NGX kicks off 2022 with strong gains, rises 2.66% w/w

Global:

Trading across global markets was mixed this week as investors digested the latest macroeconomic numbers and statements from global central bankers, while covid concerns weighed on some markets. In the Asian region, the Caixin China Purchasing Managers’ Index (PMI) printed at 50.3 in December which was higher m/m. Meanwhile, in Japan, business activities eased m/m, with the Japanese Jibun Bank Flash Manufacturing PMI printing at 52.1 in December (November: 53.0). However, the Shanghai Composite and the Nikkei-225 eased 166bps and 109bps respectively. In the Eurozone, markets posted marginal gains as concerns around the pandemic coupled with surging inflation in the region weighed on investor sentiment. Additionally, investors reacted to a report by the European Commission, which reported that economic sentiment in the region among consumers and businesses declined in December. Furthermore, investors continue to monitor the covid-19 situation in the region, after Italy and France registered records in daily infections. For the, the German Dax rose 50bps, while the French CAC and London FTSE rose 108bps and 41bps respectively. Finally, markets in the U.S. were the worst performers w/w, as covid-19 concerns and statements from the Federal Reserve weighed on markets. On Wednesday, minutes from the December 2021 Federal Open Market Committee (FOMC) meeting, revealed that the Fed’s condition of reaching maximum employment before raising interest rates “could be met relatively soon”. The possibility of a close rate hike weighed on investor sentiment, while concerns over a record 1 million new covid-19 cases in the U.S. furthered dampened sentiment. For the week, the Nasdaq, S&P 500, and Dow Jones were down 335bps, 228bps, and 117bps respectively at time of writing.

Domestic Economy:

Recently, the Minister of Finance, Zainab Ahmed, made a public presentation on the approved 2022 budget. Amid a rising deficit and a high debt service-to-revenue ratio, the Minister reeled out measures to grow our Revenue-to-GDP ratio from 8% currently to 15% by 2025. In the current year, however, the fiscal authorities will be leaning on the partial rollback of capital gains tax exemptions, imposition of excise duties on alcoholic, carbonated and sweetened beverages, as well as digital taxes. While the tax on beverages is in line with the recommendations of the World Bank, we believe this revenue measure could be easily implemented, given the inelasticity of the product and the size of the duty (N10/ litre). However, we note the fiscal authorities could face some difficulty in removing subsidies in the current year due to the electoral season. Albeit, we could see room for reforms once private and public refineries are fully operational. Ultimately, we see Nigeria’s fiscal metrics recovering the current year as oil prices are poised to remain above $60 (Benchmark: $62) while oil production recovers steadily.

Equities:

The domestic market kicked off the new year on strong note, as the NGX rose 266bps w/w in the first trade week of 2022. The improvement in global oil prices continues to drive sentiment in the oil and gas space, as the sector ended this week as the best performer rising 268bps w/w. ARDOVA and SEPLAT were beneficiaries of the positive sentiment in the space as they rose 653bps and 230bps w/w respectively. Meanwhile, marginal gains and losses were recorded across the other sectors, as investors await FY’21 earnings. Starting in the banking space, pockets of demand in mid-low cap names saw the sector rise 78bps w/w; much was the same in the Industrial Goods sector as well, as the sector rose 34bps w/w. Finally, in the consumer goods space, sell-side activity in mid-cap names saw the sector dip 87bps w/w. For the week value traded came in at 20.34 billion while volume traded came in at 900 million.

Fixed Income:

It was a week of mixed trading across the fixed income market, as investors continue to favour longer-date tenors in lieu of shorter-term notes. In the bonds space, we observed a mix of buy-and-sell side action over the course of the week, as investors seek to take positions ahead of the January bond maturity. As a result, yields on benchmark bonds rose 4bps w/w, with the yield on the 12.75% FGNAPR-2023 rising 24bps w/w to close at 7.69%. Moving to the NTB and OMO segments, despite healthy system liquidity throughout the week, we observed limited activity across the respective spaces. Across the NTB curve, yields rose 1bp on average, while in the OMO space yields rose 4bps w/w.

Currency:

The Naira gained 5.00 at the I&E FX Window to close at N430.00

What will shape markets in the coming week? Equity market:

The market closed out the week strong as investors remained bullish on BUAFOODS. We expect a mixed trading session to start the new week as investors continue to cherry pick attractive counters across board.

Fixed Income:

Barring any unforeseen catalysts, we expect the market to maintain its current trading pattern in Monday’s session, while we except to see pockets of activity in the NTB and OMO segments on the back of system liquidity.

Currency:

We expect the naira to remain largely stable across the various windows of the currency space as the CBN maintains interventions in the FX market.

Focus for the week Nigeria 2022 Outlook – Equity Market

The global economy has undergone radical changes due to the impact of the coronavirus on the socioeconomic activities of the world’s population. Nevertheless, the timely stimulus responses from fiscal and monetary authorities were able to jumpstart the global economy following the Great Lockdown of 2020. Additionally, the rebound in economic activities from such policy implementations has raised commodity prices, given a relatively slow supply response. Whilst this has led to higher inflationary pressures globally, it has been quite beneficial to emerging economies, with renewed export income boosting investor confidence in such economies.

In Nigeria, the foremost commodity-export by FX earnings, oil revenue has witnessed a 34% surge yearto-date, signaling stronger FX reserves and positively impacting sentiment around the FG’s capacity to honour its debt obligations. For the equity market, this means investors are willing to be less risk-averse in mopping up equities. Still, investments in the equity market - which have seen the NGX ASI gain 7.45% ytd - have been geared towards the Oil and Gas sector, almost with a laser-like focus. For context, whilst the Banking, Consumer Goods, Industrial Goods and Insurance

Indices have returned -0.82%, -4.36%%, 6.90% and -2.59% ytd respectively, the Oil and Gas sector has realized an outstanding 60.39% in the same period.

Although the vast gain in oil prices is the major driver of the difference in sectoral returns, several other factors have contributed to underwhelming performance of the other sectors. Specifically, the consumer goods sector remains plagued by a decline in consumer spending power, and although players in the space have used a number of strategies to tide over the impact on revenue, the pass-through effects of these strategies on margins and dividend capacity have limited investor participation in the sector. Meanwhile, for the banks, while weaker non-interest income had kept investors wary until the mid-year, reducing NPLs and the positive year-end outlook for the sector, are now slowly renewing investors’ optimism from a previously riskoff stance. Finally, the industrial goods sector has seen a turnaround in sentiment with the gradual implementation of the FG’s yearly capex plan. Despite the favourable FX balance, investor participation in the equity market has been largely driven by local investors, with the NGX placing average local participation at 78.6% and foreign investor participation at 21.4% for the year. Given the inflationary trend so far, we believe that foreign investor participation has slowed given significant negative real return in the space.

Given that rate increases especially in the advanced economies would trigger corresponding rate increases in emerging economies, we see rate hikes across the local fixed income space ensuring strained foreign investor participation in the equity space. Despite this, we see another good year for the oil and gas sector, given our outlook for still strong oil prices. Thus, we expect this to sustain positive sentiment oil-producing stocks. Furthermore, ongoing capex implementation should keep sentiment in the industrial goods sector stable, while expected rate increases could see banks’ interest income rise. Meanwhile, we expect investors to remain wary of the consumer goods sector, given the direct burden of inflationary pressure on margins, and ultimately profit.

Whilst reasonable care has been taken in preparing this document to ensure the accuracy of facts stated herein and that the ratings, forecasts, estimates and opinions also contained herein are objective, reasonable and fair, no responsibility or liability is accepted either by Vetiva Capital Management Limited or any of its employees for any error of fact or opinion expressed herein.

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