May 8, 2023/United Capital

Macroeconomic Highlights and Outlook

The House of Representatives has approved the securitization of Ways and Means Advances obtained by the Federal Government from the Central Bank of Nigeria amounting to N23.7tn.

The Transmission Company of Nigeria and the Market Operator have begun a massive disconnection of electricity distribution companies from the national grid due to failure to remit the ancillary services bills.

Nigeria’s Central Bank Governor, Mr Godwin Emefiele, stated that the electronic transaction volumes in Nigeria increased by 836.0% between 2017 and 2021.

According to data from Nigeria’s central bank, the total net loans issued to the private sector rose to N43.0tn in the first quarter of 2023, representing an N1.3tn increase.

The Courier and Logistics Regulatory Department (CLRD) of the Nigerian Postal Service (NIPOST) has carried out raids on unlicensed courier operators, including Express, Delivery, Dispatch and Logistics operators in Lagos State.

The Minister of State, Budget and National Planning, Clem Agba, has disclosed that the Federal Government plans to include an allocation for geospatial data in the budgets of government agencies.

The Organised Private Sector of Nigeria, comprising of the Manufacturers Association of Nigeria (MAN), the Nigerian Association of Chambers of Commerce, Industry, Mines and Agriculture (NACCIMA) and the Nigeria Employers’ Consultative Association (NECA), have rejected the recently announced increase in excise tax. The Ministry of Communications and Digital Economy said the digital economy had been excluded from the planned 5.0% excise duty approved by the Federal Government.

According to the Federation Account Allocation Committee (FAAC) Disbursement reports published by the National Bureau of Statistics (NBS), the Federal Government deducted c.N78.0bn from state allocation for external debt servicing in 2022.

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

Global Markets: Global indices closed mixed.

Last week, U.S. markets were driven by a combination of market-moving events from the release of several earnings reports, the FOMC rate hike on Wednesday, the ECB rate hike and Apple’s (AAPL) earnings report on Thursday, and the April Employment Report on Friday. In addition, Treasury Secretary Yellen disclosed that extraordinary measures to pay the nation’s bills could be exhausted as early as 01-Jun-2023. Following this, it was announced that President Biden would meet with House Speaker McCarthy and other Congressional leaders on 09-May-2023 to discuss the debt ceiling. Mid-week, the market experienced volatility as the FOMC voted unanimously to raise the target range for the fed funds rate by 25 basis points to 5.00-5.25%, further agitating investors’ fears who have been hunting for the next possible weak link in the system and driving down stock prices for those seen at risk of a sudden exodus by customers.  The chaotic week for financial markets ended with a rally in risk assets, possibly driven by short-covering as regional banks rebounded from a brutal rout. PacWest Bancorp. soared 81.7%, though it still lost 43.3% for the week. Western Alliance Bancorp. jumped 49.2% to trim its loss for the week to 26.8%. Fueling the rally was also AAPL posting stronger than expected earnings, which helped lift the mega-cap tech space, and the released jobs report offered significant insights. The strong hiring numbers reaffirmed that the job market is remaining resilient and is propping up the rest of the economy, which has already begun to slow under the weight of much higher interest rates. The 4.4% rise in wages for workers from a year earlier was of more importance. The fear is, too-strong wage increases could push companies to raise prices for their goods and make other moves that create a vicious cycle that keeps inflation high. That could pressure the Fed to keep rates higher for longer. Indices closed mixed as the S&P fell 0.8% w/w, the DJIA lost 1.2% w/w, and the NASDAQ Composite was up 0.1% w/w.

Elsewhere, The Hong Kong Monetary Authority, the Norges Bank, and the ECB followed the FOMC rate hike by raising their key lending rates by 25 basis points. In Europe, the continued hawkish stance by the ECB and the elevated and sticky inflation left investors risk-off as recessionary fear remain in their minds. Therefore, major indices posted weekly losses, the STOXX Europe 600 index closed -0.3% w/w, the CAC40 index closed -0.8% w/w, and the FTSE100 index closed -1.2% w/w. However, equities continued to extend their rally in Germany for the fourth consecutive week. The DAX 40 index closed +0.2% w/w.

In Asia, Earnings from Chinese companies have turned out to be below expectations in Q1-2023, the first full quarter since the country’s reopening, dampening investors’ optimism. Data compiled by China International Capital Corp. revealed that profits at firms listed in Shanghai and Shenzhen grew 2.2% on average in the January-March period from a year earlier. In addition, at least three nationwide Chinese banks lowered deposit rates, following a similar move by their smaller rivals last month as lenders battle shrinking margins. Mid-sized national banks, including China Zheshang Bank Co., Hengfeng Bank Co. and China Bohai Bank Co., said they lowered deposit rates by as much as 30bps on some tenors late Thursday. After the adjustment, these lenders will pay an annual 1.85% for one-year deposits, down from 1.95% and pay 2.95% on three-year and five-year deposits, down from 3.2% and 3.25%, respectively. Chinese banks are pressured to maintain profitability as earnings are being weighed down by falling rates and a government push for state lenders to provide cheap loans to small businesses and home buyers. Despite this, the Shanghai Composite index (+0.3% w/w) still managed marginal week-on-week gains.  In India, the Sensex closed flats amid a sell-off in banking stocks.

Oil markets closed bearish last week, as Oil prices suffered consecutive declines at the start of the week, reaching lows not seen since 2021. However, prices climbed marginally at the end of the week, not enough to reverse losses as there was no sign of a significant rebound in the coming days as ructions in U.S. banking persist, continued hawkish stance by Central Banks and the ineffectiveness of OPEC+ 1.2mn barrels output reduction in stabilising prices. Hence Brent futures prices declined by 5.8% w/w to $75.09/bbl.

We still expect to see reactions to the prior week’s rate hikes this week. In addition, the release of inflation numbers coming out of the US and Europe would heavily drive the market’s direction. The BOE would be meeting to give its interest rate decision; this would also heavily impact markets.

Domestic Equities: Buy-Interest in Banking Stocks Drove the Bullish Sentiment…ASI up 0.1%

Last week, the local equities market closed northwards as investors maintained bullish sentiments towards the market, given the release of impressive Q1-2023 earnings results. Notably, share price appreciations in banking stocks such as GTCO (+9.1% w/w), ZENITHBA (+5.5% w/w) and ACCESSCOR (+10.8% w/w) dragged the local bourse upwards. As a result, the benchmark All Share Index (NGX-ASI) climbed by 12bps w/w to print at 52,465.3 points. Hence, YTD return strengthened to 0.2%, while market capitalisation gained N33.7bn to print at N28.6tn. Activity level closed lower as average value and volume declined by 61.3% w/w and 78.8% w/w to N5.7bn and 743.3mn units, respectively. Investor sentiment weakened to 2.0x from 2.9x last week, as 51 tickers appreciated while 26 depreciated.

Across sectors, overall w/w performance was mainly bullish as all the five (5) sectors under our coverage closed in the green zone. The Banking (+5.2% w/w) sector led the gainers, following buy-interests in ZENITHBA (+5.5% w/w) and ACCESSCOR (+10.8% w/w). Trailing behind was the Oil & Gas sector (+5.1% w/w) due to bargain-hunting activities in SEPLAT (+5.4% w/w), ARDOVA (14.6% w/w) and CONOIL (+10.0% w/w). This was followed by the Insurance (+3.1% w/w) and Industrial goods (+0.1% w/w) sectors on account of price appreciations in WAPCO (+1.7% w/w) and CUTIX (+11.1% w/w). Lastly, the Consumer goods sector gained 2bps, buoyed by gains in NB (+5.3% w/w), NASCON (+7.5% w/w) and VITAFOAM (+9.5% w/w)

On corporate results, Wema Bank Plc released an impressive Q1-2023 result. The bank grew its Profit After Tax (PAT) by 88.4% y/y due to a 35.4% y/y increase in its interest income and a 61.3% y/y reduction in impairment losses. Similarly, ETI’s PAT increased by 5.4% y/y following a 33.0% y/y and 21.3% y/y climb in interest and non-interest incomes. Lastly, OKOMU Plc reported revenue turnover growth of 18.2% y/y turnover and a 7.1% y/y climb in its PAT.

On corporate actions, Access Holding Plc has received regulatory approval from the Central Bank of Angola: Banco Nacional de Angola for the acquisition of a majority equity stake in Finibanco Angola S.A.

This week, we expect bullish sentiments to persist in the market as investors continue to take advantage of the impressive Q1-2023 earnings season. However, we note that there may be pockets of profit-taking activities among investors.

Money Market Review: System Illiquidity Drove Funding Rates Lower 

The financial system opened the week liquid with a balance of N231.4bn. During the week, inflow from OMO maturities to the tune of N50.bn improved the liquidity position of the financial system. In the absence of any primary market activity, the financial system remained in surplus closing the week with a positive balance of N343.8bn. Evidently, the Open Repo Rate (OPR) and Overnight Rate (OVN), two measures of funding rates between banks tapered by 135bps w/w and 137bps w/w to close the week at 18.6% and 19.0% respectively.

The secondary NT-Bills market closed the week bullish, with investors opting to lock their funds in short-term money market instruments with high returns, amid the liquid financial system. Consequently, the average yield on NT Bills declined by 357bps to settle at 7.51% (previously 11.08%).

This week, we expect the CBN to conduct its first NT-Bill auction for May, to roll over maturing bills to the tune of N134.0bn. At the auction, we expect stop-rates to taper. Our expectation is hinged on the prevailing liquidity in the financial system. We project FTDs, inter-bank, and money market rates will remain around current levels, although reserving the possibility of inching slightly lower.

Bond Market: Bullish Sentiment Prevailed

The secondary bonds market closed mildly bullish last week amid extended short-selling activities. That said, the average yield across all sovereign bonds inched lower by 4bps w/w to close the week at 14.09% (previously 14.13%). In the same vein, the average yield on corporate bonds tapered slightly by 4bps w/w to 14.05% (previously 14.09%). In the secondary market for Eurobonds, bearish sentiments prevailed as investors remained negatively disposed toward the market. Thus, the average yield across all the tenors rose by 19bps w/w at the close of yesterday’s session to settle at 13.06%. (previously 12.87%).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%).

This week, we expect bond yields to remain around current levels, with the prospect to inch slightly lower. In addition, we expect to see some extended sell-offs around auction papers 2032s and 2050s. At the corporate bonds market, we expect N1.7bn worth of coupon payments for corporate bonds to stimulate mild buy-interest. For the Eurobonds market, we expect the bearish sentiments to prevail.

Currency Market: The Naira Closed Flat at the I&E Window

Last week, the Naira closed flat against the U.S. Dollar at the Investors & Exporters (I&E) window compared to 28-Apr-23, closing at N462.00/$. At the parallel market, we continue to find offer quotes in the N740.0/$- N750.0/$ range. Activities in the I&E window improved as average FX turnover rose 2.5% w/w to $83.8mn. Also, the most recent CBN data records Nigeria’s external reserves at $35.3bn (as of Thursday 04 May 2023).

This week, we expect continued pressure on the local currency, as witnessed in other SSA economies, given the prevailing conditions – unrelenting FX demand as against available supply, and suboptimal FX earnings, which continue to weigh on the value of the Naira.