November 8, 2022/FSDH Report

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Global equities stage rebound…but market prospects remain weak

In our October note, we stated that an attempt by value investors to “buy-the-dip” could trigger a short term rebound in the global equities market. True to that call, October was a broadly positive month for international equity markets within our coverage. We observed broad-based upticks in the United States and major European stock markets. In this month’s issue, we review the drivers of the rally, analyse its sustainability and consequently present our latest international equity strategy preference.

In the US equity market, investors appeared to ignore further warning signs that the Fed’s rate hike cycle may not be coming to an end anytime soon, instead focusing on the positives from the Q3-2022 earnings season, encouraging them to pick up stocks at attractive valuations. For context, the Fed’s preferred gauge for inflation, the Personal Consumption Expenditure (PCE) index rose to 5.1% in Sep-2022 while the labour market continued to show strength as the US economy added 263,000 new jobs with unemployment rate contracting to multi-year lows of 3.5%. In addition, the US economy expanded by 2.6% in Q3-2022, dampening any sentiments that the Feds rate hikes may be slowing down the economy. Despite these indicators pointing to sustained hike in interest rates and higher yields, investors were attracted by attractive prices in the final weeks of the month as Q3-2022 earnings results further spiced up risk appetite. Overall, key US equity benchmarks, S&P 500 (+8.0% m/m), DJIA (+14.0% m/m), and the tech-heavy NASDAQ (+4.0% m/m) closed the month higher, ending a two month losing streak.

Similar to sentiments in the US equity market, European equities showed decent strength as investors’ sentiments improved during the month despite persistent risk. First, the European Central Bank (ECB) elected to raise its benchmark interest rates by 75bps, printing at levels last seen in early 2009. In the UK, the market was roiled by both political and economic turmoil as markets reacted negatively to ex-PM, Liz Truss’ mini-budget. However, her resignation and the subsequent appointment of Rishi Sunak returned calm to the market. On the other hand, investors were broadly buoyed by fairly impressive Q3-2022 earnings season, raising appetite for equities with attractive valuations. As a result, the pan-European STOXX 600 index rebounded in October to gain 6.3% m/m, with individual markets closing higher, led by Germany (DAX up 9.4% m/m), France (CAC 40 up 8.8% m/m) and UK (FTSE 100 up 2.9% m/m).

Looking ahead, we expect the recent bullish momentum to taper off in November. At the start of the month, the US Fed announced another 75bps hike in the Fed Funds Target Rate, indicating it would continue to raise rates for as long as is required to bring inflation under control. Interestingly, while early indicators are showing signs of an economic slowdown (particularly in the tech ecosystem) in the coming months and quarters, the broad-based economy appears to remain sturdy as evidenced by positive jobs market data in the US and recovery in economic activities in Q3-2022. This is likely to give the US Fed further impetus to sustain its hawkish approach until inflation is brought under control. In Europe, the narrative is expected to remain the same as the ECB continues to align with the need for further rate hikes. In addition, technical chart analysis indicate that the recent rally is due for a reversal as the RSI of these major indices indicate they are overbought while the MACD indicator points to a likely moderation in the near term. Given the foregoing, we retain our preference for investors to broadly underweight equities with a preferred strategy of mopping up fundmentally sound stocks at attractive price levels when significant market dips are recorded, with a long term horizon in focus.

Nigerian equities record worst month since Covid downturn

In line with our expectations for the month of October, the Nigerian equities market faced significant bearish sentiments as bellwether stocks suffered significant selloffs. As expected, surge in interests rates, particularly in the money market underpinned the downturn recorded in October. In this regard, the final NT-bills auction for October saw stop rate for the 364-day bill close at 14.5% (September: 12.0%) while average rate in the secondary NT-bill market jumped 362bps m/m to close at 10.5% in October. In addition, fixed deposit rates remain in mid to high double-digits (depending on the bank). As a result, investors continue to selloff their equity exposures in favour of guaranteed double-digit money market returns. Also, the earnings season kicked in but did little to raise risk appetite as several bellwether names posted disappointing Q3-2022 reports. Overall, we witnessed Increased sell pressure in blue-chip companies like AIRTELAF (-36.3% m/m), DANGCEM (-10.0% m/m), MTNN (-1.5% m/m), SEPLAT (-4.0% m/m), and NB (-13.5% m/m). That said, the benchmark NGX-All Share Index (NGX-ASI) fell by 10.6% m/m to close at 43,839.1 points, the highest monthly loss since Mar-2020 (at the peak of the pandemic selloff). Consequently, YTD return moderated to 2.6%, with market capitalisation settling at N23.9tn.

Analysis across sectors reflected the broad-based bearish outcome, as four out of the five key sectors we track closed in the red. The Industrial Goods sector (+6.5% m/m) was the outlier this month due to buy interest in BUACEMEN (+34.6% m/m) which nullified losses in DANGCEM (-10.0% m/m) and WAPCO (-9.2% m/m). Leading the laggards was the Insurance index (-5.2% m/m) owing to sell pressure in NEM (-18.5% m/m), LINKASSU (-17.0% m/m), CORNERST (-10.7% m/m), and MANSARD (-3.6% m/m). The Oil and Gas Sector (-5.1% m/m) followed closely, dragged by losses in TOTAL (-6.7% m/m), SEPLAT (-4.0% m/m), and OANDO (-10.4% m/m). Similarly, the Consumer Goods Index (-2.9% m/m) closed in the southwards as investors sold off NB (-13.5% m/m), INTBREW (-16.2% m/m), UNILEVER (-12.6% m/m), and NASCON (-13.6% m/m). Finally, the Banking index (-1.1% m/m), dragged by losses in ETI (-11.6% m/m), ACCESSCORP (-3.1% m/m), and UBA (-2.4% m/m).

Looking ahead, we note the possibility of a short-term rebound caused by speculators attempting to bargain hunt on stocks with depressed prices. As a result, we advise investors not to be caught in the euphoria of any rebound as we expect it to be short-lived. We retain a preference to significantly underweighting domestic equities in favour of cash and other money market instruments.

Fig 1: Monthly performance of the benchmark NGX-ASI

Source: Bloomberg, FSDH Research

Fig 2: Monthly performance of the S&P 500

Source: Bloomberg, FSDH Research

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