February 4, 2022/FSDH

Global equities market review & outlook: Policy normalization rocks global equities market

In our previous notes, we highlighted the significant risks of bearish momentum across global assets following comments of policy normalization from key central banks across the globe. The global equity market kicked off 2022 on a bearish note as investors aggressively sold off risk assets across the globe due to the possibility of risks associated with monetary policy normalization. At the start of the month, minutes of the Fed’s December meeting filtered into the market with hawkish highlights such as abandoning the use of the word “transitory” to describe inflation as well as commenting on plans to begin rate hikes as early as Mar-2022 (faster than analysts had expected). The subsequent macro data releases such as inflation surging to 7.0% (a near 40-year high) and the economy expanding at an annualised rate of 6.9% (a multi-decade high) in Q4-2021 reinforced the need for the Fed to introduce hawkish monetary policies in other to prevent the economy from overheating. Contributing to the bearish sentiments, key growth stocks such as Netflix, Peloton etc., delivered earnings that underperformed analyst expectations while also indicating weaker guidance for Q1-2022. That said, heavyweights like Microsoft, Alphabet, Johnson&Johnson and Apple delivered blockbuster earnings that helped reinvigorate bullish sentiments towards the end of the month. Overall, US market closed the month bearish with the S&P 500 (-5.3% m/m), DJIA (-3.3% m/m) and NASDAQ Composite (-9.0% m/m) closing the month lower.
 
In Europe, developments were broadly akin to the global equity market narrative as fears of policy normalization spooked investors, triggering extended selloffs across European equities. Worsening sentiments, Germany reported that economic activities contracted by 0.7% in Q4-2021, re-igniting fears that the omicron variant may be taking its toll on European economies. However, solid economic expansion outings in Spain and France later dampened those fears. Fuelling the policy normalization fears was inflation data for the Eurozone which showed prices rose at a new record high of 5.0% in Dec-2021, complicating policy outlook for the European Central Bank (ECB). As a result, the Pan-European ST0XX 600 index closed the month lower by 3.9%. Similarly, country specific indices such as Germany’s XETRA DAX (-2.6% m/m) and France’s CAC 40 (-2.2% m/m) closed the month lower. On the other hand, the UK’s FTSE 100 closed with a 1.1% m/m return, extending gains into the second consecutive month.

Looking ahead to Feb-2022, investors’ attention will focus largely on earnings reports from major companies across the globe. Given that the next Fed as well as other developed economy central banks’ meetings are due for March, traders and investors alike will likely shelf the policy normalization concerns. As a result, we advise investment decisions on global equities be taken on a case-by-case basis as we expect market reactions to be based on quality of earnings reported. Overall, we expect investors to buy the dip of the market in the early weeks of February but we expect a reversion to risk-averse mode by the end of the month which could lead to renewed selloffs.
 
From a technical perspective, the S&P 500 on a daily time frame shows US equity market has managed to recover from a previously oversold regionas investors took advantage of the recent selloffs to buy value stocks at attractive entry prices. We expect investors to continue to buy the dip of the market particularly if earnings continue to impress. However, we do not expect an extended bullish run as key data that may influence the Fed’s decision in March (such as inflation) could come in negative for the equities market, sparking renewed fear and subsequently selloffs across risk assets.

Nigeria equities market review & outlook: Nigerian equities race to a strong start

Contrary to developments across the global market, the Nigerian equity market opened 2022 on a very strong note as the benchmark All Share Index (ASI) gained 9.1% m/m to close the month at 46,624.67 points. The rally in the equities market in January was broad based as widespread positive corporate actions reignited risk-on sentiments among investors. First, BUA FOODS (+61.0% m/m) listed on the Nigerian Exchange, attracting investors who attempted to speculate on the stock following its listing by introduction. Also, DANGCEM announced resumption of its share buyback program which supported bullish momentum in the stock. Lastly, earnings report from a number of heavyweights lifted market sentiments and drove broad based buying interest across the local bourse.
 
Reflecting the broad based rally witnessed in January, sectorial performance was largely bullish with four of the five key sectors of the NGX-ASI closing the month higher while one closed southwards. Leading the gainers was the Oil & Gas sector (+14.1% m/m), which rallied following buying interest in SEPLAT (+21.5% m/m), and TOTAL (+8.6% m/m), due to sustained surge in crude oil prices (which supported positive sentiments for SEPLAT) and declaration of a strong FY-2021 unaudited earnings report by TOTAL. The Banking sector (+8.6% m/m) and Consumer Goods sector (+7.7% m/m) followed after positive earnings announcement from ETI (+43.7% m/m), FIDELITY (+10.2% m/m), and GUINNESS (+24.5% m/m) drove the sectors higher. Rounding up the gainers, price appreciation in BUACEMENT (+5.5% m/m) following positive earnings report and gains in DANGCEM (+1.4% m/m), following announcement of a share buyback, propelled the Industrial Goods sector (+3.4% m/m) higher during the month. The Insurance sector (-6.0% m/m) closed the month as the lone loser.
 
In February, we expect sentiments around equities to be mixed. We expect traders and other investors will book profits in the first weeks of February following the the strong rally in January. Potential market-moving corporate actions will begin to drip into the market towards the end of February into March. Thus, for investors that have invested in line with our prior top picks, we recommend they begin to take profits of the table with a view to re-enter at lower price levels towards the end of the month.  Technically, the equities market is in need of a breather with the NGX-ASI trading in an overbought region as the RSI indicator is currently at 78.7. In addition, the MACD indicator points to a slowing bullish momentum with a bearish divergence likely in the coming weeks. Thus, we reaffirm our position that investors should begin to take profits off the table with a view to re-enter the market at lower price levels.

Fig 1: Monthly NGX-ASI Performance

Source: Bloomberg, FSDH Research

Fig 2: Monthly S&P 500 Performance

Source: Bloomberg, FSDH Research

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