October 7, 2022/FSDH Research

Torrid September for global equities market…“Buy-the-dip” could provide temporary relief

In our September note, we retained a pessimistic outlook for the global equities market. True to those expectations, equity markets across Europe and the United States suffered steep losses as familiar headwinds of surging inflation, tighter monetary policy, and economic slowdown weighed on investors’ buying interests. In this month’s piece, we analyse the drivers of September’s market outcome and provide an updated perspective on our strategy for US and European equities.

In the US equity market, the month started on a fairly positive note as stocks clawed back losses from August on the back of lower inflation expectations. However, following release of the August inflation report which showed US inflation rate printed at 8.3%, above expected levels, investors began to dump US stocks as renewed fears of a tighter US Fed concerned investors. The rout continued through the month as the US Fed Chairman announced a 75bps hike in the Fed Fund Target Rate to 3.0% – 3.25% while restating the Federal Reserve will remain hawkish for as long as is required to bring inflation rate closer to its preferred range. Subsequent speeches from other Fed offcials appeared to reiterate the Fed Chair’s position. Overall, key US equity benchmarks, S&P 500 (-9.3% m/m), DJIA (-8.8% m/m), and the tech-heavy NASDAQ (-10.5% m/m) closed the month lower, extending losses into the second consecutive month.

Similar to sentiments in the US equity market, European equities extended losses into the second consecutive month as a myriad of macroeconomic headwinds combined to weaken investor sentiments. First, in Eurozone-related data, industrial production activities for July-2022 contracted by 2.3% (the largest decline in two years), on the back of rising energy costs. In country-specific news, the UK Pound Sterling depreciated steeply against the US Dollar after the new British PM announced UK’s biggest tax break in 50 years that raised concerns on how it would be funded. In addition, UK’s inflation rate for August printed at 9.9%, lower than July’s by 20bps following decline in fuel price. However, the sticking point for investors was the persistenly elevated inflationary pressures and the uptick in Core inflation (+10bps to 6.3%). Lastly, hawkish monetary policy decisions remained the favoured approach for European monetary policy decision-makers as the European Central Bank (ECB) and Bank of England (BOE) raised their benchmark policy rates by 75bps (a record amount for the ECB) and 50bps respectively. As a result, the pan-European STOXX 600 index lost 6.6% m/m, with individual markets closing lower, led by losses in France (CAC 40 down 5.9% m/m), Germany (DAX down 5.6% m/m) and UK (FTSE 100 down 5.4% m/m).

Looking ahead, we anticipate a near-term rebound in the global equities market as several value stocks trade at 52-week lows. We see a situation where value investors attempt to mop up fundamentally sound stocks at their 52-week lows. This attempt to “buy-the-dip” will provide a near-term relief for equity investors. This is supported by the technical analysis signals that suggests US and European stocks have been oversold and indicates a near-term upturn in fortunes. However, we expect the recovery to be broadly short-lived as existing concerns to the long-term performance of the US and European equities market are likely to change. We expect inflation report for September to come in slightly favourably albeit still elevated leaving room for the Fed and ECB to continue its hawkish monetary policy approach in November. In addition, the recent decision by OPEC+ to implement production cuts will likely stoke fears of higher crude oil price and derail the recent slowdown in inflationary pressures. That said, we believe investors with a long-term growth perspective can begin to consider re-entering the equities market at current levels as we believe US and European equities are closer to the bottom than the top. With several stocks trading at 52-week lows, we recommend gradual purchase of fundamentally sound names but with no expectation of immediate gratification.

Downbeat performance for Nigerian equities…No positive catalyst in sight

Nigerian equities extended its bearish streak into the 4th consecutive month as the upward reversal in the interest rate environment remained aggressive. The Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) announced a steep 150bps increase in its benchmark policy rate to 15.5%, sustaining concerns that interest rates on Fixed income alternatives will continue trend higher. The steep increase in the MPR was triggered by multi-year high inflation print (at 20.5% for August-2022) while economic growth remained strong, expanding 3.5% in Q2-2022. Unsurprisingly, Fixed deposit rates remained in double digit territory while stop rates at the recent NT-bills auction inched higher by 100bps, 150bps, and 225bps to 6.5%, 7.5% and 12.0% across the 91-day, 182-day and 364-day bills respectively. As a result, equity investors remained on edge through August and continued to sell Nigerian equities with a preference for Fixed income instruments as the NGX-All Share Index (NGX-ASI) lost 1.6% m/m to close the month at 49,024.61pts.

Across sectors, the bearish outcome for Nigerian equities in September was broad-based as all five major sectors lost for the month. Leading the laggards, the Insurance and Oil & Gas sectors lost 6.5% and 4.5% m/m respectively, following selloffs across AIICO (-5.5% m/m), MANSARD (-7.2% m/m), SEPLAT (-3.8% m/m) and TOTAL (-10.0% m/m). Similarly, the Consumer goods and Banking sectors closed the month lower, down 2.6% and 2.1% m/m respectively, as extended losses in NESTLE (-10.0% m/m), VITAFOAM (-11.2% m/m), ZENITH (-8.7% m/m) and STANBIC (-3.2% m/m) combined to pull the indices lower. The Industrial goods index lost the least in September, closing lower by 0.2% m/m. In other sectors like the Oil Palm sector, price movements were muted as both OKOMU and PRESCO remained unchanged. In the Telecoms sector, it was mixed fortunes as MTNN (+0.4% m/m) gained while AIRTELAF (-2.0% m/m) lost.

Looking ahead, we see room for a near-term rebound for the Nigerian equities market after four consecutive months of decline. However, we believe the probability of a strong rebound is limited as investors continue to remain attracted to high-yielding money market instruments. In addition, election activities in Nigeria has kicked in, creating further palpitations for investors. As a result, we retain our view that investors should continue to underweight domestic equities in their portfolios.

Fig 1: Monthly performance of the benchmark NGX-ASI

Source: Bloomberg, FSDH Research

Source: Bloomberg, FSDH Research

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