July 17, 2023/United Capital Research

Global Markets Remain Broadly Bullish
Last week, the US stock market had an excellent week. Bullish sentiments were driven by market participants’ belief that the economy will avoid a hard landing and that the Fed is close to being done raising interest rates. Fueling this was some vital economic data released during the week. These include June CPI, PPI, and Import-Export Price Index, which showed inflation trending in a market-friendly direction, and another weekly initial jobless claims report well below recession-like levels. Notably, the CPI report showed a less-than-expected 0.2% increase in total CPI and a 0.2% increase in core CPI, which excludes food and energy. On a year-over-year basis, total CPI was up just 3.0% compared to 4.0% reported in May, the smallest increase since March 2021. Similarly, the core CPI was up 4.8% versus 5.3% in May. Broad-based buying interest further cemented the week-on-week gains and a sizable drop in market rates. The 2-yr note yield declined 21 basis points last week to 4.7%, while the 10-yr note yield dropped 23 basis points to 3.8%. All 11 S&P 500 sectors recorded gains that ranged from 0.6% (energy) to 3.4% (communication services). Those gains were logged as the Q2 earnings reporting period got underway, featuring reports from Delta Air Lines (DAL), PepsiCo (PEP), JPMorgan Chase (JPM), Wells Fargo (WFC), Citigroup (C), and UnitedHealth (UNH), all of which exceeded consensus earnings expectations. Major indices such as the Nasdaq Composite (+3.3% w/w), S&P 500 (+2.4% w/w), S&P Midcap 400 (+2.7% w/w), Russell 2000(+3.6% w/w), Dow Jones Industrial Average (+2.3% w/w).

In tandem, the European markets recorded w/w gains bolstered by bullish sentiments in the US. The European equities market recorded some gains despite the minutes of the European Central Bank’s (ECB) June meeting, which showed support for further rate increases amid concerns about persistently high inflation in the eurozone. Further driving gains in the stock markets was falling European government bond yields as slowing US inflation raised expectations that the Fed is nearing the end of its policy tightening cycle. UK bond yields declined, but robust wage data cushioned the drop. UK wages grew at a record annual pace of 7.3% in May. However, the labour market showed signs of easing, with the jobless rate ticking up to 4.0% from the 3.8% recorded in April. Major stock indexes posted weekly gains. France’s CAC 40 Index climbed 3.7%, Germany’s DAX added 3.2%, and Italy’s FTSE MIB gained 3.2%. The UK’s FTSE Index 100 expanded by 2.5%.

On the other hand, the Asian market closed mixed. Chinese equities rallied after Beijing telegraphed measures to support the country’s flagging economy. The Shanghai Stock Exchange Index rose 1.3% w/w, while the blue-chip CSI 300 added 1.9% w/w. In Hong Kong, the benchmark Hang Seng Index gained 5.7% w/w. Chinese officials announced an extension to two of the 16-point stimulus guidelines rolled out last November to support the ailing property sector. The extended policies aim to defer property development loans and encourage financial institutions to ensure the delivery of projects and will be in effect until the end of 2024. Conversely, Japanese equities lagged behind their Asian peers over the week, missing out on a regional rally driven by favourable developments in the China technology space and hopes of further Chinese stimulus. Consequently, the Nikkei 225 Index generated a flat return, and the broader TOPIX Index fell 0.7%.

In the oil market space, crude oil prices rose in Asia, hovering near three-month highs as softer-than-expected US inflation data helped ease some anxiety over rising interest rates.  In the US, inflation and economic data sparked hopes that the Federal Reserve may have fewer interest rate hikes in store, and Chinese trade figures showed monthly oil imports were the second highest on record in June. As a result, oil prices closed higher, with Brent Crude gaining 1.8% w/w to print at $79.87/bbl.

This week, the spotlight will be on the EU and the UK inflation numbers. Furthermore, at the start of the week, investors would focus on the release of China’s Q2-2022 GDP and June’s Industrial Production report. Finally, investors will closely monitor companies’ performances as the Q2-2023 earnings season continues. These data releases will determine the market’s direction and investors’ sentiments this week.

Macro Highlight and Outlook
According to the National Bureau of Statistics (NBS), capital importation into Nigeria rose by 6.7% q/q from $1.06bn recorded in Q4-2022 to $1.13bn in Q1-2023. According to the report, the largest capital importation during the period was received from Portfolio Investments, which accounted for 57.3% ($649.3mn) of total capital imported. Notably, foreign investments in the manufacturing sector dropped by 35.0% from $392.5m in Q4-2022 to $256.0m in Q1-2023.

Furthermore, Pension Funds Administrators (PFAs) have expanded their investments in less risky asset classes, mainly Federal Government (FG) securities, in Q1-2023, amidst fears of uncertainty associated with the last 2023 general election coupled with low yield in the equities market. Notably, PFAs’ investments in FG securities accelerated by 19.9% y/y from N8.5tn recorded in Q1-2022 to N10.2tn in Q1-2023.

According to the Debt Management Office (DMO), Nigeria has redeemed a $500mn Eurobond instrument, which matured on 12 July 2023. In a statement published on its website, the DMO said that the bond was issued in July 2013 for a tenor of 10 years at a coupon of 6.375 per cent annually.

The total inflows into the Investors and Exporters Window rose to $2.55bn in May and June, according to data obtained from the FMDQ. The data indicated that total inflows into the 1&E window increased for the second consecutive month in June to $1.41bn from $1.14bn in May, following the unification of official exchange rate.

In a significant milestone for the Nigerian Financial Markets, FMDQ Securities Exchange Limited and FMDQ Clear Limited, both subsidiaries of FMDQ Group Plc, introduced the dynamic FMDQ Exchange-Traded Derivatives (ETD) market. This enables capital market stakeholders to hedge inherent financial market risks in their operational and investment activities and ultimately deepen Nigerian Financial Markets.

The GCEO of the Nigerian National Petroleum Company Limited (NNPCL) stated in a Bloomberg interview that Federal Government will renegotiate the country’s production quota in the ongoing OPEC+ cuts by Nov-2023. He stated that Nigeria is working towards ramping up crude oil production by 200,000bpd to 300,000bpd by Oct-2023. Nigeria’s current oil production, excluding condensates prints at 1.3mn bpd as of Jun-2023.

This week, we await the Nigerian Bureau of Statistics (NBS) to publish the country’s Consumer Price Index (CPI) report for Jun-2023. We expect headline inflation to continue its upward trend in June, reflecting the impact of the petrol subsidy removal and the devaluation of the Naira.
 
Domestic Equities: The Bears Return… ASI Down 0.8%
Last week, the local equities market closed bearish following an 8-week bullish run. Notably, share price depreciations in MTNN (-3.6% w/w), FBNH (-22.2% w/w), ACCESSCO (-20.3% w/w) and GTCO (-8.2% w/w) were primarily the movers of the All-share index. As a result, the benchmark All Share Index (NGX-ASI) fell by 75bps w/w to print at 62,569.73 points. Hence, YTD return weakened to 22.1%, while market capitalisation lost N226.0bn to print at N34.1tn. Equity turnover worsened as the average value rose and volume traded fell by 56.4% w/w and 46.6% w/w to N12.7bn and 1.0bn units, respectively. Investors’ sentiment weakened to 0.6x (previously 3.1x), as 48 tickers appreciated while 86 depreciated.

Across sectors, overall w/w performance was bearish as three (3) of five (5) sectors under our coverage closed lower. The Banking index (-14.3% w/w) led the laggard due to share price depreciations in ACCESSCO (-20.3% w/w), ZENITHBA (-6.6% w/w) and ETI (-23.0% w/w). Trailing was the Insurance index (-11.5% w/w) on account of losses in MANSARD (-17.7% w/w) and NEM (-11.5% w/w). The Consumer Goods index (-2.3% w/w) declined following share price depreciations in NB (-10.8% w/w), NESTLE (-2.1% w/w) and PZ (-18.6% w/w). Conversely, the Industrial Index (+9.0% w/w) led the gainers, following buy-interests in DANGCEM (+11.6% w/w), BUACEMEN (+8.7% w/w) and MEYER (+11.7%). It was followed by the Oil/Gas index (+1.4% w/w) driven by buy interest in CONOIL (+10.0% w/w) and MRSOIL (+10.0% w/w).

On corporate actions, the Nigeria Exchange Group (NGX or the exchange) suspended seven (7) companies from trading on its facility effective 11-Jul-2023 having failed to file their Audited Financial Statements for the year-ended 31-Dec-2022. This was in accordance with the exchange’s Rule 3.1, which requires quoted companies to submit their full-year audited results no later than 90 days after the end of each year. The suspended companies are, Afromedia Plc., Ardova Plc., C&I Leasing Plc., International Energy Insurance Plc., Pharmadeko Plc., Presco Plc., and Royal Exchange Plc. Following this development, Presco Plc. in a corporate disclosure notified its shareholders, the exchange, and the investing public that its delay in filing its financial statements is due to the extended delay in completing Siat Nigeria Limited (SNL)’s financial statements. SNL is a subsidiary of Presco Plc. Nevertheless, Presco Plc further announced that its consolidated financial statements will be released to its board for approval no later than 31-Jul-2023.

Also, Access Holdings Plc announced that its flagship subsidiary, Access Bank Plc. (the bank) and Standard Chartered Bank have entered into agreements relating to the acquisition of Standard Chartered’s majority shareholdings in its subsidiaries in Angola, Cameroon, Gambia, and Sierra Leone, as well as its Consumer, Private & Business Banking (CPBB) business in Tanzania. Additionally, the bank has entered into a definitive agreement for the acquisition of majority equity stake in African Banking Corporation (Tanzania) Limited (“BancABC Tanzania”).

This week, we expect the bullish sentiments to resume in the equities market as investors will look to take advantage of the low-pricing of stocks (from last week’s selloffs) in the market. Lastly, we expect investors to begin to take positions ahead of the upcoming Q2-2023 earnings season.

Money Market Review: Stop Rates Tapered at PMA
Last week, the financial system (the system) opened with a balance of N771.4bn. Despite the absence of any maturity, the system closed the week with a balance of N440.5bn. Funding rates between banks were relatively flat. The Open Repo Rate (OPR) and Overnight Rate (OVN), two measures of funding rates between banks, closed mixed, with the OPR sliding lower by an average of 1bp w/w and the OVN inching higher by an average of 1bp w/w, to close the week at 0.97% and 1.38%, respectively (previously 0.98% and 1.37%).

At the primary market, the CBN conducted its first auction for the month, attempting to rollover maturing bills to the tune of N141.8bn. The auction was successful, as it was oversubscribed by 4.9x with total bids printing at N601.9bn. At the auction, investors’ interests were mainly skewed toward the 364-day bill, as it was oversubscribed by 4.8x. Stop rates across all the tenors tapered. Stop rates on the 91-day, 181-day, and 364-day bills slipped by 1bp, 87bps, and 29bps, to print at 2.86%, 3.50%, and 5.94%, respectively.

The secondary NT-Bills market was mostly quiet. However, the liquidity in the system extended investors’ buy interest, as they continued to exploit the prevailing rates in the secondary market. Thus, the average yield on NT-Bills tapered by 4bps to settle at 6.25% (previously 6.29%).

This week, we expect the liquidity in the financial system to persist. Supply and demand fundamentals will continue to drive activities in the money market. We expect the demand for higher rates to keep money market and FTD rates in the upper region of the single digit terrain.

Bond Market: System Liquidity Remained “KING”
The secondary FGN Bond market closed the week bullish. The average yield across all sovereign bond tenors dropped by 21bps w/w to close the week at 12.7% (previously 13.0%). Similarly, the corporate bonds market closed bullish, with the average yield on corporate bonds sliding by 8bps w/w to close at 12.7% (previously 12.8%).

At the Eurobonds market, we observed significant buy-pressure, after the Federal Government announced complete redemption of its $500.0mn Eurobond issue, which matured 12 July 2023. Thus, the average yield across the curve fell by 23.06ppts w/w to settle at 10.3% (previously 33.3%).

This week, the Debt Management Office (DMO) will approach the primary market with a total offer of N360.0bn across the 2029s, 2033s, 2038s, and 2053s. We expect the auction to be successful with a possible oversale, helped by liquid financial system. Marginal rates are expected to taper at the auction. Overall, we expect the bullish sentiments in the secondary market to continue, also supported by the expected bond coupon payment to the tune of N206.5bn. Liquidity will remain KING, keeping rates suppressed. For the Eurobonds market, we expect the buy-interest to persist, helped by the expected $78.4mn coupon inflow.

Currency Market: Naira Depreciated at the I&E Window
Last week, the Naira depreciated by 3.5% w/w at the Investors & Exporters (Is&E) window to close at N803.9/$, from its previous close of N776.9/$. At the parallel market, we saw offer quotes in the N790.0/$- N820.0/$ range. Activities in the I&E window weakened, with average FX turnover falling by 10.9% w/w to settle at $78.5mn. Lastly, Nigeria’s external reserves fell by 4bps to settle at $34.0bn.

This week, we envisage continued pressure on the Naira across all market segments, given that FX pressures will persist as Dollar earnings remain weak, and demand for Dollar outweighs supply.