May 2, 2023/United Capital Research

Macroeconomic Highlight and Outlook

The Federal Government, through the Ministry of Niger Delta has signed a deal with a United States-based firm, Atlanta Global Resources Inc, for the construction of a $15.0bn rail project that will stretch across all nine Niger Delta states.

The Nigerian National Petroleum Company (NNPC) Limited has signed a Memorandum of Understanding (MoU) with Golar LNG to build a floating liquefied natural gas plant in Nigeria.

The Minister of Aviation, Sen. Hadi Sirika, disclosed that the 29-May-2023 date for the launch of Nigerian Air still stands as it awaits final approval by the International Civil Aviation Organisation (ICAO).

Earlier last week, the Ports & Terminal Multipurpose Limited suspended the proposed N50,000 additional charge per unit on folk-lifted imported used vehicles.

The National Economic Council, on Thursday, 27 April 2023, in Abuja, asked the Federal Government to put the June deadline for petroleum subsidy removal on hold pending the review of existing plans to provide palliatives for Nigerians.

This week, we expect the macroeconomic data front to be relatively quiet due to the absence of significant economic releases

Global Markets: Global Indices were Mixed.

Last week, U.S. markets were driven by debt ceiling deal passed by the House of Reps., re-escalated banking sector concerns, 2023 Q1 earnings and other economic data. The debt ceiling proposal was passed by the House of Assembly last week with Republican votes. However, the debt ceiling proposal is unlikely to be passed in the Senate as the Senate is split 50-50 and the deciding vote is the VP (who doubles as the Senate president and is a Democrat). During last week, the Federal Reserve (FED) released its findings from its review of Silicon Valley Bank (the Bank). In the report, the Fed highlighted that the Bank’s troubles were due to oversight and mismanagement. Also, results from First Republic Bank on 24-Apr showed that deposits had fallen by 40.0% in Q1-2023. This reintroduces some volatility in the banking sector in the U.S Meanwhile, Personal Consumptions Expenditures (PCE) for Mar-23 was released last week. The review of the report shows that the PCE index cooled in March 2023, printing at +4.2% y/y compared to +5.1% y/y in Feb-23. Core PCE rose +4.6% y/y in the period as against +4.7% y/y in Feb-23. Also, preliminary GDP figures for Q1-2023 show that the U.S. economy grew +1.1% y/y in the first quarter of 2023 relative to +2.6% y/y in Q4-2022. These results will be considered by the FOMC in its rate decision this week.  Last week was crucial for markets as 53.0% of companies on the S&P500 index reported their 2023 Q1 earnings. According to FactSet72.0% of companies beat their revenue estimates in Q1 2023. Consequently, these earnings drove some sectors and indexes upward in the week under review. The S&P rose +0.9% w/w with the NYSE FANG+ up +3.0% w/w. The DJIA was up +0.9% w/w, and the NASDAQ Composite was up +1.3% w/w.

In Europe, a preliminary flash estimate published by Eurostat, the statistical office of the European Union (EU), showed that Q1-2023, GDP sluggishly rose by +0.1% q/q in the Euro area as against Q4-2022 readings that were flat. However, in the EU, the Q1-2023 GDP marginally rose by 0.3% q/q compared to 0.1% decrease recorded in Q4-2022. Also, seasonally adjusted GDP increased by +1.3% y/y in both the Euro area and the EU in Q1-2023, following a +1.8% y/y growth rate in the Euro area and +1.7% y/y growth in the EU in Q4-2022. Among the member States with available data, Portugal (+1.6%) recorded the highest growth compared to the previous quarter, while Ireland (-2.7%) recorded the biggest decline. The GDP figures will be taken into consideration during the ECB’s meeting this week. Some Policymakers, including the Governor of the Austrian National Bank and the Bank of Italy Governor, had stated that the financial turbulence in the banking sector in Mar-23 had compelled them to rethink rate hikes. Due to the above, some Analysts expect Policymakers to increase interest rate further by 25-50bps. Conversely, investors feared that an interest rate increase could cause a recession in the Euro area and in the EU. Therefore, the STOXX Europe 600 index closed -0.5% w/w, the DAX 40 index closed +0.3% w/w, the CAC40 index closed -1.1% w/w and the FTSE100 index closed -0.6% w/w.

In Asia, Japanese markets closed bullish, with the Nikkei 225 index closing +1.0% w/w and the TOPIX index closing +1.1% w/w. Investor sentiment was boosted by the Bank of Japan’s (BoJ) loose monetary policy stance during its 27-28 April monetary policy meeting.  The BoJ maintained its short-term policy interest rate at -0.1%. It also left its yield curve control framework unchanged, in which the 10yr JGB yields are allowed to fluctuate in the ±0.5% range. Elsewhere on the continent, the Chinese Shanghai Stock Exchange index rose 0.7% w/w, buoyed by commitments made by the country’s Politburo to continue its supportive monetary and fiscal policy stance. Additionally, on Friday 28-Apr, the People’s Bank of China (PBOC) boosted short-term cash injection into the banking system for the 11th straight day as it sought to calm investor concerns over a liquidity squeeze around month-end. The PBOC brought the net injection tally since 17-Apr to ¥‎673bn ($97.0bn).

The global commodities market was broadly lower last week. Oil markets closed bearishly last week with Brent futures closing -2.6% w/w to $80.33/bbl. US Nat. Gas (-0.4% w/w) and Dutch Nat. Gas (-3.7% w/w) futures also closed in the red. Similarly, the Agricultural commodities market closed bearish as losses were recorded in Wheat (-5.9% w/w), Cotton (-5.0% w/w) and Lumber (-12.8% w/w). Nevertheless, precious metals recorded impressive performances as Gold (+0.4% w/w) and Silver (+1.1% w/w) closed in the green zone.

Yesterday, 01 May 2023, more than sixty (60) countries celebrated International Workers’ Day (Labour Day). Due to this, major indices were closed. This week will be a busy earnings week, with one-third of S&P 500 companies reporting their Q1-2023 earnings. Aside from the Q1-2023 earnings, investors await U.S. FOMC’s and ECB’s interest rate decisions on Wednesday, 03 May 2023 and Thursday, 04 May 2023 respectively. By the same token, the Institute for Supply Management (ISM) Manufacturing and ISM Services surveys will be released on Monday, 01-May 2023 and Wednesday, 03-May 2023. Similarly, investors are expectant of  labour market data -Employment Report, rounded off by the Bureau of Labor Statistics (BLS).

Domestic Equities: Bullish Sentiments Resurface… ASI Up 204bps w/w

Last week, the domestic equities market closed bullish, with investors reacting positively to strong Q1-2023 corporate performances across board. Notably, increased bargain-hunting activities across DANGSUGA (+14.0%), BUAFOODS (+11.8% w/w), AIRTELAFRI (+4.3%), ZENITHBA (+3.9%) and MTNN (+2.1%), and  moved the bourse to a positive close. As a result, the benchmark All Share Index (NGX-ASI) climbed by 2.0% w/w to print at 52,403.51 points. Hence, YTD return strengthened to 2.25% from 0.21%, while market capitalisation increased by N570.5bn to print at N28.5tn. Equity turnover improved as the average volume and value traded rose by 132.2% w/w and 183.9% w/w to 1.2bn units traded, worth N8.7bn. Investors’ sentiments strengthened to 2.9x from 1.1x last week. Hence, 49 tickers appreciated in price during the week while 17 depreciated.

Across sectors, overall w/w performance was bullish as four (4) of the five (5) sectors covered by the Research Team closed green. The Consumer goods sector (+5.2% w/w) led the gainers, owing to increased bargain hunting across HONYFLOU (+34.9% w/w), CADBURY (+32.4% w/w) DANGSUGA (+14.0% w/w), and BUAFOODS (+11.8% w/w). Trailing was the Insurance (+2.0% w/w), Banking (+1.7% w/w), and Industrial goods (+0.2% w/w) sectors, on the back of share price appreciation across SOVERENIN (+13.8% w/w), NEM (+9.9% w/w), LINKASSU (+8.9% w/w), ZENITHBA (+3.9% w/w), ACCESSCO (+2.5% w/w), and WAPCO (+4.9% w/w). However, the Oil and Gas sector (-0.1% w/w) was the sole loser in last week’s trading sessions, closing lower despite gains in TOTAL (+10.0% w/w). and ETERNA (+3.6% w/w).

On corporate actions, GTCO, and Zenith released their Q1-2023 unaudited financial results. The top tier-1 banks grew their revenue for the period by 43.7% y/y and 20.2% y/y, respectively. Despite their tax expense climbing by 43.2% y/y and 110.2% y/y, the top-tier banks managed to remain profitable, with their PAT climbing by a significant 34.7% y/y and 13.4% y/y, respectively. Among the top tier-2 banks, Stanbic IBTC, FCMB, and Fidelity grew their earnings for Q1-2023 by a significant 44.0% y/y, 49.9% y/y, and 67.4% y/y respectively. Despite a 283.2% climb in impairment loss for the period, Stanbic IBTC grew its PAT by 91.5% y/y. FCMB and Fidelity grew their PAT by 78.8% y/y and 64.2% y/y in Q1-2023 respectively.

Among the FMCG companies, Cadbury, Unilever, and Nestle released their Q1-2023 unaudited financial results. The FMCG players recorded a decent climb in revenue for the period, each growing their revenue by 29.5% y/y, 19.7% y/y, and 16.0% y/y in that order. Despite Cadbury and Unilever’s income taxes for the period climbing by 124.0% y/y and 272.9% y/y respectively, both companies grew their PAT for the period by 124.0% y/y and 48.7% y/y, apiece. On the other hand, Nestle Nigeria Plc’s PBT for the period declined by 10.6% owing to a 158.7% y/y climb in the firm’s net finance expense. Thus, Nestle’s PAT dropped by 9.9% y/y in Q1-2023.

The Food processors, BUA Food, Nascon, and Dangote Sugar Refinery, released their Q1-2023 unaudited financial results. The food processors recorded a significant climb in their turnover for the period, each growing revenue for the period by 60.2% y/y, 57.1% y/y, and 8.1% y/y in that order. Despite their income taxes for the period climbing by 174.6% y/y, 333.8% y/y, and 21.3% y/y, BUA Foods, Nascon, and Dangote Sugar grew their PAT by 71.0% y/y, 325.3% y/y, and 43.8% y/y respectively.

The Oil & Gas players, Seplat and Total released their Q1-2023 unaudited financial results. Seplat’s and Total’s revenue for the period climbed by a significant 51.1% y/y and 39.0% y/y, respectively. Supported by a 50.4% y/y decline in income tax, the upstream oil and gas firm (Seplat) recorded a whopping 218.7% y/y climb in its PAT. Conversely, Total’s PAT declined by 5.0% y/y owing to a significant 110.2% y/y climb in its finance cost for the period.

Among the Brewers, Nigerian Breweries, and International Breweries both realized losses for the period Q1-2023, with their turnover falling by 10.5% y/y and 5.4% y/y, respectively. The loss incurred by Nigerian Breweries came on the back of a 552.5% y/y climb in net finance costs, while a 10.5% y/y climb in International Breweries’ cost of sales further expanded the company’s losses for the period. Guinness Nigeria outperformed its peers in Q1-2023, growing its revenue for the period by 8.2% y/y. Despite a significant 1696.3% y/y spike in the brewer’s net finance cost, Guinness Nigeria realized a profit of N1.8bn, albeit 72.3% lesser than what was recorded in the same period last year.

The cement firms, Dangote Cement (DangCem), BUA Cement, and Lafarge released their Q1-2023 unaudited financial results. BUA Cement and Lafarge grew their revenue for the period by 9.7%, y/y, and 1.3% y/y, respectively. BUA’s PAT declined by 19.0% y/y, weighed by a whopping 8639.3% y/y climb in its net finance costs. Lafarge’s PAT declined by 15.3% y/y, weighed by a 92.3% y/y climb in income tax. Nevertheless, Dangote Cement’s PAT improved by 3.4% y/y despite the cement giant’s turnover for the period falling by 1.6% y/y. The observed climb in Dancem’s PAT was mostly influenced by a 26.3% decline in the firm’s income tax expense for the period.

This week, we expect bullish sentiments to continue, 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: Buoyant System Liquidity Drove Rates Lower in the PMA

Last week, the financial system opened illiquid with a deficit of N407.9mn. During the week, coupon payments to the tune of N189.5bn and N736.0bn worth of bond maturity hit the system. This helped to bolster system liquidity. Overall, the financial system closed the week buoyant, with a balance of N1.1tn. Consequently, the average Open Repo Rate (OPR) and Overnight Rate (OVN) declined by 628bps w/w and 622bps w/w to close the week at 12.4% and 12.8%, respectively.

The Central Bank of Nigeria (CBN) conducted an NT-bills Primary Market Auction (PMA) rolling over a total of N131.5bn worth of bills across the 91-day, 182-day and 364-day papers. At the auction, investors’ demand was strong, supported by the excess liquidity in the system. Most of the bids were particularly skewed towards the tail-end of the curve. Thus, the auction was oversubscribed, with total subscriptions printing at N819.1bn, implying a bid-to-cover ratio of 6.2x. Notably, the Apex Bank sold just the amount on offer. Consequently, the stop rate on the 91-day and 364-day bills declined by 70bp and 453bps, settling at 5.30% and 10.17%, respectively. The stop rate on the 182-day bill remained unchanged at 8.00%.

In the secondary NT-bills market, we observed buy-interests among investors as the unmet bids in the PMA trickled into the market. As a result, the average yield on NT-bills fell significantly by 149bps w/w to close at 7.3% (previously 8.8%).

This week, we anticipate that the financial system will remain elevated. Thus, money market, funding and FTD rates may taper further, given the excess liquidity. We anticipate a total of N50.0bn worth of OMO maturities to hit the system, adding to the existing liquidity. Finally, we point out that the CBN’s CRR debits and retail FX auctions remain downsides for a sustained buoyancy in the financial system liquidity position.

Bond Market: Mixed Sentiments Dominated the Market

Last week, the secondary bonds market closed bearish despite buy pressures at the start of the week following the N189.5bn coupon payments. This comes on the back of the negative investors’ sentiment toward fixed income instruments, after the news of a halt in the planned petrol subsidy removal. Overall, the average yield across sovereign bonds climbed by 28bps w/w to close at 14.1% (previously 13.9%). On the other hand, corporate bonds traded on a bullish note, as the average yield on corporate bonds declined by 25bps w/w to 14.1% (previously 14.3%).

In the Nigerian secondary Eurobonds market, bullish sentiment dominated the market, as investors sought to hedge against FX risks. The buy interest can also be attributed to pent-up demand from the extended selloffs in the market. Thus, the average yields in the market closed lower by 30bps w/w to settle at 12.9% (previously 13.2%).

Looking forward, we expect bullish sentiments to resume in the secondary bonds market hinged on the excess liquidity in the financial system. On the flip side, we expect sustained bearish sentiments in the Eurobonds market driven by investors’ bias against the market.

Currency Market: The Naira Depreciated at the I&E Window

Last week, the Naira appreciated by 14bps w/w against the U.S. Dollar at the Investors & Exporters (I&E) window to close at N463.00/$, from its previous close of N463.67/$. At the parallel market, we continue to find offer quotes in the N730.0/$- N750.0/$ range. Activities in the I&E window declined as average FX turnover fell 24.8% w/w to $80.9mn. Also, the most recent CBN data records Nigeria’s external reserves at $35.3bn (as of Wednesday 26 April 2023).

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.