May 22, 2023/United Capital
Global Markets: Bullish Investors’ Sentiments
Last week, major indices logged weekly gains globally despite the Q1-2023 earnings cycle winding down. In the US market, participants assimilated mixed signals throughout the week, from mixed sentiments surrounding the debt ceiling deal and weaker-than-expected retail sales numbers to fear-inducing statements from the Treasury. Market participants received retail sales data for April on Tuesday morning. That report featured a 0.4% increase in total retail sales for Apr-2023, but retail sales are not adjusted for inflation. Total retail sales were flat after adjusting for inflation, suggesting weaker demand than the headline number implies. At the end of the week, media reports disclosed that Treasury Secretary Yellen told bank CEOs that more mergers might be needed, which reignited angst in the banking space. The SPDR S&P Regional Banking ETF (KRE) closed in the red. Mega stocks supported the US indices with positive responses to earnings and other corporate news. Most of the S&P 500 (+1.6% w/w) sectors logged gains this week, led by information technology (+4.2%), consumer discretionary (+2.6%), communication services (+3.1%), and financials (+2.2%). Meanwhile, the utilities (-4.4%) sector saw the most significant decline by a decent margin, followed by real estate (-2.4%). The DIJA (+0.4% w/w), Nasdaq (+3.0% w/w) and the Russell 2000 (+1.9% w/w) all printed green.
In tandem, the European markets recorded w/w gains. The Stoxx Europe 600 Index was up 0.7% w/w, climbing to the highest since Feb-2022. Financial, services and construction sectors outperformed, while retail shares dropped, with JD Sports falling after Foot Locker Inc.’s first-quarter results missed estimates and it cut its annual guidance. An advance in the DAX Index boosted the German benchmark to an all-time high. At the end of the week, the France CAC (+1.0% w/w) and Germany DAX (+2.3% w/w) closed green. Similarly, the FTSE 100 gained marginally by 3bps w/w, boosted by miners and oil-exposed stocks.
The Asian market closed mostly green despite China reporting some weaker-than-expected retail sales, along with weaker-than-expected industrial production and fixed asset investment, data for Apr-2023 revealed and playing into lingering concerns about the pace of global growth. The Shanghai composite rose by 0.3% w/w due to the buying interest driven by the attractiveness of undervalued Chinese equities. Japanese stocks extended gains, with the Nikkei 225 (+4.8% w/w) reaching its highest print in nearly 33 years, as optimism that the US will avoid default added to bullish sentiment that has fueled one of the world’s best equity rallies of 2023. The rally gained further momentum on Friday as the yen touched its lowest this year, lifting shares of exporters and increasing the purchasing power of dollar-based investors looking to buy Japanese stocks. Exchange data released Thursday showed foreign investors were net buyers of Japanese equities for a sixth-straight week, acquiring a net ¥781.0bn ($5.6bn) worth of shares and futures in the week ended 12-May-2023. The Indian SENSEX closed flat.
The oil market experienced a bit of volatility as crude prices oscillated throughout the week. At the start of last week, oil prices climbed as the U.S. government confirmed plans to begin refilling its heavily drawn Strategic Petroleum Reserve (SPR), sending a buy signal to markets. The Department of Energy (DOE) noted that it would purchase up to 3.0mn barrels of oil for the SPR. By mid-week, the bullish sentiments were sustained as optimism over oil demand and U.S. debt ceiling negotiations outweighed worries about abundant supply. However, dialling back a little of the week’s rally was the maintained upward charge of the Dollar on expectations that a higher U.S. debt ceiling deal will be achieved soon. Nonetheless, the oil markets posted week-on-week gains, with Brent Crude gaining 1.9% w/w to print at $75.58/bbl.
This week, PMI numbers for Germany, the UK and the US will be released, providing insights into the state of these economies. In addition, the UK’s Apr-2022 y/y inflation figures and the FOMC meeting minutes will be released. In Asia, the People’s Republic Bank of China would decide on the loan prime rate. These economic releases, among others would essentially steer the market’s direction and Investors’ sentiments this week.
Macro Highlight and Outlook
The National Bureau of Statistics (NBS) released Nigeria’s April 2023 Consumer Price Index (CPI) report, revealing yet another rise in y/y inflation rate, climbing by 18bps to print at 22.23% y/y from 22.05% in Mar-2023. On a divisional level, intensified pressure in the inflation of prices of Food and Non-Alcoholic Beverages was the main driver of the headline inflation print. From a month-on-month perspective, headline inflation rate recorded a 5bps climb to print at 1.91% m/m from 1.86% m/m in Mar-2023.
The latest data from the Central Bank of Nigeria (CBN) reveal the federal government’s debt service to revenue ratio rose to 111.8% in 2022. This is according to the CBN’s 2022 statistical survey data where most of the country’s fiscal and monetary-based data is reported. The high level of debt service to revenue ratio raises serious concerns about the financial management of the current administration led by President Buhari.
Nigeria recorded a total foreign exchange inflow of $72.4bn in 2022, which is a 23.3% decline compared to the $94.3bn recorded in 2021 and 37.4% lower than $115.6bn received in 2020. This is according to the data in the CBN quarterly statistical bulletin for Q4-2022.
According to a report released by S&P Global Commodity Insights, the Dangote refinery is anticipating the arrival of its first crude batch in Jun-2023. A representative from the refinery revealed that they expect to commence processing this initial batch, consisting of 500,000 bpd, before gradually increasing production to 650,000 bpd by mid-2024. The official commissioning of the Dangote refinery by President Buhari is scheduled for 22 May.
This week, we expect the Monetary Policy Committee (MPC) to convene for its May-2023 meeting. At the meeting, we expect the MPC to HIKE the Monetary Policy Rate (MPR) given the inflationary and foreign exchange pressures in the economy. Also, we expect the National Bureau of Statistics (NBS) to release Nigeria’s Q1-2023 Domestic & Foreign Debt numbers and the Q1-2023 Gross Domestic Product (GDP).
Domestic Equities: Equities Market Closed Bearish, down 0.1% w/w
Last week, the local equities market closed bearish despite gaining on three (3) of the five (5) trading days. Notably, share price depreciation in AIRTELAF (-6.0% w/w) and ARDOVA (-23.7% w/w) weighed on the local bourse. As a result, the benchmark All Share Index (NGX-ASI) declined by 5bps w/w to print at 52,187.93 points. Hence, YTD return weakened to 1.8%, while market capitalisation closed the week at N28.4tn. Equity turnover declined as average volume and value declined by 15.9% w/w and 7.8% w/w to 605.8mn units and N6.7bn respectively. Investor sentiment remained unchanged from last week at 1.6x as 44 tickers appreciated while 27 depreciated.
Across sectors, three (3) of the five (5) sectors under our coverage finished higher. The insurance index (+5.2% w/w) led the gainers, following buy-interests in MANSARD (+17.1% w/w) and CORNERST (+23.1% w/w). Trailing behind was the Banking index (+2.9% w/w) due to bargain-hunting activities in ZENITHBA (+8.3% w/w), ACCESSCO (+3.0% w/w) and UBA (+1.2% w/w). This was followed by the Consumer Goods index (+1.9% w/w) due to price appreciation in NB (+18.4% w/w), PZ (+28.8% w/w) and CADBURY (+21.3% w/w). However, the Oil and Gas Index (-1.7% w/w) and the Industrial index (-0.03% w/w) closed lower due to share price depreciation in ARDOVA (-23.7% W/W) and WAPCO (-0.8% w/w).
On corporate actions, Seplat Energy Plc announced an interim dividend at a rate of $0.03 per ordinary share, to be paid to shareholders whose names appear in the Register of Members as at the close of business on 18-May-2023 (subject to withholding tax). Also, the company confirmed that an exchange rate of N465.04/$ and £0.8017/$ will be applied when determining Q1-2023 interim dividend.
This week, we expect mixed sentiments in the equities market, comprising of pockets of buy interests across fundamentally sound stocks, and bearish sentiments arising from an upward reversal of yields in the fixed income market. We recommend a cautious approach for Equity vested investors and fund managers, with a strategic switch to defensive stocks with strong corporate actions and fundamentals.
Money Market Review: Tighter System Liquidity Drove Funding Rates Higher
Last week, after the pre-existing liquidity was cleaned up by CRR debit to the tune of N422.7bn, the financial system opened the week fairly liquid with a balance of N97.3bn. Early in the week, N10.0bn in OMO maturities arrived in the system, scarcely enhancing its liquidity status. With a balance of N14.6bn, the financial system concluded the week positively, overwhelming the negative effects of primary market settlements (in relation to the DMO’s auction). Accordingly, funding rates between banks nudged higher. The Open Repo Rate (OPR) and Overnight Rate (OVN), two measures of funding rates between banks, increased by an average of 4.3ppts w/w and 4.5ppts w/w, to close the week at 15.5% and 16.1%, respectively.
The secondary NT-Bills market closed the week mostly bearish, with investors’ demand for higher returns resurfacing amid the relatively liquid financial system. Thus, the average yield on NT Bills gained 15bps to settle at 6.80% (previously 6.65%).
This week, we expect the CBN to conduct its last NT-Bill auction for May, rolling over maturing bills to the tune of N168.7bn. At the auction, we expect stop rates to nudge higher. Our expectation is hinged on a tighter financial system, in terms of liquidity. We expect the MPC’s decision to play a crucial role in the upward reversal of rates across the curve. Lastly, we project FTDs, inter-bank, and money market rates to trend higher throughout the week in view.
Bond Market: Marginal Rates Trend Higher at DMO Auction
The DMO conducted its May 2023 bond auction at the primary market, with a total offer of N360.0bn across the 2028s, 2032s, 2042s, and 2050s. The auction was met with decent interest from investors, as it was oversubscribed by 1.2x, with total subscription printing at N444.0bn. Investors’ interest was mainly skewed toward the longer end of the curve, with 72.7% (N322.9bn) of the total auction bid coming in for the 2050s. The CBN opted to slightly oversell (N368.7bn) the auction by an allotment rate of 1.02x. Owing to the relatively liquid financial system at the time of the auction, supply and demand fundamentals influenced an uptick in marginal rates across the 2028s, 2032s, and 2042s, up by 10bps, 10bps and 29bps, to settle at 14.1%, 14.9%, and 15.69% respectively. However, marginal rates on the 2050s remained unchanged at 15.8%.
The secondary bonds market closed mildly bearish last week as short-selling activities partially resurfaced. That said, the average yield across all sovereign bond tenors inched higher by 6bps w/w to close the week at 14.1% (previously 14.0%). In the same vein, the average yield on corporate bonds nudged higher by 10bps w/w to close at 14.0% (previously 13.9%). Conversely, sentiments were slightly bullish at the secondary market for Nigerian Eurobonds, in tandem with broad-based sentiment across the Sub-Saharan African (SSA) region. Demand was predominant on the GHANA sovereigns, mainly driven by expected loan approval by the IMF. That said, the average yield across the curve tapered by c.7bps w/w to settle at 13.1% (previously 13.2%).
This week, we expect bond yields to maintain its current northward trajectory, trending higher than current levels. However, we expect shallow pockets of bullish sentiments to be spurred by the expected N17.9bn coupon inflow. At the corporate bonds market, we expect the anticipated N2.1bn worth of coupon payments for corporate bonds to stimulate mild buy-interests. For the Eurobonds market, we expect $42.6mn worth of coupon payments to trigger slight buy-interests. On a broader scale, we expect bearish sentiments to resurface, as rising debt sustainability risks, and depleting foreign reserves continues to place restrictions in the government’s budget financing options.
Currency Market: Naira Depreciated at the I&E Window
Last week, the Naira depreciated by 14bps w/w at the Investors & Exporters (I&E) window to close at N463.0/$, from its previous close of N462.3/$. At the parallel market, we continue to find offer quotes in the N740.0/$- N750.0/$ range. Lastly, the most recent CBN data records Nigeria’s external reserves at $35.2bn (as of Wednesday 17 May 2023).
This week, we expect to witness continued pressure on the Naira across all market segments, given that FX pressures will persist as dollar earnings remain weak and demand outweighs supply.
