April 25, 2023/United Capital

Macro Highlight and Outlook
According to the Central Bank of Nigeria (CBN, or Apex Bank), the country’s external reserves fell by 3.9% to $35.5bn as of the end of March 2023 from $37.0bn reported at the beginning of January. The Apex Bank attributed the decline to the fall in crude oil prices in the international market.

In addition, the Apex Bank noted that the total currency in circulation in the country jumped by N701.4bn in one month to hit N1.6tn in Mar-2023 after the Central Bank of Nigeria extended the deadline for the old naira notes in line with the Supreme Court’s order.

The Nigeria Inter-Bank Settlement System (NIBSS) noted that, the value of electronic payment transactions increased by 31.4% to N49.5tn as of March 2023 compared to N37.7tn reported in February 2023. The increase was attributed to a reduction in failed electronic transactions in the month of March.

The World Bank, in its “Macro Poverty Outlook for Nigeria: April 2023” report, noted that Nigeria spent 96.3% of its revenue on servicing of debts in 2022. The increased reading was hinged on upsurge in public debt stock. The country’s fiscal deficit stood at 5.0% of its GDP in 2022, breaching the stipulated limit for a federal fiscal deficit of 3.0%.

According to the Federal Government, most International Oil Companies (IOCs) that operate in the Nigerian upstream sector have redirected their capital investments worth $21.0bn to other countries between 2014 and 2022. This is due to regulatory uncertainty in Nigeria’s oil and gas sector prior to the enactment of the Petroleum Industry Act 2021, and the lack of investments in the development of the sector.

This week, we expect the macroeconomic environment to be quiet in the absence of any major data release.
 
Global Markets Closed Mixed as Investors Digest Economic Data Releases
Last week, the global equities market closed mixed. In the US, Wall Street stocks posted slight losses as investors digested a few corporate and economic data released during the week. Traders parsed the latest data for clues on the outlook for inflation, economic growth, and the Federal Reserve’s policy path. Equities swung between small gains and loosed throughout the week. Data showed that US business activity unexpectedly climbed to nearly one-year high, risking more inflation. The S&P Global flash, April Composite Purchasing Managers’ Index rose by 1.2pts to 53.5pts (previously, 52.3pts). This indicates the highest reading since May last year. Investors believe that if economic conditions hold up, the Fed may be emboldened to tighten policy more than current market expectations, a potential headwind to equities. On the other end, continuing jobless claims for the week ending 08-Apr-2023 accelerated by 61,000 to 1.9mn, whilst initial jobless claims for the week ending 15-Apr-2023 increased by 5,000 to 245,000. All these suggest that it is becoming more challenging to find new employment after a layoff in the US. This also indicates a possible slowdown in the US economy.  Based on the foregoing, S&P 500 (-0.1% w/w), DIJA (-0.2% w/w) and NASDAQ (-0.4% w/w) all posted weekly losses.

Conversely, the European markets recorded w/w gains as upbeat economic data releases bolstered investors’ sentiments. European stocks inched higher after data showed business activity grew for the third month running. PMI data from the region highlighted the contrasting performance of the manufacturing and service sectors. The UK’s dominant service sector is driving the recovery, with companies reporting that consumer spending was resilient. This should cool concerns that the UK risks falling into recession this year. The monthly flash Purchasing Managers’ Index (PMI) showed a score of 53.9 this month, compared with the 52.5 consensus forecast. This signals an acceleration of economic growth. However, manufacturing fell during the month. Goods producers revealed that demand is reducing as customers decrease the amount of stock they hold, and people try to cut costs in a tight economic climate. Nevertheless, consumer spending remained resilient in the service sector, according to the survey. At the end of the week, the Europe STOXX (+0.4% w/w), France CAC (+0.8% w/w), UK FTSE (0.5% w/w) and the Germany DAX (+0.5% w/w) closed higher.

The Asian market closed mixed. Chinese equities experienced selloffs as China’s chip stocks and other tech shares slid on Friday as investors took profit while assessing the impact of rising geopolitical tensions with the US. The Biden administration has proposed investment curbs for high-tech industries and hopes to get an endorsement at next month’s G-7 meeting. Conversely, Artificial Intelligence (AI) has been one of the few bright spots in the market since Feb-2023. Consequently, AI-related shares have posted gains on expectations of positive valuations ahead of earnings season. Similarly, Japanese chip stocks gained within the week. Overall, the capitalisation-weighted Shanghai Composite Index and Indian SENSEX declined by -1.1% w/w and -1.3% w/w, respectively, while the Japanese NIKKEI 225(+0.3% w/w) posted weekly gains.

In the oil market, crude traded bearishly last week as markets reassessed their outlook for demand this year amid signs of cooling economic growth and growing bets on more rate hikes from major Central Banks. As a result, oil prices closed lower, with Brent crude losing 5.4% w/w to print at $81.66/bbl.
 
This week, we anticipate Germany’s Q1-2023 GDP and Apr-2023 inflation reports. In addition, the US will publish its Crude Oil Inventories, Jobless Claims & Q1-2023 GDP reports. These data releases will determine the market’s direction and investors’ sentiments. Furthermore, following mixed earnings results last week, investors look ahead to massive corporate earnings releases this week.

Domestic Equities: Losses in Large Cap Stocks Weighed on the Bourse…ASI Down 106bps w/w
Last week, the domestic equity market closed bearish for the 6th consecutive week. In another 4-day trading week, investors were most inclined to take full advantage of the high yields in the debt market. Gains in ACCESSCO (+11.9% w/w) and TRANSCORP (+45.0% w/w) moved the bourse northward, while a decline in MTNN (-6.7% w/w) and SEPLAT (-3.0% w/w) weighed on the index. As a result, the benchmark All Share Index (NGX-ASI) fell by 1.1% w/w to print at 51,355.74 points. Hence, YTD return weakened to 0.2%, while market capitalisation decreased by N305.0bn to print at N28.0tn. However, equity turnover improved as the average volume traded rose by 38.8% w/w to 979.9mn units while the average value traded rose by 42.5% w/w to N3.9bn. Investors’ sentiments strengthened to 1.1x from 0.4x last week. Hence, 35 tickers appreciated in price during the week while 31 depreciated.

Across sectors, overall w/w performance was mostly bearish as three (3) of the five (5) sectors we cover closed lower. The insurance index (+1.4% w/w) and Consumer goods index (₊0.2% w/w) closed bullish, driven by gains in MANSARD (+9.1% w/w), CHIPLC (+15.8% w/w), INTBREW (+4.4% w/w), and PZ (+8.2% w/w). Inversely, The Banking index (-2.5% w/w) led the laggards with losses in ZENITHBA (-0.7% w/w) and UBN (-0.7% w/w). Also, the Oil and Gas index (-1.4% w/w) and the Industrial Goods index (-0.2% w/w) closed bearish following share depreciation in SEPLAT (-3.0% w/w) and WAPCO (-3.4% w/w).

On corporate actions, Access Holdings Plc released its FY-2022 audited and Q1-2023 unaudited results. The FY-2022 results showed a 42.8% growth in gross earnings to N1.4tn, while net interest income rose 19.3% y/y to N360.0bn. However, PBT and PAT fell 5.0% y/y and 4.5% y/y to N167.7bn and N152.9bn, respectively. A final dividend of N1.30 was announced. Similarly, in its Q1-2023 result, gross earnings rose 43.7% y/y to N424.9bn. However, PBT and PAT rose 24.5% y/y and 23.9% y/y to N81.6bn and N71.7bn, respectively.

This week, we expect bullish sentiments to resurface, as investors look to take advantage of fundamentally sound stocks with low pricings, with Q1-2023 earnings season already underway. However, we see room for pockets of profit-taking activities.

Money Market Review: System Illiquidity Kept Funding Rates Elevated…
The financial system remained in deficit throughout the week, despite coupon inflows to the tune of N46.4bn. Overall, the system closed with a deficit of N430.0bn last week. This is due to tight system liquidity as funding rates between banks remained elevated around a resistance level of 18.0% – 19.0%. Based on the above, the Overnight Rate (OVN) remained unchanged at 19.0% while the average Open Repo Rate (OPR) slipped by 1bp w/w to print at 18.63%.

The secondary NT-Bills market closed relatively bullish, stimulated by the not-so-significant coupon inflow. That said, the average yield on NT-Bills fell by a 3bps margin to settle at 8.79% (previously 8.82%).

This week, the CBN will conduct its final primary market auction for the month of April, rolling over maturing bills to the tune of N129.7bn. We expect stop rates to taper at the auction. In the secondary market, we anticipate pockets of bullish sentiments to outweigh the prevailing bearish sentiments, as investors look to take advantage of the elevated interest rate environment, in view of the expected liquidity to the tune of c.N941.2bn. We project FTDs, inter-bank, and money market rates to taper, albeit at a relatively slow pace, catalysed by an improved buy-interest across board.
 
Bond Market: Bearish Sentiments Prevailed
The Debt Management Office (DMO) conducted APR FGN bond auction. The DMO offered to the market a total of N360.0bn bonds across four (4) tenors, FEB 2028, APR 2032, JAN 2042, and MAR 2050. At the auction, investors oversubscribed with overall bids summing up to N442.0bn. This implied a bid-to-cover ratio of 1.2x. The DMO oversold the auction modestly by 2.1%, selling N367.6bn worth of papers across the tenors on offer. Interestingly, the marginal rate on the 2028s was unchanged at 14.0%, while the 2032s rose by 5bps to 14.8%. The marginal rate on the newly issued re-issued 2042s and 2050s printed at 15.4% and 15.8%, respectively.

On the other hand, the secondary bonds market closed bearish last week underpinned by short-selling activities. Investors drove rates higher in the aftermath of the DMO’s April bond auction, pricing in the expected bond maturity to the tune of N736.0bn. That said, the average yield across all sovereign bonds climbed by 13bps w/w to close the week at 13.85% (previously 13.72%). Conversely, the average yield on corporate bonds tapered by 2bps w/w to 14.34% (previously 14.36%).

In the Eurobond secondary market, bearish sentiments prevailed as investors remained negatively disposed toward the market. Thus, the average yield rose by 13bps w/w to settle at 13.12%. (previously 12.89%).

This week, we expect bond maturity to the tune of N736.0bn to hit the system. We project that this will stimulate buy-pressure from the mid-long end of the curve, causing yields to taper. Also, we expect total coupon inflow to the tune of N189.5bn to stimulate pockets of bullish sentiments from the start of the week. For the Eurobonds market, we expect the bearish sentiment to prevail till the end of April.

Currency Market: Naira Appreciated at the I&E Window
Last week, Naira appreciated by 7bps w/w at the Investors & Exporters (I&E) window to close at N463.7/$, from its previous close of N464.0/$. At the parallel market, we continue to find offer quotes in the N730.0/$- N750.0/$ range. Activities in the I&E window strengthened, with average FX turnover climbing by 18.6% w/w to settle at $107.6mn. Conversely, Nigeria’s external reserves fell by 23bps w/w, losing $79.8mn to close at $35.3bn.

This week, we expect continued pressure on the Naira across all market segments. This is because FX pressures will persist as Nigeria’s Dollar earnings remain weak and demand outweighs supply.