United Capital Research Investment Views This Week 13th September 2021 to 17th September 2021

September 13, 2021/United Capital Research

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Macro Overview 

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The National Bureau of Statistics (NBS) released Nigeria’s Foreign Trade in Goods Statistics for Q2-2021. In Q2-2021, total merchandise trade grew 23.3% q/q and 88.7% y/y to N12.0tn from N9.8tn in Q1-2021 and N6.4tn in Q2-2020. The increase was due to a sharp growth (74.7% q/q) in the value of export compared to N2.9tn in Q1-2021 and 128.3% y/y compared to Q2- 2020. As a result, exports totaled N5.1tn, accounting for 42.2% (Q1-2021: 29.8%) of the entire trade component, while import was valued at N7.0tn accounting for 57.8% (Q1-2021: 70.2%) of total trade. Consequently, Nigeria’s trade deficit declined by 52.6% q/q to N1.9tn in Q2-2021 from N3.9tn in Q1-2021. Read our report on the trade report here: Trade deficit contracts by 52.6% q/q in Q2-2021.
 
According to the recently published FY-2020 audited financials for the Nigerian National Petroleum Corporation (NNPC), revenue declined by 19.8% y/y to N3.7tn in 2020 from N4.8tn in 2019. The corporation attributed this loss to the decline in production and price of crude oil due to the global impact of the Covid-19 pandemic. However, due to an impairment charge reversal of N713.4bn, operating profit and net income were up by 121.1% and 1,640.1% to print at N63.6b and N287.2bn, respectively.
 
The Federal Government has approved the National Policy for the Fifth-Generation network to boost the country’s digital economy. The approval of the 5G technology comes after the Nigeria Communications Commission (NCC) ran trial runs with MTN, ZTE, Ericsson and Huawei.
 
In the coming week, we are expecting a flurry of data from the NBS, the body is expected to release GDP data calculated through the income and expenditure approach. We also expect the NBS to release inflation data ahead of the scheduled CBN’s MPC meeting.
           
Global review: Mixed performances across global markets as inflation worries linger  
Global markets were mixed last week, with weakness in the United States & Europe and contrarily, a sustained recovery in Asia. In the US, Producer Price Index (PPI) data released by the Labor department showed an increase of 0.7% m/m and 8.3% y/y in Aug-2021, indicating a tight outlook for inflation in the medium term as the pandemic continues to inhibit supply chains. Of note, the market struggled to find positive triggers, in the face of the persistent Covid-19 infections and weak jobs data from the previous week. Additionally, we believe the reputation of September as a negative month for equities soured investor sentiment. In the holiday-abbreviated week, the major U.S. indexes retreated, as the Dow Jones, the S&P 500 and the NASDAQ fell by 2.2%, 1.7% and 1.6%, respectively.
 
The European Central Bank elected to keep monetary parameters unchanged on Thursday, but unanimously decided to reduce the pace of asset purchases under its Pandemic Emergency Purchase Program (PEPP) which was implemented in Mar-2020 to cushion the effects of the pandemic. Last week’s decision was made against the backdrop of rising inflation which crept to a decade-high 3.0% in Aug-2021. The Frankfurt-based institution also raised its inflation projections for 2021, 2022 and 2023 to 2.2%, 1.7% and 1.5%, respectively. Meanwhile, the UK Prime parliament approved £12.0bn in tax increases to fund social care and the National Health Service (NHS). The Pan-European STOXX 600 index closed -1.2% w/w, while the UK FTSE-100 lost 1.5% w/w.
 
In Asia, equities recorded strong gains on the back of upbeat economic releases. Japan’s Nikkei 225 closed 4.3% higher, buoyed by dovish statements from the Bank of Japan (BoJ) and a 60bps upgrade to the initially estimated 1.3% annualized growth in Q2-2021 to 1.9%. Additionally, trade data for China came in robust, owing to strong growth in exports to US and the EU. Exports in Aug-2021 increased by 25.6% y/y (in USD terms) to $294.3bn, as imports grew 33.1% y/y to $236.0bn. The Shanghai Composite Index recorded a weekly gain of 3.4%.
 
In the commodity markets, oil prices recorded a third-consecutive weekly gain. Brent Crude rose 0.4% w/w to $72.92/b on the back of constrained supply In the US – due to Hurricane Ida. Notably, China announced plans to auction state oil reserves to local refineries, in order to alleviate energy cost pressures for manufacturers.
 
This week, we expect the release of US Consumer Price Index (CPI) for Aug-2021, as well as US Retail Sales data, to drive activities in the global environment as market participants and policymakers continue to assess the economic environment.  
 
Domestic Equities: Corporate actions trigger bearish response
Last week, the local equities market recorded selloffs as participants reacted rashly to corporate actions from tier-1 lenders on the last trading day of the week. The NGXASI closed 0.9% lower w/w at 38,921.8pts, bringing the YTD return to -3.4% and the total market capitalization to N20.3tn. Notably, majority of the selloffs took place on Friday (-0.7%), despite decent dividend announcements from Tier-1 Banks. For the week, average volume and value traded improved by 6.5% and 51.1% w/w to 285.2m and N2.6bn, respectively. Investor sentiment, as measured by market breadth improved to 0.8x as 24 tickers appreciated while 31 depreciated.

Across sectors, w/w performance was mixed as 2 sectors advanced, 2 sectors declined and one closed flat. The Oil and Gas (+2.3% w/w) and Consumer Goods (+0.2% w/w) indexes recorded weekly gains as investors sought bargain hunting opportunities in OANDO (+14.0% w/w) and INTBREW (3.2% w/w). The Industrial Goods sector remained flat on a w/w basis. The Insurance index (-3.4% w/w) depreciated on account of CORNERST (-15.8% w/w) and LASACO (-6.5% w/w). Similarly, the Banking index lost 0.4% w/w on the back of selloffs in GTCO (-2.9% w/w) and UBA (-1.9% w/w).

Tier-1 lenders, UBA and GTCO released financials for H1-2021 during the week. UBA posted a 5.1% y/y increase in Gross Earnings to N316.0bn, buoyed by 8.3% y/y growth in Interest Income. The Bank also reported a 36.3% y/y jump in PAT to N60.6bn and announced an interim dividend of N0.20/share. GTCO Gross Earnings declined by 7.7% y/y to N207.9bn, as Interest Income dipped 18.0%. Similarly, PAT for the period declined by 15.8% y/y to N79.4bn. The HoldCo announced an interim dividend of N0.30/share for the period. 

Elsewhere, Access Bank Plc notified the NGX of the authorization of Joint Bookrunners and Financial Advisers to facilitate a series of global investor calls, commencing on September 11, 2021. Subject to market conditions, the Bank aims to issue of a 5-year fixed rate USD-denominated Senior Unsecured Note under its Global Medium Term Note Programme. The issuance is expected to print at $375.0m with the bonds expected to be perpetual with a call option exercisable after five years. Indicative coupon rate is 9.0% – 9.5%.

This week, we expect some bargain hunting on some tickers that experienced selloffs in the previous week. In the medium term, we expect the market to remain choppy. Additionally, market participants will be watching the fixed income space closely amid a hike in stop rates at the recent NTB auction.  

Money market review: Stop rate on 364-day bills rose by 40bps to 7.20%

At the start of last week, funding pressures eased as interbank rates traded at single-digit territory on the back of inflows from N170.0bn worth of OMO bills maturities. However, by the end of the week, funding needs for the OMO and NT-bills auctions conducted by the Central Bank of Nigeria (CBN) renewed pressures on liquidity. Consequently, the Open Buy Back (OBB) and Overnight (OVN) rates both rose by 100bps w/w to close the week at 14.00% and 14.50%, respectively.
 
At the primary market, the Central Bank of Nigeria (CBN) conducted an NT-bills auction, selling a total of N209.5bn out of the N256.1bn worth of bills that was subscribed, compared to N138.2bn on offer. As expected, investors’ demand was high as the 91-day and 364-day bills recorded subscription rates of 1.2x and 2.2x respectively. On the other hand, interest in the 182-day bill was much weaker as it recorded subscription rate of 0.5x. The stop rate on the 91-day and 182-day bills remained unchanged at 2.50% and 3.50% respectively. Interestingly, the stop rate on the 364-day bill rose by 40bps to 7.20% from 6.80% at the last auction. This in our opinion could indicate some form of fund pressure for the Federal Government.
 
Also, the Central bank conducted an OMO auction, selling a total of only N50.0bn worth of bills, as against N129.3bn subscribed. As expected, investors’ appetite was healthy as the 117-day, 194-day and 341-day bills were oversubscribed by 1.8x, 1.6x and 3.2x respectively. Unsurprisingly, the stop rate on the 117-day, 194-day and 341-day bill remained unchanged at 7.00%, 8.50% and 10.10% from the previous auction.
 
In the NT-bills secondary market, performance was mainly bearish on the back of a rise in the stop rate in the primary market. As a result, average yield rose by 30bps w/w to close at 4.91% from 4.61% at the close of last week. Similarly, we saw marginal bearish sentiments in the secondary OMO market as the average yield closed at 6.22%, 10bps w/w higher than prior week’s close.
 
Looking ahead, we expect the bearish reaction that trailed the NT-bills auction to subside this week as we look towards another NT-bills primary market auction. During the week, the CBN would be conducting another NT-bills auction to rollover N155.9bn worth of bills. While we would like to employ a wait-and-see approach, we have a bias towards expectation of sustained upward reversal in the stop rate for the 364-day bill as the sheer volume of the rollover as well as FG’s apparent need for funding could outweigh any desire from sovereign debt managers to drive rates lower.  
 
Bond Market update: Marginal bearish performance across all markets
In the secondary bonds market, we saw an end of its sustained bullish run, as average yield on sovereign bonds was up marginally by 5bps w/w to 11.09% from 11.04%, across the curve. In the same vein, the corporate segment closed on a bearish sentiment as the average yield climbed up by 2bps w/w to 11.80% from 11.78%.

In the Eurobond market, sentiment was bearish as we observed upward yield movement as average yield climbed marginally by 6bps w/w to close at 5.75%. Contrarily, average yield declined by 2bps w/w at the corporate Eurobond market to close at 3.87%.

We expect trading activities in Eurobonds to remain dull as investors wait to see how the FG’s Eurobond issuance will play out with a lot of attention on the possible pricing. That said, the Minister of Finance has confirmed it is looking at raising $3.0bn, in contrast to the $6.2bn it initially hoped for.

Currency Market:
Parallel market continues downward spiral

Last week, the naira depreciated marginally at the I&E window, losing 0.2% to close at N412.0/$1, from N411.1/$1 in the prior week. In the parallel market, the naira sustained its downward pattern, shedding a further 2.8% w/w to close at N545.0/$1, as the naira hit record low levels. Regarding activity levels at the I&E window, the average turnover at the window dropped by 33.0% w/w to print at $141.1m, compared to $210.8m in the prior week. Lastly, external reserves rose by 1.5% w/w to close at $34.7bn.
 
The recent pressures observed at the parallel market have been driven by FX supply scarcity in that market segment as BDCs become more competitive for dollar flows in the absence of CBN’s intervention.
 
Our outlook for the naira remains bright for the official window although it remains dependent on the success of the Eurobond issuance, expected withdrawal from the International Monetary Fund’s SDR allocation, as well as the continued stability of higher crude prices. However, for the parallel market, in the short term, we await to see if the CBN’s upcoming MPC meeting could see it announce a softening of its stance regarding BDCs, which would be a major boost for the pressured segment. Otherwise, we may see continued pressure at that end of the market.  
  

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