July 3, 2023/United Capital
Global Markets Close in the Green
Last week, US markets continued their upward trend. During the week, however, a number of encouraging economic data drove bullish sentiments in the market. Jun-2023, Consumer Confidence increased to 109.7 from the 102.5 recorded in the prior month, May New Home Sales report showed the volume of US new home sales jumped, and sales of new residential homes surged 20.0% y/y to 763,000 units, according to the US Census Bureau and the Department of Housing and Urban Development well above the expected 636,000 figure. In addition, the US Q1-2023 GDP was revised upward from 1.3% to a growth of 2.0% y/y in the first quarter, according to a final revision by the Bureau of Economic Analysis-. Furthermore, the May-2023 Personal Income and Spending report revealed that personal income increased $91.2bn (0.4% m/m) in May-2023 and personal consumption expenditures (PCE) increased $18.9bn (0.1%). Finally, crystalising the week-on-week gains was the release of the Federal Reserve’s annual bank stress test results, which all 23 banks taking the test passed. The DIJA (+2.0% w/w), S&P 500 (+2.3% w/w), NASDAQ (+2.2% w/w) and the Russell 2000 (+3.7% w/w) all posted weekly gains.
European markets were broadly bullish, finishing H2-2023 strong. The French CAC (+3.3% w/w), UK FTSE (+0.9% w/w) and German DAX (+2.0% w/ w) all posted weekly gains. The Stoxx 600 Index rose 1.9% w/w by the close in London, with real estate stocks and industrials leading the gains. Tech stocks underperformed slightly as ASML Holding NV declined after a report that the US plans to force the Dutch company to ship fewer of its so-called deep ultraviolet lithography machines to China. However, the consensus opinion is that gains will be capped from here on. Data from Bank of America revealed that the region’s stock funds just suffered a 16th straight week of investment outflows, taking total withdrawals to $27.0bn YTD. In the past week alone, Europe had the most significant outflows among major regions, with a $4.6bn exodus. The redirection in capital towards US equities markets highlights investors’ concerns about growth prospects in the euro area (following reminders from Fed Chair Powell, ECB President Lagarde, and BoE Governor Bailey that more tightening will likely be needed to bring down inflation) and investors’ preference for growth stocks & mega-cap technology, which have a much bigger presence in the US.
Asian equities closed green, Despite economic releases showing that China’s Non-Manufacturing Purchasing Managers Index (PMI), which provides an early indication each month of economic activities in the Chinese Non-manufacturing sector, declined to 53.2 from 54.5, making it the third consecutive month of decline. Driving the upward trend in China was Equities in mainland China which gained as stimulus expectations fueled hopes of boosting consumer spending. In addition, Chinese property developers (like Hua Yuan Property Co Ltd, gaining 10.1%) advanced at the end of the week amid expectations that Chinese authorities may introduce more stimulus measures to boost the struggling sector The CSI300 real estate index added 4.2%. The Shanghai composite and the Hang Seng rose marginally by 0.1% w/w and 0.04% w/w, respectively. Japan’s Nikkei 225 Index (+1.2% w/w) rallied while the Taiwan SE weighted index (-1.7% w/w) closed in the red. Indian equities rose to all-time highs. The S&P BSE Sensex (.BSESN) hit an all-time high at 63,588.31 as the country recorded increased FPIs. June becomes the best month in terms of inflows, in 2023. The foreign portfolio investors (FPIs) pumped in ₹47,148 crores in Indian equities in June, the highest monthly buying of the year. This would also be the fourth consecutive month where FPIs have continued to end as net buyers in domestic stocks. In H1-2023, FPIs have now invested ₹76,407 crores. The country’s improving macros could trigger sustained buying as investors rebalance portfolios away from Chinese equities as growth prospects moderate. The Sensex gained 2.8% w/w
At the start of last week, oil prices rose due to supply concerns due to speculation about Vladimir Putin’s hold on power after a weekend uprising against the president of Russia, the world’s third-largest oil producer but U.S. crude remained below the $70.0/bbl mark as investors balanced fears about political instability in Moscow. Within the week, despite Chinese data pointing to continued economic headwinds in the world’s largest oil importer, prices rose, with Brent poised for its first monthly gain this year, as a significant drawdown in U.S. oil stocks outweighed concerns that fuel demand will be dented further by more interest rate rises and the expected reduction in economic activity. Thus, Brent Crude futures climbed 1.4% w/w to print at $74.90/bbl.
This week will be a shortened week in the US markets will be closed for the independence day celebrations; nonetheless, financial markets will be driven by data releases out of the US; investors will pay close attention to Junes Unemployment & Nonfarm Payrolls reports and the FOMC’s minutes. The direction of the financial markets would also be largely dependent on the release of Jun-2023 PMI numbers for Germany, the UK and the US.
Macroeconomic Highlights
According to the CBN’s ‘Financial markets department annual activity report 2022’, in continuation of its periodic intervention in the foreign exchange market, the Central Bank of Nigeria injected another sum of $17.81bn into the inter-bank foreign exchange market in 2022. This slightly increased from the $16.55bn injected in 2021. The CBN attributed the decline in reserves to various factors, including external debt financing among other challenges. However, we expect pressure on reserves to ease in the long run a monetary authorities pull back on the defense of the Naira. This will preserve external reserves.
In its recently released ‘Central Bank of Nigeria (Customer Due Diligence) Regulations, 2023’ document, the apex bank asked financial institutions to use the social media handle, amongst other things, of their customers to verify their identity. However, this new Central Bank of Nigeria identification policy will only apply to 31.6mn Nigerians which as of Jan-2023, according to Statista, is the total number of Nigerians on social media. Nonetheless, social media as a means of identification is expected to strengthen customer due diligence regulations further and deepen the identification process in the banking system, the apex bank noted. However, additional requirements to opening a bank account generally do not encourage people to open bank accounts.
The Manufacturers Association of Nigeria (MAN) has warned that implementing the proposed electricity tariff hike by power distribution companies may force more multinational companies to relocate their factories outside Nigeria. This is because manufacturers that rely on energy-intensive processes will see their production costs rise as energy prices go up. This can lead to lower profit margins or even losses, if the manufacturers are unable to pass on the higher costs to their customers.
According to data obtained from the Debt Management Office, between January and March 2023, Nigeria spent N874.13bn on domestic debt servicing, while it spent $801.36m (N368.87bn) on external debt servicing, giving a total of N1.24tn. The exchange rate of the DMO, which was $1=N460.3, was used for external debt servicing. Given the recent depreciation of the Naira, we expect Nigeria’s external debt servicing costs to rise. Thus, the government will have to use more of its revenue to pay interest on its debt, which will leave less funds available for other spending. It could potentially lead the government to raise taxes to cover the debt.
This week, we do not expect any macroeconomic report publications from the National Bureau of Statistics. In the absence of any policy announcements from the new administration, we expect the macroeconomic front to be relatively quiet.
Domestic Equities: Bullish Sentiments Persists in the Market…ASI up 3.0%
Last week, the local equities market maintained its upward trend as the market closed bullish. The bulls maintained their dominance in the market despite the short-holiday week arising from the Eid-Mubarak celebrations. Positive sentiments amongst investors continued to drive the rally in the market amid the depressed fixed-income environment. Notably, share price appreciations in large-cap stocks such as AIRTELAF (+6.3% w/w), MTNN (+3.0% w/w) and banking stock, GTCO (+11.3% w/w), led the rally. As a result, the benchmark All Share Index (NGX-ASI) climbed by 298bps w/w to print at 60,968.3 points. Hence, YTD return strengthened to 19.0%, while market capitalisation gained N960.6bn to print at N33.2tn. Activity level improved as average value and volume traded climbed by 64.9% w/w and 14.5% w/w to N13.8bn and 771.5mn units, respectively. Investors’ sentiment weakened to 1.3x from 1.8x, as 77 tickers appreciated while 59 depreciated.
Across sectors, overall w/w performance was mainly bullish as all the five (5) sectors under our coverage closed in the green. The Banking (+7.8% w/w) sector led the gainers, following buy-interests in ZENITHBA (+7.0% w/w) and ACCESSCOR (+11.0% w/w). Trailing was the Oil & Gas (+4.6% w/w) sector, buoyed by gains in ETERNA (+32.5% w/w), TOTAL (+4.2% w/w) and SEPLAT (+2.9% w/w). This was followed by the Insurance (+1.9% w/w) and Consumer goods (+1.1% w/w) sectors, due to bargain-hunting activities in MBENEFIT (+17.8% w/w), MANSARD (+4.5% w/w), DANGSUGA (+5.9% w/w) and NB (+3.0% w/w). Lastly, the Industrial goods sector gained 0.6% w/w, on account of price appreciations in BUACEMEN (+2.5% w/w) and WAPCO (+2.3% w/w).
This week, we expect the bullish sentiments in the equities market to persist on the back of the attractiveness of the market over the depressed rates in the fixed-income market. Also, we believe the positive sentiments around the new policies to continue to drive the rally in the market. Lastly, we expect investors to begin to take positions ahead of the upcoming of Q2-2023 earnings season.
Money Market Review: Funding Rates Tapered At The PMA
Last week, the financial system was mostly liquid, supported by FAAC inflow. Despite the absence of any maturity, the financial system closed the week with a balance of N1.5trn. Funding rates between banks inched lower. The Open Repo Rate (OPR) and Overnight Rate (OVN), two measures of funding rates between banks, tapered by an average of 739bps w/w and 773bps w/w, to close the week at 1.6% and 2.3%, respectively.
At the primary market, the CBN conducted its ultimate NT-Bill auction for the half (H1-2023), rolling over maturing bills to the tune of N187.2bn across the 91-day, 182-day, and 364-day bills. As expected, the auction was oversubscribed by 4.0x, with total bids printing at N753.5bn. Stop rates across the bills on offer tapered significantly. Rates on the 91-day, 182-day and 364-day bills declined by 202bps, 75bps and 201bps to print at 2.87%, 4.37%, and 6.23% respectively. The decline in rates came on the back of the liquid financial system. The removal of the cap in funding rates was the key driver of the magnitude of decline observed in yields at the primary market auction (PMA).
The secondary NT-Bills market was bullish, with investors looking to exploit the elevated rates in the secondary market amid the liquid financial system. Thus, the average yield on NT Bills tapered by 15bps to settle at 6.35% (previously 6.50%).
This week, we expect rates to hover around current levels. On one side, we expect the liquid financial system to stimulate further buy pressure. On the other side, the overall desire for higher rates has managed to keep money market and FTD rates in the upper region of the single-digit terrain. There will be a tussle between fund managers and Bank treasuries. However, liquidity will remain KING, determining the direction of rates in the fixed-income market.
Bond Market: Liquidity remained KING, Determining the Direction Of Rates…
Similarly, liquidity was KING in the secondary market for bonds. Fund managers and Asset Management companies looked to exploit the higher rates in the market. The average yield across all sovereign bond tenors tapered by 80bps w/w to close the week at 12.98% (previously 13.78%). In the same vein, the average yield on corporate bonds declined by 100bps w/w to close at 12.50% (previously 13.50%).
Conversely, sentiments were bearish at the secondary market for Nigerian Eurobonds. The pressure for higher rates resumed in tandem with sentiments in Sub-Saharan African (SSA) region. That said, the average yield across the curve climbed by 113bps w/w to settle at 12.83%. (previously 11.70%).
This week, we expect the bullish sentiments in the secondary market to continue. Liquidity will remain KING, keeping rates suppressed. For the Eurobonds market, we expect bearish sentiments to continue.
Currency Market: Naira steadies at the I&E window.
Last week, the Naira gained w/w at the Investors & Exporters (I&E) window to close at N769.25/$, from its previous close of N770.17/$. At the parallel market, we continue to find offer quotes in the N762.0/$- N767.0/$ range. Activities in the I&E window improved, with average FX turnover rising by 66.2% w/w to $230.8mn. Lastly, Nigeria’s external reserves fell by 58bps to settle at $34.2bn as at 26-Jun.
This week, we expect foreign exchange rate in the I&E window to be determined by the market forces.
