United Capital Research Investment Views This Week 6th June 2022 to 10th June 2022

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June 6, 2022/United Capital Research

Macro Highlights and Outlook

Last week, the Central Bank of Nigeria (CBN) ordered banks and Payment Service Providers (PSPs) to accept indemnity from customers for highly secured online funds transfers above N1.0mn for individual and N10.0mn for corporate, subject to a maximum of N25.0mn (individual) and N250.0mn (corporate).

According to a CBN report, Nigeria recorded a 60.0% y/y rise in foreign capital importation to $610.0mn in Jan-2022 from $380.0mn in Jan-2021. However, foreign capital outflow from the economy also saw a significant 163.0% y/y rise to $290.0mn in Jan-2022 from $110.0mn in Jan-2021. Moreso, figures also show that portfolio investment consisting of mainly money market instruments, rose massively by 390.0% y/y to $400.0mn from $10.0mn in January 2021.

Following the country’s external reserve’s depletion to $38.5bn (as of May 31st, 2022), reports have stated that banks are extending waiting period to access forex. This applies to both Personal and Business Travel Allowance requests as well as international school fees, accommodation, and upkeep payments.

In the telecommunications space, stakeholders and the industry regulator have expressed their readiness for 5G network rollout in August this year, but insisted that the identified challenges, which may likely impede the rollout and sustainability plan must be addressed urgently.

Looking forward into coming week, we expect the National Bureau of Statistics to release the country’s Nigerian Domestic and Foreign Debt Q4-2021 report.

Global Markets: Global equities close bearish as uncertainties weigh

Last week, global equities were broadly bearish, reversing previous week’s gains. The bearish performance was influenced by cloudy thoughts and events around macroeconomic outlook, monetary policy outlook and corporate earnings outlook. For example, Fed Governor Waller, Fed Governor Brainard and Cleveland Fed President Mester all acknowledged intentions to support hawkish policy decisions through 2022 even though risks of recession have increased. In addition, the Bureau of Labour Statistics reported at the close of the week, a stronger than expected increase in non-farm payrolls, expanding by 390,000, higher than the expected 328,000 jobs addition, with hourly earnings rising 0.3% m/m in May, 10bps less that the consensus estimates of 0.4% m/m. This raised fears that the jobs report will only go ahead to reinforce a hawkish policy approach. Lastly, top CEOs, Jamie Dimon and Elon Musk expressed fears regarding the US economy, indicating expectations of a recession. Overall, last week’s trading session saw US equities record a lower w/w close. For context, the NASDAQ Composite, S&P 500, and DJIA lost 1.0% w/w, 1.2% w/w, and 0.9% w/w.

Last week, European markets traded mostly in the red even as the UK markets closed the week earlier amid Spring Bank Holiday to celebrate the Queen’s jubilee. On the news front, the European Commission formalised the sixth package of sanctions against Russia, which was announced during the week. Also, Turkey and EU are reportedly in discussions about sending gas from Azerbaijan and Turkmenistan through the Southern Gas Corridor. In addition, European markets appeared to feed from the negative sentiments in the US markets as data from Eurozone’s April Retail Sales showed it declined by 1.3% m/m, 160bps lowers that previous growth of 0.3% m/m. This raised fears that surging inflation may be finally hurting consumer spending, a recipe for recession. That said, the broad-based pan-European STOXX 600 lost 0.6% w/w, with all other stock performance across the individual countries sustaining similar momentum as the UK FTSE 100 and French CAC 40 declined 0.7% w/w, and 0.5% w/w, respectively. Similarly, the German XETRA DAX lost marginally, down 1bp w/w.

Last week, Asian markets ended the week on a mostly higher note, despite markets in China and Hong Kong closing for the Dragon Boat Festival holiday on Friday June 3, 2022. Also, the National Bureau of Statistics of South Korea released the country’s May-22 inflation data, recording a 60bps hike in the country’s inflation rate to settle at 5.4% y/y from 4.8% y/y in April, its fastest pace since 2008. However, in response to the ease in Covid 19 restrictions in China, Asian stocks rallied to close the week in the green. That said, last week’s trading sessions saw major stocks across the Asian market maintain northward climb, with the Japan’s NIKKEI 225 (+3.7% w/w) recording the highest gain, followed by China’s Shanghai Composite SHCOMP (+2.1% w/w) and Indian SENSEX (+1.6% w/w).

Last week, the crude oil market, had a strong head start, hitting a two-month high of $121.0/bbl, after China eased Covid-19 restrictions, with traders also pricing in expectations that the EU will eventually reach an agreement to ban Russian oil imports. However, during the week, European Union leaders agreed to a phased ban on Russian oil. After volatile trading week, oil prices edged higher at the week’s close, bolstered by expectations that OPEC’s decision to increase production targets by slightly more than planned won’t have significant impact on the tight global supply of the commodity amid rising demand from China’s ease in Covid restrictions. Overall, on a w/w perspective, Brent crude climbed 0.2% to close at $119.7/bbl. extending previous week’s gain.

Looking forward, we recommend investors interested in taking position in US equities adopt a gradual portfolio buildup to take advantage of dips and lower valuations in the market. We continue to express caution as we remain concerned by the direction of monetary policy in the US.

Domestic Equities: Local bourse dominated by bears…ASI down 2.2% w/w

Last week, the domestic equity market closed in red, with the benchmark NGX-All Share Index (NGX-ASI) declining 2.2% to settle at 52,908.2 points. The decline in the equities market was broadly reflective of investors’ concern around the recent monetary policy decision which could see yields begin to trend higher, prompting the need to take some profits off the market. Consequently, the YTD return declined to 23.9%, as market capitalisation settled at N28.5tn. Last week, activity levels in the market saw an improvement, with average volume and value traded increasing 1,461.5% w/w and 666.2% w/w to settle at 5.7bn units and N41.8bn, respectively. The surge in activity level was down to a rare negotiated deal in Union Bank which saw Atlas Mara complete its acquisition of the bank. Meanwhile, as measured by market breadth, investors’ sentiment improved from 0.4x to 0.8x, with 36 equities gaining while 44 declined. Despite the improvement in investor sentiment, it remained in bear market territory.

The sectorial performance mirrored the bearish trend as four of the five sectors we track closed the week in red. Leading the losers last week was the Industrial sector (-3.7% w/w) due to sell  offs in  WAPCO (-4.1% w/w) and BERGER (-2.2% w/w), followed by the Consumer goods sector (-2.5% w/w) with major sell offs in NB (-8.1% w/w), INTBREW (-8.2% w/w) and FLOURMILL (-1.5% w/w). Similarly, the Banking sector (-0.7% w/w) closed lower as sell pressures in ZENITH (-1.9% w/w), UBA (-2.5% w/w) and WEMABANK (-12.3% w/w) fed the decline. Lastly, the Oil and Gas sector (-0.5% w/w) was moved by selloffs in CONOIL (-8.4% w/w) and ARDOVA (-1.0% w/w). The lone gainer was the Insurance sector (+0.8% w/w) owing to buy interests in NEM (+10.0% w/w), CHIPLC (+4.6% w/w) and SOVRENINS (+8.0% w/w).

Although we anticipate continued profit taking, we also expect investors to begin bargain hunting by cherry picking fundamentally sound stocks at a discount. We advise investors to buy stocks on our recommendation list at current prices ahead of the H1-2022 earnings and dividend season.

Money Market Review: FAAC inflows drives average funding rates lower

Last week, the financial system opened with buoyant liquidity, opening the week with a balance of N170.4bn. The liquidity position of the banks improved further as FAAC inflows and OMO maturity hit the financial system pushing liquidity balance northwards of N500.0bn during the week. At the end of the week, the system liquidity was approximately N347.9bn as of Friday. In tandem, we saw a gradual decrease in funding rates progressively through the week.  The average Open Repo Rate (OPR) and Overnight Rate (OVN) decreased 4.6ppts w/w and 4.5ppts w/w to print at 8.4% and 8.7% respectively.

Also, last week N65.0bn worth of OMO maturities hit the financial system with the CBN deciding to mop up the liquidity by conducting an OMO auction, offering a total of N40.0bn across the 110-day, 187-day and 355-day maturities. Interestingly, stop rates were maintained at 7.00%, 8.50% and 10.10% respectively, across the tenors. The auction was oversubscribed by N298.1bn (with total bids of N338.1bn), skewed toward the long-term paper on offer. The CBN however sold the exact amount on offer.

In the secondary market, despite the buoyant system liquidity, the NTB secondary market witnessed bearish investor sentiments, likely a pass-through impact of the recent rate hike and NT-bills auction result. Overall, the average yield across NT-bills increased 13bps w/w to close at 4.0%

Looking ahead, no OMO maturities are scheduled to hit the financial system this week. However, a N167.2bn NTB rollover is scheduled midweek where we expect the stop rates to print higher. We expect money market yields and funding rates to print higher as system liquidity gradually tightens.

Bond Market: Bonds market witness bullish performance

Last week the FGN bond auxiliary market experienced renewed buy interest with significant interest on short and mid tenor papers, especially the 2026s and 2027s. Overall, the average yield across sovereign bonds declined by 6bps for the week, closing at 11.2% in the auxiliary market. Similarly, the corporate bonds segment witnessed a bullish performance as average yields fell 10bps w/w to 11.0%.

In the Eurobonds market, mixed sentiments dominated the SSA sovereign Eurobond markets as we saw activities from investors cherry-picking attractive instruments. Although across the curve the market experienced significant investor selloffs in the Nigerian, Angolan and Egyptian markets on the back of global push factors. For Nigerian Eurobonds, the sentiments were broadly bearish as average yields increased by 85bps w/w to close at 11.6%

In the month of June, no coupon repayments will hit the system, however, we expect the bonds market to remain broadly quiet until days before the bond auction where we would begin to see short-selling activities from investors. As a result, we see a quiet week for the bonds market this week.

Currency Market: Naira depreciates at I&E Window

Last week, the Naira depreciated at the Investors & Exporters (I&E) window losing 6bps w/w to settle at N419.65/$. At the parallel market, we found offer quotes in the N605.0/$ region while bid quotes were close to N604.0/$ – N608.0/$ level as of close of Friday. In the I&E window, average FX turnover increased 110.8% w/w to $252.4mn (from $119.7mn in the prior week).

Meanwhile, the economy’s FX reserves declined 30bps w/w to close at $38.5bn.

Looking forward, we expect to see continued pressure on exchange rate as factors influencing the dollar shortage pressures in the economy remain unabating.

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