July 24, 2023/United Capital Research
Global Markets: Markets Closed Mixed
Last week, focus was shifted from macroeconomic data to the earnings season. Thus far, reports are modestly positive with financial stocks making the strongest gains. The results of financial companies, and commentary from their Management Teams, indicate that there has not been a significant deterioration in credit quality, consumer spending remains resilient, and net margins are resilient. This drove a rally in the financial sector with the regional bank ETF (KRE) up 7.5% w/w. Elsewhere, DOW Transport index was up 2.6% w/w with airlines continuing to post strong results. It was quieter on the macroeconomic front in part due to FOMC members being in a media blackout window. Investors widely expect the U.S. Fed to hike rates by 25bps on Wednesday, but there is no consensus regarding whether this will be the final hike of the cycle. Thus, the S&P500 closed the week up 0.7%, while the NYSE FANG+, which provides exposure to next generation technology and tech-enabled stocks fell -3.3% w/w.
In Europe, major markets were mixed with Q2-2023 earnings impacting the indices. The German DAX rose 0.4% w/w, while the pan-European STOXX Europe 600 appreciated by 1.0% w/w. In the U.K., the FTSE 100 outperformed as inflation data came in better than expected. U.K. annual inflation for Jun-2023 printed at 7.9% y/y, below expectations considering May-2023’s 8.7% reading. However, it is still well above the Bank of England’s 2.0% target. Thus, the U.K. FTSE 100 accelerated by 3.1% w/w.
In Asia, China underperformed due to disappointing economic data. The government continued to take steps to bolster the economy, such as its decision not to cut its interest rates. The Shanghai Composite Index fell -2.2% w/w, and the Hang Seng index fell -1.7% w/w. The notable development in Japan was Bank of Japan officials pushing back against a shift in its Yield Curve Control policy this week which caused the Yen to weaken. The Nikkei 225 fell -0.3% w/w. Overall, emerging markets closed modestly lower due to the US Dollar rally. The Dollar Index rose 1.25 w/w. The EM ex-China index fell -0.9% w/w.
Commodity markets ended the week mixed. Energy commodities closed higher. Oil prices rose following Saudi Arabia’s extension of its previously announced production cuts through year end. Brent Crude rose 1.5% w/w. Agricultural commodities extended moved higher last week as the UN grain deal expired (on Mon, 17-Jul), and as both warring parties continued their aggressive rhetoric.
This week, earnings will continue to be the major driver of market activity as 1/3 of the companies in the S&P 500 are set to report their Q2-2023 earnings by the end of the week. Other major catalysts are Central Bank interest rate decisions, including the U.S. Federal Reserve (Wed, 26-Jul), European Central Bank (Thur, 27-Jul), and the Bank of Japan (Fri, 28-Jul). On economic data, the most impactful data release will be the regional inflation data in Europe, i.e., Germany CPI and France CPI.
Macroeconomic Highlights and Outlook
Nigeria’s headline inflation rate rose for the sixth consecutive time to a 17-year high of 22.79 per cent in June 2023 from 22.41 per cent in the previous month. On a divisional level, Food and Non-Alcoholic Beverages was the main driver of headline inflation contributing 51.8% of the year-on-year increase. On a month-on-month basis, headline inflation rose 19bps climb to print at 2.13% m/m from 1.94% m/m in May-2023.
Banks’ net domestic credit to the economy has hit N84.0tn representing an 11.0% month-on-month rise from N75.49 trillion in May. The breakdown of the CBN’s Money and Credit Statistics shows that the private sector took N52.8 trillion, about a 17.9% rise from the N44.78 trillion it collected in May 2023.
In addition, the Central Bank of Nigeria and the Central Bank of Egypt have signed a MoU to establish a Nigeria-Egypt FinTech Bridge. The MoU is aimed at cultivating an innovative space for fintech startups and entrepreneurs in Egypt and Nigeria to accelerate financial inclusion, deepen our payment systems and drive economic growth across the African Continent.
Last week as well the Central Bank of Nigeria (Apex Bank) released an updated list of Bureau de Change dealers (BDC) approved in the country. According to the list published by the Apex Bank, the total number of approved BDC operators reduced to 2,991 from 5,689.
Thee first batch of petrol, 27 million litres imported by an independent marketer has arrived in the country, putting an end to a downstream monopoly market once enjoyed by the Nigerian National Petroleum Company Limited. The vessel, ST Nnene arrived at Ijegun-Egba on Wednesday following the official end to subsidies by President Bola Tinubu on May 29. ST Nnene, had cost Emadeb Energy’s Chief Executive Officer, Adebowale Olujimi, and its bank partners $17.0mn (about N13.0bn) to hire. Five financial institutions- Polaris, First Bank, Union Bank, Access Bank, and Fidelity Bank bankrolled the deal.
Nigeria’s oil output climbed month-on-month by 5.5 per cent to 1.249 mb/d, in June 2023, from 1.184mb/d in May 2023. Also, year-on-year, the nation’s oil output dropped by 17.6 per cent to 1.249 mb/d in June 2023 from 1.515 mb/d in the corresponding period of 2022.
According to the CEO of the Nigerian Midstream and Downstream Petroleum Regulatory Authority (NMDPRA), demand for Premium Motor Spirit (PMS) has dropped by 35.0% since the removal of the PMS subsidy. He stated that the daily PMS demand has reduced significantly to 47.0mn ltr./day from 66.0mn ltr./day in May.
Following the destruction of its food export terminals, the Ukrainian Ministry of Agrarian Policy and Food in collaboration with Lagos Free Zone (a venture of the Tolaram Group) have signed a Memorandum of Understanding (MoU) to build a grain terminal in the Lekki port, Nigeria.
The Federal Government, through the Federal Competition and Consumer Protection Commission, stated yesterday that it will begin to rollout sanctions against members of trade associations guilty of anti-competitive practices, indiscriminate and irrational hikes in food prices.
This week, we expect the Macroeconomic space to be relatively quiet due to the absence of data releases.
Domestic Equities: The Bulls gear up for the upcoming earnings season… ASI up 389bps w/w
Last week, the Bulls resumed bargain hunting on the floor of the exchange, with the financial services industry (measured by volume) leading the activity chart, with 3.0bn shares valued at N36.8bn traded in 20,079 deals; thus contributing 72.1% and 37.1% to the total equity turnover volume and value respectively. For context, we observed resumed bargain across most banks, with FBNH (+25.6% w/w), GTCO (+14.2% w/w), and ACCESSCORP (+22.7% w/w) leading the fray in terms of index influence. That said, a key factor responsible for interest in the banks is FBNH’s Q2-2023 financial results, which indicated strong profitability, with the bank’s profit climbing by a whopping 468.3% for the period. That said, the benchmark NGX-All Share Index (NGX-ASI) gained by 389bps w/w to close the week at 65,003.4 points. As a result, YTD return improved to settle at 26.8%, with market capitalization printing at N35.4tn, thus bagging a total profit of N1.3trn. Overall, activity level was mixed, with the average value of stocks traded climbing 56.3% w/w to print at N19.8bnN19.8bn, despite the average volume of stocks traded declining by 20.2% to print at 834.4mn shares traded. Investor sentiment from last week’s trading session improved significantly, strengthening to 3.8x from 0.4x as 73 tickers appreciated while 19 depreciated, as measured by market breadth.
From a sectoral perspective, overall w/w performance was bullish as all five (5) sectors we cover closed in the green. The Banking (+15.8% w/w) sector led the gainers last week, driven by resumed bargain hunting across ACCESSCO +22.7% w/w), ZENITHBA (+8.2% w/w), and UBA (+16.0% w/w). Trailing were the Insurance (+5.6% w/w), Industrial goods (+2.8% w/w), Consumer goods (+1.7% w/w), and Oil & Gas (+0.6% w/w) sectors, owing to share price appreciation across MANSARD (+15.0% w/w), NEM (+11.1% w/w), AIICO (+9.4% w/w), DANGCEM (+5.1% w/w), NB (+11.9% w/w), UNILEVER (+20.3% w/w), PZ (+11.1% w/w), and ETERNA (+10.3% w/w).
On corporate disclosures, Dangote Cement Plc (“DCP” or the “Company”) announced the completion of the first tranche (“Tranche 1”) of its share buy-back programme which was announced on 7 July 2023. The total number of Shares that were repurchased amounted to 121,404,714 representing 0.71% of the Company’s issued and fully paid ordinary shares, valued at N41,155,703,818.10, at an average price of N339.0/share. Following the conclusion of “Tranche I”, the total number of issued and fully paid outstanding shares of DCP amounts to 16,752,154,537.
On financial results that were released, FBN Holding Plc (or “FBNH”) released its Q2/H1-2023 financial report. From the report, the Bank’s income for the period (Q2-2023) printed at N203.7bn, 74.3% y/y higher than what was recorded in Q2-2022. The Bank’s income for the period H1-2023 arrived at N383.3bn, up by 69.4% y/y from N226.3bn in H1-2022. Owing to a whopping 1758.0% y/y climb in the fair value gains from financial assets held by the bank, from N12.7bn in H1-2022 to N235.97bn in H1-2023, FBNH recorded a significant 231.1% y/y climb in its PAT for H1-2023, which recorded at N187.2bn vs N56.6bn in H1-2022. In further context, FBNH grew its PAT in Q2-2023 by 468.3% to 137.15bn from N24.13bn in Q2-2022.
This week, we expect increased activities on the floor of the exchange, in terms of volume and value traded. This expectation is hinged on the prevailing investors’ sentiment toward listed corporates, particularly the Banks, which has been positive since the new FG administration took charge, on the back of the favourable policies that were introduced (particularly positive for foreign investors). The depressed interest rate environment is also a strong basis for our expectations. For equity-vested stakeholders, taking positions this week is still in order, in anticipation of the Q2/H1-2023 earnings season.
Money Market Review: System Liquidity Tightens
Last week, the financial system opened liquid with a balance of N430.1bn. During the week, a total inflow of N131.5bn worth of coupon payments hit the system. However, the system liquidity was depressed following mop-up activity by the DMO through bond settlements. As a result, the financial system closed the week in a deficit of N74.7bn. Consequently, the average Open Repo Rate (OPR) and Overnight Rate (OVN) climbed by 1032bps w/w and 1063bps w/w to close the week at 11.3% and 12.0%, respectively.
In the secondary NT-bills market, we observed buy pressures amongst investors, particularly at the short end of the curve. As a result, the average yield on NT bills declined significantly by 191bps w/w to close at 4.3% (previously 6.3%).
This week, we expect the Central Bank of Nigeria (CBN) to conduct an NT-bills auction, rolling over a total of N264.3bn maturing bills across the 91-day, 182-day and 364-day bills. At the auction, we expect investors’ demand to be strong, and we believe that stop rates would taper given the expected liquidity in the financial system. We expect a total inflow of N128.9bn worth of coupon payments to hit the financial system. In addition, we anticipate FAAC inflows will keep liquidity elevated during the week.
Bond Market: DMO Oversold the Auction
Last week, the Debt Management Office (DMO) conducted the Jul-2023 FGN bond auction with a total offer size of N360.0bn across the 2029s, 2033s, 2038s and 2053s papers. At the auction, investors’ demand was strong supported by the liquidity present in the financial system at the time of the auction. Thus, the total subscription printed at N945.1bn, implying a bid-to-cover ratio of 2.6x. Notably, the DMO oversold the auction, allotting a total of N656.7bn. Consequently, the marginal rates on the 2029s, 2033s, 2038s and 2053s papers declined by 140bps, 110bps, 135bps and 140bps to settle at 12.5%, 13.6%, 14.1% and 14.3% respectively.
The secondary bonds market was muted as the average yield on bonds fell marginally by 1bp to close at 12.7%. Similarly, corporate bonds traded on a bullish note, as the average yield on corporate bonds fell by 14bps w/w to 12.6% (previously 12.7%).
In the Nigerian secondary Eurobonds market, sentiments were largely bearish as investors’ bias against SSA Eurobond resurfaced. Thus, the average yields in the market closed higher by 22bps w/w to settle at 10.5% (previously 10.3%).
Looking forward, the focus will be on the Monetary Policy Committee (MPC), scheduled to meet on the 24th and 25th of July to decide on the direction of interest rates. Although the current administration has hinted at its drive for a low-interest rate environment, we expect the MPC to maintain a wait-and-see approach given the current economic conditions (rising inflationary pressures and depreciating Naira). Thus, we expect the Monetary Policy Rate (MPR) to be HELD at 18.5%. In the secondary bonds market, we expected continued buy interests supported by the expected system liquidity. On the other hand, we expect sell pressures in the Eurobonds market as investors remain averse.
Currency Market: Naira Appreciated at the I&E Window
Last week, the Naira appreciated by 324bps w/w at the Investors & Exporters (I&E) window to close at N777.82/$, from its previous close of N803.90/$. At the parallel market, we saw quotes in the N820/$- N855.0/$ range. Lastly, the most recent CBN data shows Nigeria’s external reserves declined by $66.0mn to settle at $33.97bn (as of Thursday, 20-Jul-2023).
This week, we expect continued pressure on the Naira across all market segments, given that FX pressures will persist as Dollar earnings remain weak, and demand outweighs supply. We envisage the CBN to continue to monitor and implement necessary plans to defend the Naira’s exchange rate as evidenced by recent developments.
