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August 8, 2022/FSDH Research

Global equities market rebounded in July…but appears to be a dead-cat bounce

The month of July brought much needed respite as the global equities market saw sellers take a breather from selling while investors sentiments were buoyant in the face of recent macroeconomic policy developments as well as corporate earnings. For context, the MSCI World Index gained 7.9% in July, evidencing the return of strong buy sentiments from global equity investors. In this month’s edition of FSDH Top Picks Note, we review the global and Nigerian equities market performance for July and provide our views on what investors can expect in August.

In the US market, equities raced off to a strong start as positive labour market data (such as a 5.1% increase in hourly wages and the addition of 372,000 new jobs) watered down fears of a recession. Subsequently, activities slowed as June inflation printed at 9.1%, hotter than the 8.8% consensus estimate expectation. This raised fears of a stronger hawkish stance by the Federal Open Market Committee (FOMC), with some investors betting on chances of a 100bps hike. However, by the conclusion of the July FOMC meeting, the committee’s chairman, Jerome Powell announced a 75bps hike in the Fed Funds Target Rate. The sweetener for equity investors was his comment emphasizing the US Fed believes the current policy rate level is at a neutral level where it does not interfere with economic growth. He also reinforced that future rate hikes will be data driven. Consequently, investors interpreted these comments as dovish, betting that rate hikes will slow down going forward. In addition, the US economy contracted for the second consecutive quarter as Q2-2022 GDP contracted by 0.9%, further emboldening investors that the Fed will adopt a softer stance on rate hikes going forward. Overall, key US equity benchmarks, S&P 500 (+9.1% m/m), DJIA (+6.7% m/m), and the tech-heavy NASDAQ (+12.6% m/m) closed the month higher.

Similar to sentiments in the US equity market, European equities recorded a standout performance in July despite a flurry of negative headlines. First, the England’s Office of National Statistics (ONS) released inflation data for June showing that inflation rate printed at a new 4-year high of 9.4%, raising odds of further rate hikes by the Bank of England (BOE). In addition, the Manufacturing Purchasers’ Manager Index (PMI) and Services sector PMI for the Eurozone slowed significantly to 49.6 (from 52.1) and 50.6 (from 53.0) respectively, raising fears of an economic slowdown in the Eurozone. Furthermore, the European Central Bank (ECB) announced its first rate hike, raising its benchmark interest rate by 50bps, higher than earlier projected by investors. Despite the flurry of negative headlines, European equities closed the month strong with the pan-European STOXX 600 gaining 7.6%. Similarly, individual European equity markets closed higher with the French CAC 40 (+8.9% m/m), German DAX (+5.5% m/m) and UK FTSE 100 (+3.5% m/m) closing higher.

For the global equities market, the recent uptrend has been broadly supported by markets perceiving the Fed to become kinder in its policy decisions at subsequent meetings. However, we believe an end is not near in sight for the Fed’s hawkish policy direction. Thus, while we note that the magnitude of increase in the Fed Funds Target Rate may slow to c.50bps (from the consecutive 75bps hike), we still expect the Fed to remain aggressive in its approach for as long as inflation stays out of its comfort zone. Interestingly, a number of Fed governors and board members have indicated the Fed would need to do more and remain hawkish for longer in order to bring inflation under control. In addition, we believe the ECB is at the early stage of its policy normalization process with more hikes to follow in the coming months. Thus, while we note that there is room for the current rally to go on, we do not expect it to be sustained. As a result, we advise investors to continue to maintain a cautious perspective on the global equities market.

Reversal in yield environment derails equity market momentum

Nigerian equities lost steam in July as a surge in interest rates dampened sentiments for risk assets like equities, driving significant selloffs across the market. In July, the Monetary Policy Committee (MPC) met to decide its monetary policy direction in light of heightened inflationary pressures, sluggish output growth and dwindling FX inflows. The committee elected to sustain its tightening stance, raising its benchmark policy rate by 100bps to 14.0%. The decision to hike the MPR combined with tighter system liquidity led to a significant surge in interest rates (with fixed deposits yielding 15.0%). This triggered asset rotation for PFAs, selling down equities to position in high yielding money market instruments. Meanwhile, the freefall of the exchange rate in the parallel market triggered selloffs by HNIs and retail investors who looked to liquidate Naira investments in other to buy dollars, invest in Eurobonds and Eurobond funds. That said, H1-2022 corporate earnings season was broadly positive but was inadequate to lift investor sentiments. Overall, the NGX-All Share Index (NGX-ASI) lost 2.8% m/m in July following the selloffs.

Performance across sectors reflects the downbeat performance of the broader equities market. Notably, the Consumer Goods sector led the underperformers, losing 8.1% in July on the back of aggressive selloffs in NESTLE (-9.8% m/m), NB (-18.9% m/m) and INTBREW (-20.6% m/m). Furthermore, the Insurance and Banking sectors lost 6.3% m/m and 4.9% m/m respectively following selloffs in AIICO (-10.9% m/m), MANSARD (-14.0% m/m), ZENITH (-3.2% m/m) and ACCESSCORP (-3.8% m/m). Rounding off the laggards, the Industrial Goods sector lost 4.2% m/m on the back of persistent sell pressures in DANGCEM (-3.6% m/m), BUACEMENT (-10.0% m/m) and WAPCO (-10.1% m/m). The Oil & Gas sector emerged as the lone gainer for the month, rising 2.0% m/m as gains in SEPLAT (+10.0% m/m) drove the sector northwards.

The landscape of the Nigerian equities market has changed dramatically in the past one month. The CBN’s persistent hawkish approach, prolonged tight system liquidity, and aggressive government borrowing will continue to push interest rates higher. Thus, despite expectations that listed corporates will continue to deliver strong profit growth, we reckon that sustained upward pressure on interest rates will continue to create apathy towards risk assets like equities. That said, we note that the bearish sentiments will linger through Q3-2022. However, we do not rule out a knee-jerk rally in Q4-2022 due to interim dividend announcements and early positioning for FY-2022 dividend announcements.

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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