September 18, 2023/United Capital
Global Markets: Most Global Indices Finished Higher.
Last week , some key economic indicators were released ahead of the US Federal Reserve (The Fed) interest rate decision slated for Wednesday, 20 September 2023. One of these indicators was the US CPI, which rose for a second consecutive month from 3.2% y/y in Jul-2023 to 3.7% y/y in Aug-2023. According to the Bureau of Labor Statistics, the increase was due to oil prices which have been on the rise in the last two months, and base effects from the previous year. However, core inflation, which excludes the effects of volatile items such as food and energy, slowed for the 5th successive month from 4.7% y/y in Jul-2023 to 4.3% y/y in Aug-2023. This (core inflation) lifted hopes for a soft landing by the US Fed in its interest rate decision as it showed the Fed has made progress in its fight against inflation. However, US investors also considered that rising energy prices may prompt the Fed to further tighten monetary policy. Consequently, some US equity indices finished mixed, with the S&P500 down by 0.2% w/w while the DJIA was slightly up by 0.1% w/w.
In Europe, the European Central Bank (ECB) raised its interest rate for the 10th consecutive time, hiking its deposit rate by 25bps from 4.25% to 4.5%, a record high. However, ECB President, Christine Lagarde hinted that the body was nearing the end of its monetary tightening campaign. She highlighted that interest rates at current levels will make a substantial contribution to the return of CPI to its target levels if maintained for a long duration. Hence, the pan-European STOXX Europe 600 went up 1.6% w/w. The German DAX was up 0.9% w/w, France’s CAC 40 was up 1.9% w/w, and Italy’s FTSE MIB was up 2.4% w/w.
In Asia, Chinese equities closed mixed as key indicators suggested that the economy may have bottomed and showed signs of economic stabilisation. This came on the back of some positive economic data from China which lifted investor sentiment as industrial production grew from 3.7% y/y in Jul-2023 to 4.5% y/y in Aug-2023. Also, retail sales, a gauge of consumption, grew from 2.5% y/y in Jul-2023 to 4.6% y/y in Aug-2023. Thus, the Shanghai Composite index closed the week flat while the Hang Seng was down 0.1% w/w.
In energy markets, oil prices surged last week on the back of production cuts due to floods in Libya. Brent crude was up 4.0% w/w. Natural Gas closed higher despite a 2.4% d/d loss on Friday following a bullish EIA storage figure. US Natural Gas was up 1.5% w/w. However, Dutch Natural Gas rose 5.8% w/w following a breakdown of talks between Chevron and union workers which broke down without a deal. Industrial action has now escalated to two weeks of 24-hour stoppages. Chevron has asked Australia’s Fair Work Commission (FWC) to intervene. Similarly, precious metals were modestly up; Gold was up by 0.1% w/w, Silver rose by 0.6% w/w and Copper increased by 2.2% w/w.
The focus this week will be on Central Bank decisions. The Fed’s interest rate decision, the updated FOMC economic projections, and the U.S. Fed Chair, Jerome Powell’s Press Conference would be released this week. Also, the People’s Bank of China (PBOC) and the Bank of Japan (BOJ) will deliver their interest rate decisions this week. The General debate of the United Nations General Assembly (UNGA) starts 19 – 26 September. Important economic data releases including Japan’s inflation/Jibun Bank Composite PMI, and E.U. inflation/PMI will be of interest to investors. Finally, the Australia Labour Tribunal for Chevron LNG dispute will hold its first Hearing on Friday, 22-Sept.
Macro Highlight and Outlook
The National Bureau of Statistics (NBS) released the Aug-2023 Consumer Price Index (CPI) report which showed that Nigeria’s inflation rose to 25.80% in the month of August 2023, 1.72% points higher than the 24.08% recorded in the previous month. According to the report, the significant increase reflects the impact of the removal of petrol subsidies and the devaluation of the official exchange rate on consumer prices. Month-on-month inflation rose to 3.18% in the review month from 2.89% recorded in the prior month.
The Central Bank of Nigeria (CBN, or the Apex Bank) issued a directive instructing Commercial Banks to refrain from utilising their Foreign Exchange (FX) revaluation gains for dividends and operational expenditures. According to the Apex Bank, FX revaluation gains must serve as a counter-cyclical buffer to safeguard against potential adverse FX rate fluctuations. In addition, Banks are mandated to use these gains to reinforce their capital reserves, thus enhancing the banking sector’s capacity to endure volatility and economic shocks.
Minister of Aviation and Aerospace Development, Festus Keyamo, disclosed that President Bola Tinubu yesterday, directed the Central Bank of Nigeria, CBN, to create a platform for quarterly reconciliatory meetings with foreign airlines to address the backlog of trapped funds in excess of $600 million.
According to the CBN, the Federal Government recorded a fiscal deficit of N3.7tn in the first five months of 2023. The combination of declining revenues and increasing expenditures has led to a growing fiscal deficit, necessitating borrowing, and potentially fuelling inflationary pressures.
On Friday, September 15, 2023, President Tinubu approved the nomination of Dr. Olayemi Michael Cardoso to serve as the new Governor of the CBN for a term of five (5) years at the first instance, pending his confirmation by the Nigerian Senate. The directive is in conformity with Section 8 (1) of the Central Bank of Nigeria Act, 2007, which vests in the President of the Federal Republic of Nigeria, the authority to appoint the Governor and Four (4) Deputy Governors for the Central Bank of Nigeria (CBN), subject to confirmation by the Senate of the Federal Republic of Nigeria.
The Chairman of the Presidential Committee on Fiscal Policy and Tax Reforms, Mr. Taiwo Oyedele said Nigeria has over sixty (60) different forms of taxes and levies. He further noted that his committee was working to reduce taxes and levies to less than ten (10). This would imply a 83.3% decrease in the number of taxes and levies.
The Executive Vice President of Intra-African Trade Bank, Afreximbank, Kanayo Awani announced during a media briefing that Afreximbank has said that it intends to double its financing of intra-African trade to $40 billion on a revolving basis by 2026, up from $ 20 billion in 2021.
The Development Bank of Nigeria (DBN) says it plans to disburse N150 billion to micro, small, and medium enterprises (MSMEs) across the country in 2023. Joseph Nnanna, chief economist at DBN, revealed that the disbursement would be done through participating financial institutions for onward lending to MSMEs across various sectors of the economy.
According to Mohammed Idris, Horti Nigeria’s Programme Director, the vegetable industry in Nigeria is underutilised. This statement was made due to a supply deficit of approximately 13.0mn metric tonnes. He further disclosed in a statement that Horti Nigeria was partnering with EnGRAIS to ramp up vegetable production in the country and close the supply gap.
This week will be relatively quiet because we are not expecting bunch of economic release, however, the NBS would publish Nigeria’s Q2-2023 Terms of Trade report (ToT). We expect to see futher moderation in the nation’s ToT numbers primarily driven by an increase in import prices.
Domestic Equities: The Bears Prevailed… ASI Down 110bps.
Last week, the Nigerian Exchange Limited (NGX, or the local bourse) commenced on a red note, with the bears gaining the upper hand, as panic was triggered in the market by a combination of the CBN’s directive to all Banks regarding the treatment of FX revaluation gains, and FTSE Russell’s (a subsidiary of the London Stock Exchange Group) reclassification of Nigeria from frontier to unclassified market status. The demotion was due to the Nigeria’s FX crisis and the difficulties experienced by foreign institutional investors in terms of repatriating their invested capital and gains made from investments. That said, the local bourse closed in the red in three (3) out of the five (5) trading sessions. Notably, sell-offs across banking stocks pioneered the bear market, with ZENITHBA (-10.0% w/w)) and GTCO (-8.2% w/w) leading the fray. Also, sell-offs across DANGSUGA (-10.8% w/w) and MTNN (-1.5% w/w) also influenced the magnitude of the bourse’s decline. Thus, the benchmark All Share Index (NGX-ASI) depreciated 110bps w/w to record at 67,395.7 points. YTD return weakened to 31.5%, while market capitalisation lost N433.2bn to settle at N36.7tn. Conversely, equity turnover improved as the average value and volume traded rose by 4.5% w/w and 15.5% w/w to N9.5bn and 585.8mn units, respectively. Investors’ sentiments worsened further at 0.80x (previously 1.6x), as fifty-six (56) tickers appreciated while seventy (70) depreciated.
Across sectors, overall w/w performance was broadly bearish as four (4) of five (5) sectors under our coverage closed in the red terrain. The Banking Index (-3.2% w/w) led the losers, following sell-interest in ZENITHBA (-10.0% w/w). It was followed by the Oil & Gas (-2.0% w/w), Consumer Goods (-1.8% w/w), and Industrial Goods (-0.3% w/w) indices, driven by share price depreciation across CONOIL (-10.0% w/w), MRSOIL (-10.0% w/w), DANGSUGA (-10.8% w/w), NESTLE (-4.7% w/w), NASCON (-10.7% w/w), and WAPCO (-4.9% w/w). On the flip side of the coin, only the Insurance Index (+0.5% w/w) closed in the green zone, owing to buy-interest across CORNERST (+12.9% w/w), AIICO (+4.6% w/w), MANSARD (+2.1% w/w), and NEM (+0.8% w/w).
On corporate releases, Zenith Bank Plc (Zenith or the Bank) released its Audited H1-2023 Financial Result. The Bank increased its Net Interest Income for the period under review by 41.8% y/y (from N184.7bn in H1-2022 to N261.9bn). Zenith Bank Plc recorded an impairment charge of N207.9bn, a 727.7% y/y increase, with 98.5% (N204.8bn) of the impairment charges attributed to Expected Credit Losses (ECL) on Loans and Advances. The Bank recorded a whopping 161.8% y/y increase in its bottom line (Profit After Tax, PAT), from N111.4bn in H1-2022 to N291.7bn, underpinned by a significant turnaround in its Foreign Currency Revaluation (FCY), recording gains to the tune of N355.6bn, up by 5,794.0% y/y compared to FX Revaluation loss of (N6.2bn) recorded in H1-2022. This completely absorbed any form of shock that would have emanated from the 727.7% y/y increase in impairment charges in the period (H1-2023). Consequently, Zenith Bank declared an interim dividend of N0.50kobo per share, with a qualification date of 22 September 2023. Dividends will be paid electronically to shareholders on 29 September 2023.
Also, United Bank for Africa Plc (UBA or the Bank) released its Audited H1-2023 Financial Result. The bank advanced its Net Interest Income for the period under review by 56.7% y/y (from N177.5bn in H1-2022 to N278.1bn). UBA recorded an impairment charge of N153.9bn, a 1,748.1% y/y increase, with 93.5% (N143.9bn)
of the impairment charges attributed to Expected Credit Losses (ECL) on Loans and Advances. The Bank recorded an enormous 437.8% y/y increase in its bottom line, from N70.3bn in H1-2022 to N378.2bn in the period under review. UBA’s impressive result was due to improved FCY Revaluation gains (up by 1,290.5% y/y from N2.1bn in H1-2022 to N29.2bn), and Net fair value on derivatives (profit) of N348.4bn up by 1,641.6% y/y from a loss position of N22.6bn recorded same period last year. Interestingly, the UBA declared an interim dividend of N0.50kobo per share, indicating a 150.0% increase compared toa dividend of N0.20kobo per share which was announced same period in 2022. The qualification date is 26 September 2023, with dividends to be paid electronically to shareholders on 06 October 2023.
Looking ahead, we expect mixed investors’ sentiments toward listed corporates, with positive sentiments bordering on corporates with strong fundamentals and corporate actions. Furthermore, we expect sustained positive sentiment toward the Tier-1 Banks, considering the fantastic H1-2023 earnings and improved interim dividend declared by the Banks. However, we believe that provided the yields at the short end of the yield curve remain elevated, risk-averse investors will remain more inclined toward the money market. However, Fund Managers may continue cherry-picking stocks with strong fundamentals, particularly Banks with improved interim dividends.
Money Market Review: System Liquidity Tightens
Last week, the financial system opened with a deficit of N125.0bn. In the absence of zero maturities and coupon payments, system liquidity became deflated following the mop-up activity by the Debt Management Office (DMO) via the bond auction. As a result, the financial system closed the week lower, with a deficit of N317.5bn. Consequently, the average Open Repo Rate (OPR) and Overnight Rate (OVN) climbed by 16.5ppts w/w each to close the week at 22.4% and 23.1%, respectively.
In the primary market, the Central Bank of Nigeria conducted an NT-bills auction, rolling over a total of N152,2bn maturing bills across the 91-day, 182-day and 364-day bills. At the auction, investors’ demand was strong, given the increased preference for shorter-tenured instruments. As a result, the total subscription printed at N643.9bn, implying a bid-to-cover ratio of 4.2x. Notably, the CBN allotted the same amount that was on offer. Thus, the stop rates across all the 91-day and 364-day bills climbed by 200bps and 43bps to settle at 6.50% and 12.98%, respectively. However, the stop rate on the 182-day bill remained unchanged at 7.0%.
In the secondary NT-bills market, we observed mild sell pressures across the curve as investors shifted their attention to activities in the Primary Market Auction (PMA). As a result, the average yield on NT-bills climbed by 5bps w/w to close at 7.98% (previously 7.93%). Meanwhile, the average yield on OMO bills fell by 4bps to settle at 13.3%.
This week, we expect a total inflow of N185.8bn worth of coupon payments to hit the financial system. This will help support the already depressed system liquidity. Thus, we project that FTD and money market rates will remain at current levels with a possibility of tapering downward.
Bond Market: Marginal Rate Trend Higher at the Primary Market Auction
Last week, the DMO conducted the Sep-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 abysmal due to the illiquidity of the financial system. Total subscriptions printed at N291.0bn, implying an undersubscription and a bid-to-cover ratio of 0.8x. Notably, The DMO undersold, allotting a total of N251.5bn worth of papers. Thus, the marginal rates on the 2029, 2033, 2038 and 2053 papers climbed by 65bps, 45bps, 35bps and 40bps to settle at 14.50%, 15.45%, 15.55% and 16.25%, respectively.
The secondary bonds market was dominated by bearish investors’ sentiments as the average bond yield rose by 24bps to close at 14.40% (previously 14.16%). Similarly, corporate bonds traded on a bearish note, as the average yield on corporate bonds increased by 42bps w/w to 14.87% (previously 14.45%).
In the Nigerian secondary Eurobonds market, sentiments were largely bearish in tandem with SSA Eurobonds. Thus, the average yields in the market closed higher by 2bps w/w to settle at 11.22% (previously 11.20%).
Looking forward, we expect the volatility in the fixed-income market to persist as investors await the release of the Q4-2023 bond auction calendar. We do not think the incoming liquidity of N185.8bn worth of coupon payments will drive the bond market, as we have observed a weak correlation between system liquidity and bond yields. In the Eurobonds market, we expect the bearish sentiments to continue, as seen in previous weeks, as investors remain averse to Nigerian Eurobonds.
Currency Market: Naira Depreciated at the I&E Window
Last week, the Naira depreciated by 4.8% w/w at the Investors & Exporters (I&E) window to close at N756.91/$, from its previous close of N722.39/$. At the parallel market, Naira depreciated further, as we saw offer quotes in the N930.0/$- N955.0/$ range. Activities in the I&E window weakened, as average FX turnover fell by 37.0% w/w to settle at $56.1mn. Lastly, Nigeria’s external reserves fell by 30bps w/w as at 13-Sept to settle at $33.3bn.
The Association of Bureaux De Change Operators of Nigeria (ABCON) disclosed that it is seeking the merger of several Bureaux De Change operators and not recapitalisation of the industry. ABCON further disclosed that the recommendation was to effectively help its corporate governance and rules of engagements with the Apex Bank. The merger option was adopted for class ‘A’ BDCs in 2007/2008, which entitled them to $1m weekly allocation with N500m capital base.
This week, we expect continued pressure on the Naira across all market segments, as FX pressures persist due to weak Dollar earnings, and demand outweighs supply.
