May 15, 2023/United Capital
Global Markets: Mixed Investors’ Sentiments
Last week, the global equities market closed mixed on the back of mixed economic data releases. In the US, headline inflation slowed marginally for the tenth consecutive month to 4.9% y/y in Apr-2023 from 5.0% y/y recorded in the previous month, spurring hopes that the Fed may hold its policy rate at its next meeting. This represents the lowest reading since Apr-2021, buoyed by lower food and energy costs. In addition, the Producer Price Index (PPI) eased to 2.3% y/y in the period under review compared to the 2.7% y/y increase in Mar-2023 as commodity prices continue to fall and supply chains have improved. These positive economic data drove bullish sentiments across the US equities market. However, market sentiments reversed towards the end of the week following the ongoing concerns about the US debt ceiling and the inconclusive agreement reached at the congressional meeting with President Biden. The Treasury Secretary had warned of potential economic chaos if the debt ceiling is not raised. This negative news also dragged the University of Michigan consumer sentiment for the US to a six-month low of 57.7pts in May-2023 from 63.5pts in Apr-2023. In addition, the five-year inflation expectations increased to 3.2% from 3.0% in the previous month amid renewed concerns about the trajectory of the economy. As a result, the US indices closed mixed with the DIJA and S&P 500 losing 1.1% w/w and 0.3% w/w, respectively. Conversely, the NASDAQ Composite (+0.4% w/w) closed the week higher.
In tandem, the European markets recorded w/w losses as investors digested the rate hikes delivered across central banks in the previous week. The Bank of England (BoE) raised its bank rate by 25bps to 4.5% in its May-2023 meeting, marking the twelfth consecutive rate increase. The central bank forecasts inflation to fall to 5.1% by Q4-2023 and meet the 2.0% target by late 2024, compared to its current 10.0% levels. In addition, the economy is projected to be flat in H1-2023 before picking momentum in 2024 and 2025. On economic growth, the British economy slowed by 0.2% y/y in Q1-2023, compared to the 0.6% growth recorded in Q4-2023. This is the smallest growth rate since 2021, driven by declines in production and manufacturing. Thus, the UK FTSE closed the week 0.3% w/w lower. Elsewhere, France’s headline inflation climbed to 5.9% y/y in Apr-2023, up from 5.7% y/y in the previous month, mainly due to the acceleration in energy prices. In Germany, the annual inflation rate printed at 7.2% y/y in the period under review, the lowest in seven months, compared to 7.4% y/y in March. Despite slowing for the second month in a row, inflation remains very high, with food inflation remaining the biggest contributor. At the end of the week, the France CAC (-0.2% w/w) and Germany DAX (-0.3% w/w) closed lower. On the other hand, the Europe STOXX gained 4bps w/w.
The Asian market closed mixed as slowing inflationary pressures across the continent spurred mixed investors’ sentiments. In China, the headline inflation rate printed at 0.1% y/y in Apr-2023, compared with February’s print of 0.7%. This is the lowest reading since Feb-2021, amid an uneven economic recovery after the removal of a zero-COVID policy, thus driving a further decline in the cost of food and non-food items. In addition, Chinese exports surged by 8.5% y/y in Apr-2023, albeit lower than the 14.8% climb in the previous month.
However, China’s Manufacturing PMI unexpectedly fell to 49.5pts in Apr-2023 from 50.0pts in Mar-2023 amid an ongoing property downturn and fears of a global slowdown. As a result, the capitalisation-weighted Shanghai Composite Index lost 1.9% w/w. In India, headline inflation rate slowed sharply to 4.7% y/y in Apr-2023, the lowest since Oct-2021, from 5.7% y/y in the previous month. Lastly, Japan’s service sector sentiment increased to 54.6pts in the period under review from 53.3pts in Mar-2023. Overall, the Japanese NIKKEI (+0.8% w/w) and Indian SENSEX (+1.6% w/w) closed the week higher supported by gains in technology and consumer-related stocks.
In the oil market, crude oil prices declined as the political standoff over the U.S. debt ceiling stoked recession jitters in the economy, while rising U.S. jobless claims and weak Chinese economic data weighed on market sentiments. As a result, oil prices closed lower, with Brent Crude losing 1.5% w/w to print at $75.30/bbl.
This week, the spotlight will be on speeches by several Fed officials and other major central bank officials around the globe. In the US, investors will be watching out for the resolution reached by President Biden and the Republican congress on the debt ceiling. We anticipate the inflation figures and Q2-2023 number for Japan. In addition, the unemployment rates for the UK and France are set to be released. Finally, China will publish it’s individual production and retail sales figures. These data releases will determine the market’s direction and Investors’ sentiments.
Macroeconomic Highlights and Outlook
Last week, the President, Major General Muhammadu Buhari (retd.), approached the National Assembly seeking approval for a fresh $800m loan from the World Bank, for the National Social Safety Net Programme.
The Budget Office of the Federation disclosed that Nigeria now has a “limited borrowing space” due to its poor debt-to-revenue ratio, stressing that “trouble” looms for the country if it exceeds its limits.
According to the Nigerian Upstream Petroleum Regulatory Commission (NUPRC), oil production declined by 2.9% m/m to 1.27mbpd in Mar-2023 from 1.31mbpd in Feb-2023, due to crude oil theft in Niger Delta. This led to revenue losses for IOCs and indigenous operators.
According to the Federal Government on Wednesday, Nigeria’s oil production is currently lower than its technical allowable capacity by about one million barrels per day. The FG attributed the low output to challenges such as lack of investments, insecurity, and reduction in hydrocarbon funding arising from energy transition, among others.
The Vice President, Prof. Yemi Osinbajo, commissioned Transafam Power Limited, a subsidiary of Transnational Corporation Plc’s 240MW Afam Three Fast Power plant in Afam, Rivers State. With an already existing power plant residing in Afam, this brought the cumulative generating capacity of the plant to 1,000MW. The project was executed in a collaborative effort between General Electric, the Federal Government, and other stakeholders to improve power generation and supply in the country.
Eight banks recorded N502.0bn net impairment charges in 2022 to reduce the negative impact of Ghana’s debt crisis and the slowdown in the global economy on their risky assets. These banks include Access Holdings Plc; Ecobank Transnational Incorporated Plc; FCMB Group Plc; Guaranty Trust Holdings Company Plc; Stanbic IBTC Holdings Plc; United Bank for Africa Plc, and Zenith Bank Plc.
The Central Bank of Nigeria (CBN) disclosed that it has disbursed a total of N144.0bn to exporters of semi and finished commodities as rebates in line with its RT200 Programme. In Q1-2023, the exporters were paid a total of N25.0bn, an 8x increase compared to the same period last year.
The CBN has also stated that any foreign bank(s) willing to engage in granting Dollar-denominated loans to Nigerian companies are obliged to pay a non-refundable application fee of N5.0mn and another non-refundable licensing fee of N10.0mn. This applies to banks with oversees headquarters.
NNPC Gas Marketing Limited and Transit Gas Nigeria Limited inaugurated a 150 million metric cubic feet per day natural gas city gate in Ogun State to boost gas utilitisation and ensure safe delivery to industrial and commercial users.
International airfares on Nigeria routes to various global destinations have skyrocketed again as the International Air Transport Association’s exchange rate for ticket sales has risen 37.5% above the official rate (N461.1/$) to print at N634.0/$.
This week, we expect the NBS to release data for the country’s April CPI Inflation rate. We forecast y/y inflation rate for April 2023 to print at 22.06%.
Domestic Equities: Sell-Off in Large Cap Stock Weighed on the Bourse…ASI Down 48bps w/w
Last week, the domestic equity market closed bearish solely on the back of selloffs in BUACEMEN (-8.0% w/w). Investors’ sentiments toward the bourse remained decent, with notable bargain hunting across fundamentally viable stocks. That said, the benchmark All Share Index (NGX-ASI) fell by 48bps w/w to print at 52,214.62 points. Hence, YTD return weakened to 1.9%, while market capitalisation decreased by N126.0bn to print at N28.6tn from N28.7tn in prior week. Notably, equity turnover improved as the average volume traded rose by 23.1% w/w to 719.8mn units while the average value traded rose by 37.9% w/w to N7.3bn. Investors’ sentiments strengthened to 1.6x from 2.0x last week. Hence, 48 tickers appreciated in price during the week while 30 depreciated.
Across sectors, overall w/w performance was mostly bullish as three (3) of the five (5) sectors we cover closed in the green terrain. The Oil & Gas sector index (+5.20% w/w) led the gainers, owing to buy-pressure across ARDOVA (+37.5% w/w), CONOIL (+10.0% w/w), and MRSOIL (+20.8% w/w). Trailing were the Insurance (+1.2% w/w) and Consumer goods (+0.9% w/w) sectors. This was mainly due to share price appreciation across AIICO (+5.4% w/w), SOVERNIN (+27.3% w/w), MANSARD (+2.3% w/w), and BUAFOODS (+2.6% w/w). The Industrial goods index (-3.4% w/w) led the laggards on the back of losses in BUACEMEN (-8.0% w/w). Lastly, the Banking index (-1.0% w/w)) closed lower following share depreciation in UBN (-1.4% w/w), ACCESSCO (-0.7% w/w), and ZENITHBA (-0.2% w/w).
On earnings releases, Airtel Africa Plc released its Q1-2023 consolidated financials. The telcom firm grew its revenue for the period by 11.5% y/y. However, a 70.5% climb in finance cost weighed on Airtel’s profitability for the period. As a result, Airtel’s PAT for Q1-2023 declined by 0.7% y/y.
Fidelity Bank announced a final dividend of N0.40kobo/share bringing total dividend for the financial year ended December 31, 2022, to N0.50kobo/share. Qualification and payment dates are scheduled for 12 May 2023, and 23 May 2023, respectively.
This week, we recommend a cautious approach toward the Nigerian equities market. We expect bullish sentiments to linger, with plenty room for profit taking. Technically, stocks that are overbought in the equities market often tend to retrace to a support. For Equity vested managers/investors, switching to defensive stocks with high dividend performance will be a choice strategy. Our expectation for an upward reversal of the yield curve remains a strong downside for the equities market in the short-term. Also, political risks will remain a high, encouraging risk-off sentiments.
Money Market Review: System liquidity Drove Stop-Rates Lower at PMA
The financial system opened the week liquid with a balance of N516.8bn. The system remained buoyant throughout the week due to the CRR refund trickling into banks. Thus, the system closed the week with a surplus balance of N701.2bn. However, at the close of the week, the CBN debited the banks, the CRR debit was to the tune of N422.7bn. This drove the funding rates between banks slightly upwards, with the Open Repo Rate (OPR) and Overnight Rate (OVN) closing the week at 12.1% and 12.6% respectively. Overall, the weekly average of the OPR and OVN inched higher by 23bps w/w and 20bps w/w to close the week at 11.23% and 11.61% respectively.
The Central Bank of Nigeria (CBN) conducted its first NT-bills auction for May-2023 at the primary market. Investors’ demand was strong, with total subscriptions printing at N820.8bn. The stop rates across all tenors tapered, with the 91-day, 180-day, and 364-day papers falling by 80bps, 156bps, and 118bps respectively. The decline in stop rates can be attributed to the buoyant liquidity present in the financial system following the residual inflows from April’s bond maturity.This week, we expect N10.0bn in OMO maturities to hit the system, system liquidity to dry up, and the yield curve to begin to tilt upward. FTDs, inter-bank, and money market rates will remain at current levels, with the possibility of slight higher.
The secondary NT-Bills market closed the week bullish amid the liquid financial system, as bullish sentiment from the NTB auction trickled down to the secondary market. Consequently, the average yield on NT Bills declined by 85bps to settle at 6.7% (previously 7.5%).
This week, we expect N10.0bn in OMO maturities to hit the system. We expect system liquidity to dry up considerable, in the aftermath of DMO’s bond auction on Monday. That said, we expect the yield curve to begin to tilt upward before the close of the week, albeit at a relatively slow pace. We project FTDs, inter-bank, and money market rates will remain around current levels, although reserving the possibility of inching slightly higher.
Bond Market: Bullish Sentiment Persists For Sovereign Bonds
The secondary bonds market closed the week bullish amid excess system liquidity. As a result, the average yield across all sovereign bonds declined by 9bps w/w to close the week at 14.00% (previously 14.05%). 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 10bps w/w at the close of yesterday’s session to settle at 13.16%. (previously 13.06%).
This week, we expect the DMO to approach the primary market with a total offer of N360.0bn across the 2028s, 2032s, 2042s, and 2050s. At the auction, we expect marginal rates to inch higher. At the secondary market for bonds, we expect a return of bearish sentiments. Similarly, in 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, closing at N462.33/$. 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 67.4% w/w to $140.4mn from $83.9mn. Also, the most recent CBN data records Nigeria’s external reserves at $35.2bn (as of Wednesday 10 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.
