February 19, 2024/United Capital Research
Global Markets
Last week, US markets were volatile in response to key economic releases. Inflation data and some other economic reports were below market expectations. Headline inflation rose by 3.1% y/y compared to 3.4% y/y in Dec-2023. This was above Analysts’ expectation of 2.9%. Similarly, the core inflation (which excludes the volatile food and energy prices) increase by 3.9% y/y, matching Dec-2023’s increase and surpassing market’s 3.7% estimate. In a related update, retail sales fell more than expected, declining by 0.8% m/m. By the same token, industrial production unexpectedly slipped in Jan-2023 by 0.5% m/m, attributing this to bad weather. Thus, the S&P 500 was down 0.4% w/w.
Conversely, the European markets ended the week higher with major bourses and most sectors closing on the positive territory. Hence, STOXX Europe 600 appreciated by 1.4% w/w, German DAX up by 1.1% w/w, and the UK FTSE 100 upsurge by 1.8% w/w. Additionally, in the UK, retail sales data came in stronger than expected. According to the Office for National Statistics (ONS), sales accelerated by 3.4% m/m, higher than the 1.5% m/m market forecast. This was the biggest monthly increase since Apr-2021. This positive data came in at a point when the UK economy has entered into a technical recession, contracting by 0.1% in Q3-2023 and by 0.3% in Q4-2023.
Moreso, the Asian markets reported impressive performances. Although China was closed for the week in observance of, Lunar New Year holiday last. The Hong Kong Hang Seng Index rallied after reopening, up by 3.8% w/w on optimism of the spending over the holiday. Japan’s Nikkei rose by 4.3% w/w, hitting a 34-year high as investors bet that the weak economy will cause the Bank of Japan to maintain its ultra-loose monetary policy.
Updates from the commodity markets indicate that oil futures were stable sustaining the previous week’s gains. Oil futures ended the week modestly higher as it approached the $84.0 highs last recorded in Nov-2023. Brent crude futures surge by 1.6% w/w. Natural gas futures continued to nosedive hitting multi-year lows, Thus, Dutch natural gas decreased by 9.0% w/w while US natural gas decelerated by 12.9% w/w. Finally, agricultural commodities continued to decline with wheat futures falling by 5.9% w/w (-11.6% YTD) while corn futures decreased by 2.9% w/w (-11.6% YTD).
Looking ahead, US Equity and Bonds Markets will closed on Monday, 19-Feb. in observance of President’s Day. Nonetheless, China’s markets will reopen haven been closed last week in observance of the Lunar New Year celebrations. Furthermore, we expect some releases of FY-2023 financials from predominantly smaller companies this week. In the same vein, the market awaits the release of the FOMC minutes on Wednesday, 21-Feb. Meanwhile, key economic data in the week will be China’s Central Bank (PBOC)’s Loan Prime Rate 1yr/5yr interest rate decision, EU/Germany PMI flash, and S&P Global flash PMIs.
Macroeconomic Highlights
Consumer Price Index (CPI) report for the month of Jan-2024 reveals that headline inflation printed at 29.9% y/y compared to 21.8% y/y recorded in January 2023. This represents an 808bps upsurge in the general prices of goods and services on a year-on-year basis. However, the CPI rose by 98bps compared to its 28.9% y/y reading in Dec-2023.
According to data released by the National Bureau of Statistics (NBS) total capital importation into Nigeria stood at $1,088.5mn in Q4-2023, 2.6% higher than $1,060.7mn recorded in Q4 2022. In comparison to the preceding quarter, capital importation into Nigeria recorded a significant 66.27% improvement, from $654.65mn in Q3 2023.
Foreign Portfolio Investments (FPIs) recorded a significant improvement in Q4-2023, recording at $309.6mn, 225.6% higher than $87.1mn recorded in Q3-2023. Comparing to prior year, FPIs improved by 8.6% y/y versus $285.3mn in Q4-2022. Notably, FPI’s accounted for 28.5% of total capital imported into Nigeria in the reference quarter.
Capital Importation during the reference period (Q4-2023) originated largely from the United Kingdom with $267.2mn, indicating a percentage share of 24.6%. This was followed by Mauritius with $226.2mn (20.78%) and the Netherlands with $149.9mn (13.77%). Lagos state remained the top destination in Q4 2023 with $771.7mn, accounting for 65.4% of total capital importation, followed by Abuja (FCT) with US$370.80 million (34.07%) and Rivers state with $6.0mn (0.55%).
Additionally, Stanbic IBTC Bank Plc received the highest capital importation into Nigeria in Q4 2023 with $499.5mn (45.9%), followed by Citibank Nigeria Limited with $229.1mn (21.0%) and Rand Merchant Bank Plc with US$85.9mn (7.9%).
In line with the Central Bank of Nigeria’s (CBN) commitment to ensure transparency and stability in the foreign exchange market and avoid foreign exchange malpractices, the apex bank issued a directive directing that all authorised dealer banks shall henceforth effect payout of PTA/BTA through electronic channels, including debit or credit cards, with strict restriction on cash payments.
Also, the CBN disclosed that it had observed that proceeds of crude oil exports by International Oil Companies (IOCs) operating in Nigeria, are transferred offshore to fund parent accounts of the IOCs (otherwise referred to as “cash pooling”). It further revealed that the referenced activity of the IOCs had impacts on the liquidity position of the domestic foreign exchange market.
Consequently, in a bid to ensure minimal negative impact on liquidity in the Nigerian foreign exchange market, the apex bank directed that banks are allowed to pool cash on behalf of IOCs, subject to a maximum of 50.0% of the repatriated export proceeds in the first instance. Also, the balance of 50.0% may be repatriated after 90 days from the date of inflow or the export proceeds.
The Trade and Exchange Department of the CBN released a disclosure on allowable deviation limit on the price verification system, disclosing that due to global inflation and other related challenges, the CBN had reviewed the allowable limit of price deviation for exports and imports to -15.0% and +15.0% of the global average prices, respectively (previously +/- 2.5% of global average prices).
For further clarification, the CBN noted that the PVS is not meant to determine the actual prices of items for tariffs or duty charged by government but rather to enable the CBN curtail the excess outflow of limited foreign exchange, through over-invoicing and other price manipulation activities.
The International Monetary Fund (IMF, or the Fund) in its latest country report for Nigeria, revealed that Nigeria’s foreign reserves may fall to $24.0bn in 2024 before increasing again to $38.0bn in 2028 as portfolio inflows resume. The Fund also added that the financial account is likely to deteriorate, with no projected issuance of Eurobonds, large Fund and Eurobond repayments of $3.5bn, and portfolio outflows.
The Dangote Petroleum Refinery has issued tenders to sell two fuel cargoes for export, the first cargo from the newly commissioned refinery has been awarded to Trafigura and is due to load at the end of February. The refinery has also purchased some US oil and is expected to receive two million barrels of US WTI Midland in early March.
Figures from the 2024 approved budget show that states would receive N2.24tn more than the N3.3tn disbursed in 2023. Despite this improved funding, no fewer than 32 states have indicated plans to borrow N2.78tn from domestic and external institutions to fund their 2024 budget. Last year, governors got the most Federal Account Allocation Committee (FAAC) allocations in at least 7 years after the petrol subsidy removal and currency reform reportedly delivered a 40.0% boost to income.
According to the Federal Government, Nigeria’s power sector indebtedness to Electricity Generating Companies (GenCos) and gas producers has risen to about N3.3tn, and projected that subsidy on electricity for 2024 would gulp about N3.0tn. Conversely, only N450.0bn was budgeted for the purpose of electricity subsidy in the 2024 budget. Consequently, the Minister of Power, Adebayo Adelabu opined that Nigeria must begin to move towards a cost-effective tariff model, as the country is currently indebted to the tune of N1.3tn to the GenCos, while the debt to gas companies was stated at $1.3bn.
This week, we expect the macroeconomic data front to be sparse, as investors digest the recent data on capital importation Q4-2023, released by the NBS.
Domestic Equities: Large-Cap Stocks Led the Positive Performance…ASI up 3.8% w/w
Last week, the Nigerian Exchange (NGX) saw decent share price appreciation across large-cap stocks like BUAFOODS (+20.8% w/w), AIRTELAFRI (+10.0% w/w), GEREGU (+33.3% w/w) and SEPLAT (+9.6% w/w). Noteworthy is the fact that the bourse recorded a positive performance despite the elevated yield levels at the fixed income market. This brings to the fore the tremendous value available in the market. That said. the benchmark All Share Index (NGX-ASI) trended higher by 379bps w/w to print at 105,722.80 points. Hence, YTD return strengthened to 41.4%, while market capitalisation closed at N58.1tn. On the flip side, activity level slowed despite the positive performance of the market, as the weekly average of total value and volume of stocks traded declined by 23.5% w/w and 36.9% w/w to settle at N7.3bn and 310.0mn respectively. The decline in market activity was quite reflective despite the large-caps impressive performance amid the elevated yield environment in the fixed income market. However, investors sentiment as measured by the market’s breadth strengthened to 0.7x from 0.3x, as 34 tickers appreciated while 47 depreciated.
Across sectors, overall w/w performance was mostly bullish as three (3) sectors under our coverage closed in the green terrain. The Consumer Goods Sector (+10.96% w/w) led the gainers owing to significant buy-pressure in BUAFOODS (+20.8% w/w). Trailing was the Oil & Gas (+5.25% w/w) and Insurance (+2.7% w/w) Sectors, owing to share price appreciation across SEPLAT (+9.6% w/w), CORNERST (+12.1% w/w), MANSARD (+5.3% w/w), and MBENEFIT (+14.75% w/w). On the flipside, the Industrial Goods (-1.8% w/w) Sector led the laggards on the back of share price depreciation in BUACEMEN (-4.6% w/w). Lastly, the Banking Sector (-1.3% w/w) recorded sustained adverse sentiments from investors, despite the index trading at the oversold region. That said, sell-offs across ACCESSCO (-9.1% w/w), ZENITHBA (-2.85% w/w), and UBA (-2.2% w/w) weighed the banking index the most.
As negative sentiments continue to outweigh the positives in the short-term, we expect broad-based bearish sentiments to thrive in the short-term. We foresee activities in the fixed income market to stand as key demotivator for equities investments this week. The uncertainty and overall market expectation of a HIKE in the MPC’s next meeting (to be held on 26 and 27th of Feb-2024) may underpin a cautious investment approach toward risk assets. Given the tremendous value that still exists in the equities market, on the back of currently undervalued stocks particularly the banking stocks (which are currently trading beyond the oversold region), we still expect background bargain hunting activities, albeit overshadowed by the short-term negative sentiment, pending the release of FY-2023 financial results and corporate actions from top-tier banks, and other corporates.
Money Market Review: System Liquidity Tightens
Last week, the financial system opened liquid with a surplus balance of N219.8bn. Meanwhile, there was an inflow of N40.0bn from coupon payments during the week. However, there were no auctions (bonds, NT-bills, and OMO) during the week. Consequently, the financial system closed the week with a surplus balance of N77.2bn. Nevertheless, the average Open Repo Rate (OPR) and Overnight Rate (OVN) declined by 413bps and 453bps w/w to settle at 15.31% and 15.98%, respectively.
In the secondary NT-bills market, we observed bearish sentiments across the curve. As a result, the average yield on NT-bills rose by 12bps w/w to close at 15.47% (previously 15.35%). On the other hand, the average yield on OMO bills fell by 10bps to settle at 17.82%. (17.92%)
This week, we expect the Central Bank of Nigeria (CBN) to roll-over a total of N265.5bn worth of maturing NT-bills across the 91-day, 182-day and 364-day bills. In the absence of any maturity during the week, we anticipate a depressed liquidity in the financial system. Additionally, the combination of the NT-bills and bond auctions is expected to weigh on system liquidity, in line with recent trends. Thus, we project that FTDs and money market rates will trend higher this week, primarily driven by the resultant system deficit, in the aftermath of the primary market auctions.
Bond Market: Bearish Sentiments Dominate in the Secondary Market
The secondary bonds market was dominated by bearish investor sentiments amid concerns relating to the direction of the interest rate within the economy and the release of the Feb-2024 bond offer circular. The Federal Government (FG) plans to raise N2.5tn through bond instruments offerings. In line with the plan to reduce long-term borrowings, two new instruments are on offer, with the longest tenure being a 10-YR paper and second paper being a 7-YR paper. Thus, the average bond yield rose by 63bps to close at 16.12% (previously 15.49%). Similarly, corporate bonds traded on a bearish note, as the average yield on corporate bonds increased by 75bps w/w to 17.74% (previously 16.99%).
On the other hand, we observed mild buy-interests in the Nigerian secondary Eurobonds market as investors sought to re-invest inflows from coupon payments to the tune of $59.1mn. Thus, the average yields in the market fell by 11bps w/w to settle at 9.67% (previously 9.78%).
Looking forward, the Debt Management Office (DMO) is schedule to conduct the Feb-2024 bond auction with an offer size of N2.5tn across the newly issued 2031 (7-YR) and 2024 (10-YR) papers. At the auction, we expect marginal rates to trend higher given the liquidity in the financial system compared to the offer size. In the secondary bonds market, we expect the bearish sentiments to persist. Lastly, we expect the bearish sentiments to return to the Eurobonds market as the nation’s debt sustainability issues and FX volatility drive sell offs.
Currency Market: Naira Depreciated at the I&E Window
Last week, the Naira depreciated by 4.6% w/w at the Nigerian Autonomous Foreign Exchange Market (NAFEM) to close at N1,537.96/$, from its previous close of N1,469.97/$. At the parallel market, the Naira depreciated by 10.6% w/w to close the week at N1660.0/$ (previously, N1500.0/$). Activities in the I&E window improved, as average FX turnover fell by 82.7% w/w to settle at $84.0mn. Lastly, Nigeria’s external reserves rose by 30bps to settle at $33.2bn.
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.
