy palliatives requirement in the country.
We anticipate the release of the Mar-23 CPI and Inflation report this week.
Global Equities Closed Mixed Due to Economic Data
Last week the US stock market was dominated by bearish investor sentiments, which led to weekly losses across significant indices. Market participants’ fears surrounding the possibility of a recession worsened as a slew of economic releases came in weaker than expected. Some of the releases include Institute for Supply Management’s (ISM) survey that revealed that the US services sector slowed more than expected in Mar-23 due to decline in demand. The index’s measure of prices paid by services businesses fell to its lowest in nearly three years. In addition, new orders for US manufactured goods shrank more than expected, signalling a slowdown in global manufacturing activity in March. Furthermore, the market remained volatile due to higher-than-expected weekly jobless claims, which indicated slowing job growth. Job cuts increased significantly this year compared to last year, and the number of available positions fell below 10.0mn in February for the first time in almost two years. The data for jobless claims suggests that the Fed’s rate hikes are beginning to slow down the labour market. However, the slowdown in the economy increases the likelihood of a recession. Thus, the S&P 500 had its first losing week in four, losing 0.1% w/w, while the Nasdaq fell by 1.1% w/w. Conversely, the DIJA gained 0.6% w/w.
European stocks advanced before Easter break as traders await US jobs data. The Stoxx Europe 600 rose 0.2% w/w as the prices of real estate, banks and insurance stocks accelerated. However, the prices of consumer products stocks were laggards last week. On the other hand, the banking sector climbed higher as it continued a general positive trend after recent volatility. During last week, the management ofUBS and Credit Suisse met with Credit Suisse’s shareholders in an annual general meeting after the acquisition of Credit Suisse by UBS. According to the Federal Statistical Office, German’s industrial production increased by 2.0% in February above the expected 0.1% reading. This report came after the revised 3.7% growth in January which was attributed to the increase in UK’s house prices and notable contribution arising from the production of motor vehicles & spare parts. Consequently, the above data suggest a reduced risk of a technical recession in Europe. Nevertheless, the expected slowdown of the US economy argues a downside risk to industrial sector optimism. The FTSE 100 gained 1.4% w/w, and the French CAC climbed marginally by 3bps. In contrast, the German DAX declined 0.2% w/w.
Asian markets were bullish due to capital inflows and price appreciations in technology and semiconductor stocks. The Indian SENSEX (+1.4% w/w) and the Shanghai Composite (+1.2% w/w) had weekly gains. Conversely the Nikkei lost 1.9% w/w.
Oil prices recorded weekly gains despite markets digesting a slew of weak US economic indicators. However, supply constraints bolstered a rally in oil markets, signs of shrinking inventories and an unexpected announcement by OPEC+ to cut its production levels to provide price stability to oil markets. Thus, Brent’s future prices rose 6.7% w/w to close at $85.12/bbl.
As economic releases point to a slowdown in the US, global markets need clear direction with respect to Federal Reserve rate hikes. Financial markets are currently pricing in around a 51% chance of the Fed holding rates steady at its next meeting, according to CME’s FedWatch tool. We expect the release of the following significant economic releases, FOMC minutes, China, Taiwan, India, US & Germany’s Mar-2023 inflation numbers.
Domestic Equities: The Bears Maintain Dominance…ASI Down 3.4%
Last week, the local equities market closed southwards, as the bears remained dominant in the market following the recent increases in fixed income rates amid the buoyant system liquidity. Thus, we observed selloffs across board as investors take advantage of the current attractive yields on fixed-income instruments. Notably, share price depreciations in large-cap stock AIRTELAF (-10.0% w/w) dragged the local bourse down. As a result, the benchmark All Share Index (NGX-ASI) lost 3.4% w/w to print at 52,994.1 points. Hence, YTD return weakened to 3.4%, while market capitalisation gained N1.0tn to print at N28.9tn. Activity level closed lower as average value and volume declined by 19.2% w/w and 36.4% w/w to N2.8bn and 263.4mn units, respectively. Investor sentiment weakened to 0.4x from 1.2x last week as 16 tickers appreciated while 37 depreciated.
Across sectors, overall w/w performance was mainly bearish as only four (4) of the five (5) sectors we cover closed red. The Industrial goods sector (-3.7% w/w) led the laggards due to share price depreciations in WAPCO (-0.8% w/w) and CUTIX (-0.5% w/w). This was followed by the Banking (-1.0% w/w) and Consumer goods (-0.6% w/w) sectors, following selloffs in ETI (-5.8% w/w), ZENITHBA (-1.4% w/w), INTBREW (-10.0% w/w) and FLOURMIL (-4.8% w/w). The Oil & Gas sector lost 0.1% w/w on the back of losses in ETERNA (-19.1% w/w). On the flip side, the Insurance sector (+2.2% w/w) was the lone gainer on account of price appreciations in MANSARD (+15.8% w/w) and AIICO (+3.5% w/w).
On corporate results, BUA Foods released an impressive FY-2022 result. The company grew its gross income by 29.0% y/y to N132.8bn, following a 25.5% y/y rise in revenue. On profitability, the company recorded a 30.9% y/y increase in Profit After Tax (PAT), buoyed by the 880.5% y/y climb in other income. INTBREW made a loss of N21.6bn in FY-2022 on the back of a 207.3% y/y increase in the company’s net finance cost. Lastly, UACN recorded a loss of N4.0bn, mainly driven by increased operating expenses and net finance costs.
On corporate actions, Access Holding Plc has completed a $300.0mn capital investment in its flagship subsidiary, Access Bank Plc. The investment took the form of a Tier-1 capital and will support the bank’s capital needs for its African expansion strategy.
On the dividend announcement, FCMB Group Plc and Unilever Nigeria Plc declared a final dividend of N0.25k per share each for FY-2022.
This week, we expect the bearish sentiments to continue in the market, supported by the illiquidity in the financial system. Subsequently, investors may favour the fixed-income market over the equities market. However, the low prices and valuations provide an opportunity for BUY-SIDE to re-enter the market and take positions ahead of the Q1-2023 earnings season.
Money Market Review: System Illiquidity Kept Funding Rates Elevated…
Last week, the financial system opened relatively liquid with a net balance of N43.3bn. The system was mostly illiquid through the week as it lacked support from maturities or coupon inflows. The financial system closed the week with a deficit of N160.6bn. Consequently, funding rates between banks stayed elevated, above the 17.0% – 18.0% region. The average Open Repo Rate (OPR) and Overnight Rate (OVN) climbed by 43bps w/w and 18bps w/w to close the week at 18.3% and 18.6%, respectively.
The secondary market for NT-bills was mostly quiet last week. Average yields across the NT-bills yield curve climbed marginally by 3bps to settle at 7.76% (previously 7.73%). On the other hand, the average yield on OMO bills fell marginally by 1bp w/w to print at 4.0%.
This week, we expect the CBN to roll over maturities to the tune of N146.5bn in a primary market auction. At the auction, we forecast investors’ demand for NT-bills to remain strong. System liquidity will be pivotal to the direction of yields. However, we expect rates on the 364-day paper to taper. Lastly, we project FTDs, inter-bank, and money market rates to remain around current levels.
Bond Market: Bullish Sentiments Prevailed…
Last week, the secondary bonds market was mostly bearish. Investors opted for short positions, largely motivated by their desire for higher rates on the funds. Amidst the prevailing system illiquidity, average yield across the sovereign bonds yield curve climbed by 12bps to print at 13.68% (previously 13.56%). In tandem, corporate bonds traded on bearish sentiments. The average yield on corporate bonds rose by 14bps w/w to 14.13% (previously 13.99%). In line with our expectations, the Nigerian Eurobonds market traded bearishly in the absence of any coupon inflow. On average yields across the yield curve climbed 15bps to print at 12.54% (previously 12.39%).
Looking forward, we expect the bearish sentiments in the secondary bonds market to persist. For the Eurobonds market, we expect bearish sentiments to prevail, buoyed by the risk of sustaining elevated debts in SSA region.
Currency Market: Naira Depreciated at the I&E Window
Last week, Naira depreciated by 40bp w/w at the Investors & Exporters (I&E) window to close at N463.25/$, from its previous close of N461.38/$. At the parallel market, we continue to find offer quotes in the N745.0/$- N760.0/$ range. Activities in the I&E window weakened as average FX turnover declined by 8.5% w/w to settle at $101.8mn. Most recent CBN figures print Nigeria’s external reserves at $35.4bn as of 05-Apr-2023.
This week, we expect continued pressure on the Naira across all market segments, given that FX pressures will continue as Nigeria’s earnings in Dollar remain weak and demand for Dollar outweighs supply.
