April 17, 2023/United Capital

Macro Highlight and Outlook
The National Bureau of Statistics (NBS) released Nigeria’s March 2023 Consumer Price Index (CPI) report. Extracts from the report revealed that inflation rose by 14bps to settle at 22.04% y/y compared to 21.91% reported in February 2023. The increase in inflation was mainly driven by an upsurge in the prices of food and nonalcoholic beverages which contributed 11.4% to the y/y increase of the CPI. On a m/m basis, headline inflation climbed 1.9% in March as against 1.7% recorded in February.

Food inflation uptick by 2.1% m/m in March as against 2.0% m/m in February. The slight increase was due to increases in the prices of oil and fats, bread & cereals, potatoes, yams, fish, fruits, meat, vegetables, and spirits. On the other hand, the core inflation component (all items less farm produce, or food) advanced by 1.8% m/m compared to 1.1% m/m in February. 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.

During last week, oil marketers issued warning signals to Nigerians to prepare for a possible rise in petrol prices as a result of additional four million barrels per day crude oil production cuts by the Organisation of Petroleum Exporting Countries and its allies.

The State Chairman of Tomato Out Growers Association of Nigeria, Alhaji Sani Yadakwari averred that, tomatoes farmers in northern parts of Nigeria are lamenting the infestation of a pest known as Tuta absoluta, (tomatoes leaf miner). Consequently, the Association threatened to push the cost of tomatoes up by 450.0% on the back of a loss of 70.0% in output.

On Wednesday, 12 April 2023, the Seme Area Command of Nigeria’s Customs Service reported a decrease in cement export to Togo. The decline was due to the rivalry between Nigerian cement and locally made products in Togo. The Area Commander further disclosed that the shortfall in export was to the tune of 75,000 metric tonnes of cargo.

The International Monetary Fund (IMF, or the Fund) has in its “World Economic Outlook: A Rocky Recovery (2023 Apr)”, forecasted Nigeria’s 2023 economic growth at 2.8% as against 3.4% recorded in 2022.  However, the Fund anticipated that Nigeria’s economic growth for 2024 would remain uptick at 3.0% relative to 2023 readings.

The Federal Government has iterated its commitment to impose a $49.0mn (N22.0bn) fine on oil and gas firms operating onshore, for flaring 24.0bn Standard Cubic Feet of gas valued at about N40.0bn ($86.0mn) between January and February 2023.

The Central Bank of Nigeria in a press release on “the management of dormant accounts, unclaimed balances, and other financial assets in banks and other financial institutions” proposed the transfer of funds in bank accounts that have been dormant for up to ten (10) years into a trust fund account.

This week, we expect the macroeconomic data front to be relatively quiet.

Global Markets: Strong Economic Data Releases Drove the Positive Momentum
Last week, the global equities market closed green as positive momentum returned following a slew of stronger-than-expected economic data releases. In the US, headline inflation slowed for the ninth consecutive month to 5.0% y/y in March 2023 from 6.0% y/y recorded in the previous month, raising hopes that the Fed’s monetary policy tightening stance may be nearing an end. This represents the lowest reading since May 2021. The decline was buoyed by lower food and energy costs. In addition, Producer Price Index (PPI) eased to 2.7% y/y in the period under review compared to the upwardly revised 4.9% increase in February 2023. However, extracts from the minutes of the Federal Open Market Committee (FOMC) meeting revealed that officials are predicting a recession this year and the likelihood of another rate hike in May. Notably, Fed Governor Waller (FOMC voter) reiterated that raising interest rates was appropriate following the 5.6% y/y acceleration in core inflation in March. On corporate actions, Q1-2023 earnings results showed that big financial companies are doing well despite the recent banking turmoil. JPMorgan Chase, Wells Fargo, and Citigroup reported better-than-expected earnings, triggering a rally in banking stocks. Also, BlackRock assets grew, and JP Morgan’s deposits climbed unexpectedly as investors moved funds following the collapse of several regional banks. That said, the DIJA (+1.2% w/w), S&P 500 (+0.8% w/w) and NASDAQ Composite (+0.3% w/w) closed the week higher.

Similarly, the European markets recorded w/w gains as positive economic data releases across the continent bolstered investors’ sentiments amid the start of the Q1-2023 earnings season. Industrial production in the Euro Area rose by 2.0% y/y, a second consecutive month of increase and above market expectations of a 1.5% growth. Despite the UK’s trade deficit widening by 37.8% m/m in February 2023, the UK FTSE climbed by 1.7% w/w following the resilience in the US financial system and rallies in banking stocks. Elsewhere, Germany’s headline inflation slowed to 7.4% y/y in March 2023, down from 8.7% y/y in the prior month. Similarly, France’s inflation eased to a six-month low of 5.7% y/y from 6.3% y/y in February. Signs of cooling inflation bolstered expectations that the major Central Banks, especially the Fed, are nearing the end of the monetary policy tightening cycle. At the end of the week, the Europe STOXX (+1.7% w/w), France CAC (+2.7% w/w) and Germany DAX (+1.3% w/w) closed higher.

By the same token, the Asian market closed higher as slowing inflationary pressures across the continent spurred bullish investors’ sentiments. In China, the headline inflation rate printed at 0.7% y/y in March 2023, compared with February’s print of 1.0%. This is the lowest reading since September 2021, as the cost of food and non-food declined further. In addition, Chinese exports surged by 14.8% m/m in March compared to the 6.8% drop in the previous month, allaying some concerns about a slowing global economy. In Japan, producer prices slowed to 7.2% y/y in the period under review from an upwardly revised 8.3% rise in February. Overall, the capitalisation-weighted Shanghai Composite Index, Japanese NIKKEI and Indian SENSEX climbed by 0.8% w/w, 3.5% w/w and 1.0% w/w, respectively.

In the oil market, crude oil prices climbed as cooling U.S. inflation data spurred hopes of a less hawkish stance by the Fed. In addition, the International Energy Agency (IEA) noted that the demand for crude oil could hit a record peak in 2023, supported by a spike in consumption by top importer China. As a result, oil prices closed higher, with Brent Crude gaining 1.4% w/w to print at $86.31/bbl.

This week, we anticipate the inflation figures for UK and Japan. In addition, the Purchasing Managers Index (PMI) for US, UK, France, Germany, and Euro Area are set to be released. Finally, China will publish its Gross Domestic Product (GDP) growth rate and retail sales figures in the course of the week. These data releases will determine the market’s direction and investors’ sentiments for the week.

Domestic Equities: Loss in Large Cap Stock Weighed on Bourse’s Performance…ASI Down 2.1% w/w
Last week, the local equities market closed southwards. Investors maintained bearish sentiments after the easter break following the recent increases in fixed-income rates amid the suppressed system liquidity. Thus, we observed selloffs across board as investors continued to 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 2.1% w/w to print at 51,893.94 points. Thus, YTD return weakened to 1.3%, while market capitalisation lost N0.6tn to print at N28.3tn. The activity level closed higher as average value and volume climbed by 9.1% w/w and 168.0% w/w to N2.7bn and 705.9mn units, respectively. Investor sentiment strengthened to 0.5x from 0.4x last week as eighteen (18) tickers appreciated while 39 depreciated.

Across sectors, overall w/w performance was mainly bearish as three (3) of the five (5) sectors we cover closed in the red zone. The Insurance sector (-1.5% w/w) led the laggards due to share price depreciations in CHIPLC (9.1% w/w) and NEM (-2.8% w/w). This was followed by the Banking (-1.4% w/w) and Industrial goods (-0.4% w/w) sectors, following selloffs in FIDELITY (-4.1% w/w), ACCESSCO (-1.1% w/w), WEMABANK (-5.0% w/w) and UBA (-0.6% w/w). Conversely, the Consumer goods sector (0.0% w/w) and the Oil & Gas sector (0.0% w/w) closed relatively flat.

On corporate actions, Global Spectrum Energy Services PLC, following the approval of its application to delist its entire issued share capital from the Nigerian Exchange Limited (NGX), were on Tuesday, 11- Apr-2023, delisted from the Daily Official List of NGX.

Regarding dividend announcement, Jaiz Bank PLC proposed a dividend of N0.05, Industrial & Medical Gases Nigeria PLC proposed a dividend of N0.40, and Skyway Aviation Company PLC proposed a dividend of N0.165. ABC Transport PLC proposed a dividend of N0.015. Glaxo SmithKline Consumer NIG. PLC proposed N0.55, and Guaranty Trust Holding Company PLC proposed N2.80.

This week, we expect mostly bearish sentiments in the market, supported by the illiquidity of the financial system. We note that the current bear trend is approaching a turning point, as the Q1-2023 earnings season draws nearer. We anticipate the broad-based return of investors’ risk-on sentiments, which is to be catalysed by declining yields in the fixed-income market. The current low prices and valuations will allow BUY-SIDE investors the opportunity to re-enter the market and take positions in fundamentally sound stocks, thus maximizing market returns.

Money Market Review: System Illiquidity Remained Pivotal In The Direction Of Yields…
The financial system opened the week with a deficit of N124.7bn. The system remained in deficit throughout the week as a result of absence of inflow into the financial system. Thus, the system closed the week with a deficit of N183.2bn. Consequently, funding rates between banks stayed elevated, within the 18.0% – 19.0% region. The average Open Repo Rate (OPR) and Overnight Rate (OVN) climbed by 36bps w/w and 37bps w/w to close the week at 18.6% and 19.0% respectively.

At the NT-bills Primary Market Auction, the CBN offered a total of N149.6bn worth of maturing bills. Investor’s demand was high as the auction was oversubscribed by 1.9x with total subscription printing at N280.4bn. Notably, the CBN sold just the amount on offer. Therefore, the stop rate across the 91-day and 182-day bills remained unchanged at 6.0% and 8.0%, respectively. Conversely, the stop rate on the 364-day bill fell marginally by 4bps to 14.7%.

The secondary NT-bills market closed bearish, with investors’ sentiment largely driven by an increased desire for higher returns on investments. As a result, the average yield rose by 106bps to settle at 8.82% (previously 7.76%).

This week, system liquidity will remain pivotal in the direction of yields in the money market. We project FTDs, inter-bank, and money market rates to remain around current levels.

Bond Market: Bearish Sentiments Prevailed
The secondary bonds market closed mildly bearish last week as short-selling activities lingered in anticipation of the upcoming DMO auction. That said, the average yield across all sovereign bonds inched upwards by 4bps w/w to close the week at 13.72% (previously 13.68%). The average yield on corporate bonds rose by 23bps w/w to 14.36% (previously 14.13%). In the Eurobond secondary market, bearish sentiments prevailed as investors remained negatively disposed toward the market. Thus, the average yield rose by 35bps w/w at the close of yesterday’s session to settle at 12.89%. (previously 12.54%).

This week, we expect the DMO to approach the primary market with a total offer of N360.0bn across the 2028s, 2032s, 2042s, and 2049s. At the auction, we expect marginal rates to taper, albeit mildly. At the secondary market for bonds, we expect the first sovereign coupon inflow  (N46.4bn) of the month to stimulate buy-interests, with bids mainly skewed toward the 2037s. For the Eurobonds market, we expect the bearish sentiment to prevail till the end of April.

Currency Market: The Naira Depreciated at the I&E Window
Last week, the Naira depreciated by 12bps w/w against the US Dollar at the Investors & Exporters (I&E) window to close at N464.00/$, from its previous close of N463.25/$. 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 12.2% w/w to $89.9mn. However, Nigeria’s external reserves climbed by 0.1% w/w to $35.4bn.

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.