Kindly click here to download the report or visit the FSDH Research to view all our reports. 

Image Credit: FSDH Research

April 8, 2022/FSDH Research

Q1-2022: Global equities suffer rout amidst elevated risks

In our equity strategy note at the start of the year, we highlighted how the global equities were likely to face significant turmoil due to mounting pressures from factors such as the policy normalization by central banks across the globe. These predicitions could not have been more accurate as global equities were broadly depressed in Q1-2022. In April’s edition of our investor guide, we review the factors that have impacted global equity performance as well as provide our outlook and recommendations for Q2-2022.

As expected, the global equities market kicked off the year on a bearish note with investors showing jitters on record inflation numbers, change in Fed’s description of inflation from “transitory” to “persistent” and subsequent rate hike signalling. In addition, investor sentiment further dampened as earnings announcements in January were generally mixed, casting a shadow on corporate profit growth sustainability. Overall, across global markets, major equity indices like the US S&P 500 (-5.3% m/m), NASDAQ 100 (-9.0% m/m), Europe’s STOXX 600 (-3.9% m/m), Germany’s DAX (-2.6% m/m) as well as France’s CAC 40 (-2.2% m/m) all closed January with significant losses.

Heading into February, the rout in the global equities market continued unabated as the policy normalization narrative heated up. Economic data pointed to healthier economic growth while inflation remained elevated. This clearly indicated monetary policy tightening was unavoidable. Appetite for risk assets suffered further setback as Russia invaded Ukraine, after months of camping around Ukrainian borders. This led to a slew of sanctions from western allies, stoking volatility and fear of contagion. Interestingly, investors appeared to shrug off these concerns towards the end of February. Regardless, equities already recorded significant losses making a comeback difficult by the end of the month. In February, all major equity indices in the US and Europe closed lower with the DAX (-6.5% m/m), CAC 40 (-4.9% m/m), DJIA (-3.6% m/m), NASDAQ 100 (-3.4% m/m) and pan-European STOXX 600 (-3.4% m/m) leading the losses.

Following consecutive months of losses, the global equities market saw some respite in March despite sustained volatility underpinned by the Russia-Ukraine crisis as well as the US Fed’s announcement of a 25bps rate hike with a similar move made by central banks of other advanced economies. Investors appeared to take advantage of lower prices in the market to bargain-hunt on attractive tickers, particularly in the technology space. Overall, it was a month of broad-based gains across US and European markets except in Germany where the DAX lost 0.3% in March. Key indices in the US rebounded, with the S&P 500 (+3.6% m/m), NASDAQ 100 (+4.2% m/m) and DJIA (+2.4% m/m) gaining, while European markets recorded modest gains evidenced by the 0.6% m/m uptick in the STOXX 600 index.

Despite the positive close to the quarter, losses recorded in January and February saw the global equities market close Q1-2022 with a negative print, reflecting that negatives during the quarter broadly outpaced the minor shoots of positivity. Across our coverage global markets, all closed Q1-2022 in the negative save for the UK market with the FTSE 100 gaining 1.8% q/q. On the other hand, the major US indices, S&P 500 (-4.9% q/q), DJIA (-4.7% q/q), and NASDAQ 100 (-9.1% q/q) all closed lower. Similarly, other European markets closed the quarter lower with the benchmark French and German indices losing 6.9% and 9.3%respectively.

Heading into Q2-2022, we continue to advise investors to remain cautious with regards to foreign equities. The US Fed released the minutes of its March meeting which reinforced its quantitative tightening plans as well as rates hikes as it looks to “expeditiously” counter the economy’s hottest inflation in decades. For context, the central bank is looking at reducing its bond holdings by $95.0bn monthly as part of its tightening policies. In addition, sustained positivity on the economic recovery narrative will do more to strengthen the Fed’s position. These moves will reinforce further uptick in yields across global fixed income markets. Clearly, equities and fixed income yields have always demonstrated an inverse relationship as investors sell off equities for fear of overpriced valuation. In addition, it remains unclear if a diplomatic resolution can be found in an attempt to resolve the Russo-Ukraine crisis. That said, investors could take some comfort in the unwillingness of world leaders to let the crisis degenerate into a world war. We recommend investors underweight foreign equities, with a preference for defensive stocks amid the upcoming volatility.

Nigerian equities kick off 2022 in style but …?

The domestic equities market kicked off 2022 on a positive note with the benchmark NGX-All Share Index (NGX-ASI) racing to gain 9.1% m/m in January. The gains were mainly driven by corporate-specific events such as listing of BUAFOODS on the stock exchange which led to a 61.0% return in the first month of listing. Also, DANGCEM announced the resumption of its share buyback program which fed buying interest in the stock. We also note the strong rally in SEPLAT in January, reflecting the impact of the gains in crude oil prices. Also, a number of corporates announced positive unaudited results which triggered broad-based interest in domestic equities. Stocks like TOTAL, FIDELITY, GUINNESS and PRESCO benefitted from the gains.

By February, the gains slowed as investors appeared to have already priced in most of the upside for Nigerian equities in January. News such as SEPLAT’s acquisition of some of ExxonMobil’s oil assets fed some modest bullish streak in what was broadly a mixed month of Nigerian equities. As a result, the benchmark NGX-ASI returned 1.7% in February.

The gains fizzled out in March as investors began to sell off positions in the equities market in bid totake some profits off the table. The preference for profit taking was further bolstered by negative surprises from a number of large cap corporates in the downstream oil & gas and banking sectors. In addition, rumours of expectation of higher yields in the fixed income market from Q2-2022 further stoked bearish sentiments. As a result, the domestic equities market lost 0.9% in March. Overall, the domestic equities market gained 9.9% in Q2-2022 following the healthy returns posted in January.

Looking ahead to Q2-2022, we advise investors begin to rotate their portfolios to underweight equities as we approach an extended period of quiet and profit taking in the domestic equities market. We note that the equities market will likely suffer a lack of positive triggers to boost a risk-on approach from investors. This could lead to a period of extended losses through Q2-2022. That said, we expect active short term traders would see opportunities to trade oversold stocks for modest profits. For relatively long term investors, we recommend they restructure their portfolios to include commodity-focused companies such as upstream oil & gas companies and agriculture companies as they are likely to benefit from increased demand and higher global prices for commodities like crude oil, gas and palm oil.

Fig 1: Monthly performance of the S&P 500

Source: Bloomberg, FSDH Research

Fig 2: Monthly performance of the benchmark NGX-ASI

Source: Bloomberg, FSDH Research

FSDH Top Stock Picks

FSDH Research
research@fsdhgroup.com