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June 7, 2022/FSDH Research

Lacklustre May for global equities…Outlook remains dull

The global equities market extended its lacklustre performance into May. As we have highlighted in our previous notes, the global equities landscape is experiencing lukewarm investor sentiment largely due to the synchronized shift in monetary policy stance across most central banks that has triggered northward pressure on interest rates, forcing investors to reduce equities exposure.

In the US market, equities trading started off on a bearish note as investors reacted to the FOMC’s decision to hike the Fed Funds Target Rate by 50bps (the highest hike since 2000) as well as slower than expected decline in inflation numbers. In addition, renewed concerns about the economy as fears of a recession dominated investors’ sentiments, contributed to further sell-offs. In more bad news for the market, speeches from key Fed voting members appeared to do little to douse market concerns around policy normalisation by the US Fed as they agreed to raise interest rates to as high as needed to curb inflation surge. However, towards the end of the month, investors swooped in to take advantage of the low valuations of the market following the prior steep decline in prices. As a result, the US equity market rallied to erase nearly all the losses record at the start of the month. Nevertheless, most stocks still closed lower than where they opened the month as evidenced in the NASDAQ Composite losing 2.1% m/m. The Dow Jones Industrial Average (DJIA) lost a marginal 4bps while the S&P 500 closed the month flat.

In Europe, equity market performance mirrored the US markets with most markets not showing a clear sign of direction. For most of the month, investors’ navigated surging inflation across the Eurozone and subsequent indications of tighter monetary policy. Truly, the European Central Bank (ECB) President, Christine Lagarde indicated plans to commence interest rate hikes at the ECB’s July meeting, in response to multi-decade high inflation. In addition, the Russian-Ukraine crisis continued with EU leaders’ working to push through a deal that aims to ban over 90.0% of Russia’s crude exports. This caused a spike in crude oil prices and raised concerns of weaker consumption spending, a recipe for recession. Overall, European equities were mostly down with sprouts of positivity in few countries. For context, the pan-European STOXX 600 lost 1.6% m/m with the French market also closing lower as indicated by the 1.0% m/m decline in the benchmark CAC 40. On the flipside, the German and UK markets were modestly upbeat as the XETRA DAX (+2.1% m/m) and FTSE 100 (+0.8% m/m) closed higher.

Heading into the final month of H1-2022, we continue to advise investors to underweight exposure to stocks for developed economies. As acknowledged by key CEOs like Jamie Dimon and Elon Musk, there seems to be signs of ominous clouds of an economic downturn. This has forced corporates to revise their revenue and profit guidance for FY-2022e, while simultaneously announcing possibilities of downsizing. In our opinion, elevated prices over a prolonged period would soon begin to weigh on consumer demand, creating the likelihood of pressured revenue and profitability for companies. Meanwhile, monetary policy authorities appear not to be backing down on rate hikes to curb inflation surge. Putting these factors together, we expect corporate earnings to be mostly disappointing in subsequent quarters while higher interest rates will lower valuations. Thus, we see scope for further downside across global equities. Consequently, we recommend investors remain broadly underweight across US and European equities.

Stellar outing from Nigerian equities in May

The month of May continued the pattern of strong outing for the Nigerian equities market. Retail investors appeared to jump on the bandwagon of equity investing following the initial institutional-investor driven rally. The buy interest was spurred on by a number of factors including; bullish expectations on corporate earnings, slow movement in interest rates as well as fear-of-missing-out (FOMO) factor from investors. However, the decision to hike the benchmark policy rate by 150bps from the Monetary Policy Committee (MPC) in May threw a spanner in the works as investors feared a subsequent surge in interest rates. As a result, the mood of the equities market changed in the final 10 trading days with investors taking profits off the market. Overall, it remained an upbeat month for the market as the benchmark NGX-All Share Index rose 8.1% m/m to close at 53,772.35.

Interestingly, while the equities market was upbeat, the momentum was limited to select sectors, largely in line with our recommendation from last month’s note. We recommended investors focus attention on FMCG stocks, Brewers, Oil & Gas, Oil Palm Stocks and Cement companies. Clearly, the upbeat momentum came mainly from these sectors as well as the Telecom sector. Across sectors, the Consumer goods sector led the rally, gaining 5.4% m/m following buy interest in stocks like NB (+9.3% m/m), INTBREW (+54.9% m/m) and CADBURY (+78.1% m/m). Following closely was the Oil & Gas sector (+5.3% m/m), supported by gains in CONOIL (+30.7% m/m) and ETERNA (+12.5% m/m). The Industrial sector (+4.0% m/m) also gained, pulled higher by investor interest in DANGCEM (+1.6% m/m), CUTIX (+17.6% m/m) and BUACEMENT (+8.2% m/m). Still on positive drivers, oil palm stocks and telecom stocks rallied significantly as reflected in OKOMU (+46.3% m/m), MTNN (+7.2% m/m), AIRTELAF (+27.5% m/m) etc. On the flipside, the Insurance and Banking sectors lost 6.1% m/m and 2.1% m/m respectively, reflecting sell pressures in AIICO (-10.4% m/m), NEM (-8.6% m/m), ZENITH (-4.3% m/m) and UBA (-6.1% m/m).

As previously highlighted, in recent days, the equities market has slipped into a bearish pattern as investors continue to take profits off the market in light of the recent MPC rate hike. In our opinion, this has created an attractive buying opportunity for investors as we approach the H1-2022 earnings and dividend season. We remain bullish on key sectors like Consumer goods (FMCGs & Brewers), Oil Palm, Cement, and Oil & Gas etc. While we expect the risk of higher interest rate to likely weigh on broad based sentiments, we project the previously highlighted sectors will outperform the broader market on the back of robust earnings performance and dividend declarations.

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

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