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February 6, 2023/FSDH Research

Global equities race to a strong start in 2023

2023 has started on a very positive note for global equity investors as markets across the globe have recorded strong gains, rewarding risk-on investors. In the United States (US), investor sentiments were bolstered by macroeconomic data releases that supported sentiments that the Federal Open Market Committee (FOMC) will slow rate hikes faster than previously anticipated. At the start of the month, labour market data showed a slowdown in weekly hourly earnings growth even as unemployment slowed. In addition, ISM manufacturing index showed a contraction, following a steep decline in new orders. Investors viewed these data releases as a potential for a slower rate hike. Furthermore, better-than-expected inflation numbers corroborated investors’ optimism on slower rate hikes while modest GDP growth in Q4-2022 nearly extinguished fears of a recession in the US. Lastly, corporate earnings releases were broadly positive, further bolstering investor sentiments. Overall, all major US equity indices closed the month higher with the NASDAQ Composite (+10.7% m/m) leading our coverage list, trailed by the S&P 500 (+6.2% m/m) and DJIA (+2.8% m/m).

Similar to sentiments in US equities, European equities have displayed a strong start to the year despite underlying monetary policy concerns. At the start of the year, inflation data for the Eurozone came in better-than-expected as lower energy costs continued to support disinflation. As a result, investors had renewed hope that the European Central Bank (ECB) would switch to a less aggressive monetary policy posture. However, the ECB reiterated its aggressive policy stance, stating its focus is on controlling inflation lower and that it will continue to raise rates for longer. This dealt a momentary blow to investor sentiments but buying interest recovered towards the end of the month as recession fears in the Eurozone waned due to stronger manufacturing and services data in Germany. Overall, the pan-European STOXX 600 closed the month with a gain of 6.7%. Across individual countries, the French CAC 40 (+9.4% m/m) led, trailed by the German DAX (+8.7% m/m) and the UK’s FTSE 100 (+4.3% m/m).

Risk-on sentiments on US equities have improved significantly in the past months as inflation has shown signs of moderating, raising hopes of a less aggressive monetary policy. Interestingly, in line with market expectations, the US Fed opted to raise the fed funds target rate by 25bps, providing a boost for buying interest. However, an unexpected surge in non-farm payroll data renewed fears that the Fed may opt to switch to a more aggressive tone as the labour market appears to remain tight. That said, we reiterate our conviction communicated in our final note for 2022 that the time is right for investors to begin to raise allocation to US equities. We expect inflation to continue to trend lower, supported by simmering energy cost, effects of policy tightening on credit consumption, and a high base effect. In addition, our projections support sustained economic growth in the US with recession fears broadly minimal. As a result, we see room for the Fed to continue to slow down rate hikes with a strong case for a pause by H2-2023. In this regard, we support greater portfolio allocation to growth stocks, compared to value stocks, while investors with greater risk tolerance can consider a bias for mid to small cap stocks.

Nigerian equities record a positive 2023 opening

The Nigerian equity market started 2023 on a strong note as a combination of lower yields and decent start to the earnings season supported buying interest. For context, yields in the Nigerian money market has slumped significantly (average NT-bills yield fell 382bps m/m to 1.6%) due to robust financial system liquidity, occasioned by the CBN’s recall of old naira notes (banks have received N1.9tn in new deposits from old notes). On the other hand, earnings announcements by listed corporates have encouraged investors to continue to increase bets on Nigerian equities. Notably, price movements across large-cap stocks, MTNN (+4.7% m/m), BUAFOODS (+14.6% m/m), GEREGU (+29.9% m/m), DANGCEM (+2.3% m/m), AIRTELAFRI (+1.5% m/m), and BUACEMEN (+1.7% m/m), played a decisive role in the bourse’s strong close in January. The benchmark NGX-All Share Index (NGX-ASI) climbed by 3.9% m/m to close at 53,238.7 points. Consequently, YTD return settled at 3.9%, with market capitalisation growing N1.1trn to settle at N29.0tn.

From a sectorial viewpoint, market activities were broadly bullish, as all five (5) sectors under our coverage closed in the green. The Banking (+7.5% m/m) sector led the gainers due to bargain hunting in ETI (+16.5% m/m), ZENITHBA (+4.2% m/m), FIDELITY (+24.1% m/m), ACCESSCO (+7.1% m/m) and UBA (+7.9% m/m). Following behind were the Consumer Goods (+5.6 % m/m) and Oil & Gas (+5.4% m/m) sectors owing to price appreciation in BUAFOODS (+14.6% m/m), DANGSUGA (+8.1% m/m), UNILEVER (+16.8% m/m), TOTAL (+16.1% m/m), and ETERNA (+12.1% m/m). The Insurance sector grew +5.4% m/m due to buy-interest in MBENEFIT (+44.4% m/m), AIICO (+6.8% m/m), WAPIC (+12.5% m/m), and LINKASSU (+20.0% m/m). Lastly, the Industrial sector grew 2.1% m/m owing to price appreciation in DANGCEM (+2.3% m/m), BUACEMEN (+1.7% m/m), and WAPCO (+4.6% m/m).

The rally in the market has been driven by a depressed yield environment (particularly in the money market), amidst elevated system liquidity. The performance of the local bourse will be driven by i) how long low rates will persist ii) earnings season sentiments and iii) 2023 general elections outcome. For interest rates, we see room for depressed interest rates till April as a combination of the impact of CBN’s naira redesign program and elevated debt maturity inflows will keep money cheap, despite the Monetary Policy Committee’s (MPC) tightening stance. Furthermore, a positive earnings season in line with the first batch of results will likely provide support for increased buying appetite. The impact of the 2023 elections will be broadly defined by how peaceful the conduct and aftermath of the elections are. Examining these factors indicate that there remains catalyst for further upside in Nigerian equities. However, technical indicators (across all timeframes) indicate the Nigerian equities market is stretched and is due a pullback. As a result, we believe the probability of downside outweighs upside probability in current market conditions. We expect investors to begin to book profits earned over the past weeks ahead of the elections. Thus, while we note that a case can be made to continue to invest in Nigerian equities, we reckon the market is nearing its peak with limited upside, justifying the need to reduce portfolio exposure to Nigerian equities.

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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