May 6, 2022/FSDH Research

Policy normalisation extends bearish trend in global equities

The global equities market kickstarted Q2-2022 on a bearish note as fears of a surge in interest rates underpinned risk-off sentiments towards equities. This was broadly in line with our outlook for the month as only one of the equity indices we track across US and European equities market closed northwards in April. In this month’s note, we review April’s performance, the drivers of the performance as well as our outlook for the month of May.

In the US market, equities trading kicked off the month on a positive note following encouraging soundbites around peace talks on the Russia-Ukraine crisis. However, those positive soundbites vanished while the policy normalization narrative was renewed. The Federal Reserve’s March meeting minutes indicated the likelihood of a more aggressive monetary policy approach to combat surging inflationary pressures. Furthermore, key economic data on the labour market (unemployment rate fell to 3.6% while new jobs created surged to over 400,000) and inflation (surged to a four-decade high of 8.5% y/y) reinforced these expectations. In the build up to Fed’s May meeting, key voting members indicated a preference for hikes as high as 50bps to 75bps. This spooked yields in the fixed income market, climbing to three-year highs, creating panic among equity investors. As a result, we saw significant selloffs across all equity categories (value and growth). Meanwhile, investors were unable to find respite in earnings announcements as bellwether stocks like Alphabet, Amazon, and Netflix led below-market expectations announcements. Overall, the benchmark S&P 500 (-8.8% m/m), DJIA (-4.9% m/m) and tech-heavy NASDAQ (-13.4% m/m) all trended downwards in April.

In Europe, equity market performance was bearish albeit milder than the negative performance recorded in the US market. Similar to developments in the US, evaluation of the lingering impacts of the Russian-Ukraine crisis was a key topic on the mind of investors as they attempted to cut through the uncertainty to identify companies poised to benefit from the crisis and those likely to record a dent in their performance. Furthermore, another record inflation as well as hawkish soundbites from the European Central Bank (ECB) kept investors on their toes. Overall, European markets were mostly bearish for the month of April as the pan-European STOXX 600 benchmark lost 1.2% m/m. Similarly, the German XETRA DAX (-2.2% m/m) and French CAC 40 (-1.9% m/m) closed the month lower. On the other hand, the UK markets managed to eke out a marginal gain for the month as the FTSE 100 gained 0.4% m/m.

Heading into May, we continue to advise investors to underweight exposure to stocks for developed economies. This is premised on the expectations of further downside in the US and European markets. Following the FOMC’s decision to hike interest rates by a further 50bps (largest move since 2000), we expect investors to remain on the edge as they price in further rate hikes for the rest of the year. Although the Fed Chairman, Jerome Powell stated that the Fed would not likely implement hikes northward of 50bps, we do not expect this to change the narrative as the dollar yield curve is expected to continue to steepen.

Nigerian equities extend stellar run into April

The Nigerian equities market extended its stellar 2022 performance into April as investors were in upbeat mood with investors aggressively taking positions in the equities market particularly with a focus on consumer goods names as well as oil palm companies. The improved sentiments was first kicked off by dividend reinvesting activities by investors but was further spurred on by the outstanding Q1-2022 earnings season. Impressive outings from companies like OKOMU, GUINNESS, NB, Unilever Nigeria, Lafarge Africa etc triggered a buying spree as investors’ interest notched a new level. Overall, the benchmark NGX All Share Index (NGX-ASI) gained 5.7% m/m to close the month at a 49,638.94 points.

The rally in the Nigerian equities market was broad based as all major sectors within our coverage closed higher. The rally was led by the Oil & Gas sector (+19.1% m/m), as buying interest in tickers like SEPLAT (+29.0% m/m) and OANDO (+30.7% m/m) sent the market higher. The rally in oil & gas stocks is reflected of the bullish sentiments in the crude oil market, particularly for SEPLAT which was also expected to make a quarterly dividend payment. In addition, announcement of a board meeting by OANDO triggered a buying spree in the stock. A solid outing for FMCG stocks in the Q1-2022 earnings season bolstered the performance of the Consumer Goods sector which gained 11.5% m/m led by gains in GUINNESS (+30.6% m/m), NB (+41.2% m/m), and CADBURY (+22.0% m/m). Similarly, the Banking sector gained 6.2% following buying pressure in counters like FIDELITY (+18.8% m/m), and ZENITH (+9.4% m/m). The Insurance sector (+3.7% m/m) joined in the party following upticks in AIICO (+17.9% m/m) and CUSTODIAN (+10.0% m/m) during the month. Lastly, the Industrial Goods sector closed the month with a 3.3% m/m gain as WAPCO (+13.9% m/m) and DANGCEM (+6.9% m/m) recorded upticks.

Going forward, we see further room for upside in the Nigerian equities market, particularly among FMCG companies who have been able to finally pass on more cost increases to consumers. In addition, we continue to remain bullish on upstream oil & gas companies (particularly SEPLAT), and oil palm companies, following Indonesia’s decision to ban exports of palm olein which is expected to trigger a surge in CPO prices. Clearly the trend of activities in the equities market has changed as domestic institutional investors are now taking bigger bets on Nigerian equities following expectations of prolonged bearish sentiments in the bonds market. This narrative will likely continue for an extended period as bond yields are projected to continue the uptrend which would cause institutional investors to raise allocations to equities, particularly as new funds flow into the market. However, we advise investors to exercise patience and wait for the recent rally to cool off before taking positions in the market, as the market is over-stretched in the short term.

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 Research