July 31, 2023/United Capital
Global Markets Posted Weekly Gains.
Equities posted weekly gains in the US market following the release of some corporate earnings, economic, and central bank news during the week. Investors’ expectations were that the Fed’s rate hikes are ending, and earnings growth will accelerate in the second half of the year. The FOMC voted unanimously on Wednesday to raise the target range for the Fed funds rate by 25 basis points from 5.25% to5.50%, as expected. The policy directive also upgraded the description of economic activity from “continuing to expand at a modest pace” to “expanding at a moderate pace”. According to the CME FedWatch Tool, the probability of a second-rate hike at any of the remaining FOMC meetings this year remains under 30.0%. Last week also featured a series of economic reports indicating that the US economy was far from a recession in the second quarter of 2023. This was due to an uptick in consumer confidence, which was driven both by improved sentiments about current conditions and the outlook, another low level of weekly initially jobless claims, and a stronger than expected 2.4% increase in Q2-2023 GDP, which was up from 2.0% growth recorded in Q1-2023. Thus, the DIJA (+0.7% w/w), NASDAQ (+2.0% w/w), S&P 500 (+1.0% w/w) and Russell 2000 (+1.1% w/w) all posted weekly gains.
Similarly in Europe, equities rallied, EURONEXT 100 (+0.9% w/w), France’s CAC 40 Index (+0.6% w/w), Germany’s DAX (+1.8% w/w), and the UK’s FTSE 100 Index (+0.4% w/w) advanced. Despite the Federal Reserve and the European Central Bank (ECB) announcing interest rate increases, investors’ sentiment remained broadly bullish due to the dovish tone struck by policymakers about future interest rate decisions. The ECB followed suit with the FOMC rate hike with a 25bps increase. The ECB (Apex Bank) increased interest rates to a record-equaling high of 3.75% in a largely expected move, although there is a speculation, driven by the language in its directive, that the Apex Bank could also be close to being done raising rates, as the Monetary Committee hinted that a pause in monetary tightening could be on the horizon. However, the Apex Bank cited the prospect of euro area inflation staying too high for too long as a critical reason for the rate hike. It also suggested that it was keeping an open mind about future rate decisions.
In Asia, Japan’s stock markets rose over the week, with the Nikkei 225 Index up 1.4% and the broader TOPIX Index gaining 1.3%. Following its monetary policy meeting, the Bank of Japan (BOJ) decided to keep its key short-term interest rate unchanged at -0.1% and that of 10-year JGB yields around zero per cent. However, it announced increasing flexibility around its yield curve control (YCC) target. The BOJ disclosed it will maintain the target rate at 0.5% but will offer to purchase 10-yr JGBs at 1.0% every business day through fixed-rate purchase operations. It judged that a sustainable and stable achievement of its 2.0% price stability target had not yet come in sight and revised its forecast for consumer price inflation in fiscal 2023. Elsewhere, reports from China within the week suggested that authorities are considering further support to boost the world’s second-largest economy; this encouraged investors; thus, Chinese equities rallied. The Shanghai Stock Exchange Index gained 3.42% w/w, while the blue-chip CSI 300 soared 4.47% w/w. In Hong Kong, the benchmark Hang Seng Index rose 4.41% w/w. The Communist Party’s Politburo, China’s top decision-making body led by President Xi Jinping, pledged to provide stimulus to boost domestic consumption amid a flagging recovery after the end of pandemic lockdowns in December. Officials also vowed to enhance support for the ailing real estate sector following the Politburo’s latest meeting, during which leaders set economic policy for the rest of 2023. Despite signalling a pro-growth stance, the post-meeting statement contained no specific policy measures.
Oil markets rallied last week as supply concerns persist. Saudi’s oil production would theoretically drop by 2.5mbpd from their norm of 9.5mbpd. In addition, due to pledges by Russia and nine other oil producers participating in the production squeeze, the market is missing at least 4.0mbpd in supply. Further driving the rally was forecast-beating US economic growth. Brent Crude rose 4.1% w/w to close at $84.41/bbl.
This week, the continued release of companies’ earnings results would primarily drive the market’s direction. However, investors will also turn their attention to employment data from the US. At the start of the week, the Job Openings and Labour Turnover Survey (JOLTS) report would be released, and at the tail end of the week, initial jobless claims, unemployment numbers and the nonfarm payrolls would be released. In Europe, stakeholders will get July’s CPI results at the start of the week, and later in the week, the Bank of England will meet for its interest rate decision. In addition, PMI numbers for Europe, China and the US would also be released and aid in painting a clearer picture of those economies.
Macroeconomic Highlights
In its July 2023 meeting, the Monetary Policy Committee (MPC, the Committee) concluded with a decision to raise the Monetary Policy Rate (MPR) by 25 basis points (bps) from 18.50% to 18.75%.. The decision was supported by four members of the committee, while the remaining two members leaned towards a higher 50bps hike. Additionally, the MPC voted to adjust the asymmetric corridor around the MPR to +100/-300 basis points from the previous range of +100/-700 basis points. The Committee also made the decision to retain the Cash Reserve Ratio (CRR) at 32.5% and the liquidity ratio at 30.0%.
The International Monetary Fund (IMF or The Fund) has retained its 3.2% forecast for Nigeria’s economic growth in 2023. Meanwhile, the IMF lowered its forecast for Sub-Saharan economic growth in 2023 by 0.1ppts from 3.4% to 3.5%. The Fund, however, raised its forecast for global economic growth in 2023 by 0.2ppts from 3.3% to 3.5%.
Foreign investment into the stock market, Nigerian Exchange Limited, fell year-on-year by 40.4% from N243.5bn reported in H1-2022 to N145.1bn in H1-2023.. The decline reflects low investors’ confidence in the Nigerian economy, driven by prolonged foreign exchange scarcity as well as uncertainties that arose prior to the 2023 elections. Similarly, net foreign exchange (forex) inflow into the economy fell year-on-year by 2.4% from $7.5bn recorded in Q1-2022 to $7.3bn in Q1-2023, reflecting challenges in the external sector of the economy.
Despite huge investments in the oil sector, the country’s crude oil revenue has continued a downward trajectory. According to data obtained from the Organisation of Petroleum Exporting Countries (OPEC) Revenue Factsheet released by the US Energy Information Administration, from January to May-2023, the net oil export revenue of the country experienced a significant decline of 66.0% y/y, falling to $11.0bn, against the $34.0bn earned during the same period last year. This is as militants have threatened to resume attacks on critical oil installations in the Niger Delta.
This week, we do not expect any macroeconomic report 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: The Bulls Prevailed in the Market…ASI up 0.1%
Last week, the local equities market remained on its upward trajectory despite closing in the red zone in three (3) out of five (5) trading sessions. We observed profit-taking activities in NB (-16.4% w/w), FBNH (-6.6% w/w) and GTCO (-3.8% w/w) following extended rallies in the past weeks. However, the market closed positive w/w majorly due to buy-interests in large-cap stock SEPLAT (+21.0% w/w). In addition, gains in STANBIC (+10.9% w/w), MTNN (+0.7% w/w) and GEREGU (+3.6% w/w) drove the local bourse northwards. As a result, the benchmark All Share Index (NGX-ASI) climbed by 8bps w/w to print at 65,056.4 points. Hence, YTD return strengthened to 26.9%, while market capitalisation gained N7.7bn to print at N35.4tn. Activity level declined, as average value and volume traded fell by 61.6% w/w and 38.4% w/w to N7.5bn and 570.9mn units, respectively. Investors’ sentiments weakened to 0.7x from 3.8x, as 39 tickers appreciated while 54 depreciated.
Across sectors, overall w/w performance was mainly bearish as only one (1) sector under our coverage closed on the green zone. The Oil & Gas (+9.3% w/w) sector was the sole gainer, following buy-interests in SEPLAT (+21.0% w/w) and TOTAL (+4.1% w/w). On the flip side, the Consumer goods (-2.4% w/w) sector led the laggards due to sell-offs in NB (-16.4% w/w) and INTBREW (-12.4% w/w). Trailing was the Banking (-2.2% w/w) sector on the back of losses in ZENITHBA (-3.3% w/w) and ACCESSCOR (-4.6% w/w). This was followed by the Insurance (-1.6% w/w) sector following sell pressures in MANSARD (-9.3% w/w) and AIICO (-5.7% w/w). Lastly, the Industrial goods sector lost 0.3% w/w, on account of price depreciations in WAPCO (-5.9% w/w)
On corporate actions, several companies released their financial results for H1-2023. In the banking sector, WEMA and ETI recorded strong topline growth due to increases of 51.9% y/y (H1-2023: N76.6bn) and 40.6% y/y (H1-2023: N445.9bn) in their interest income. Notably, Wema’s Profit After Tax (PAT) grew by 98.9% y/y to N10.5bn in H1-2023 from N5.3bn in H1-2022. ETI’s PAT climbed by 36.1% y/y to N105.2bn in H1-2023 from N77.3bn in H1-2022.
In the Consumer goods sector, Nigerian Breweries recorded a loss after tax of N47.6bn in H1-2023, down 354.0% y/y from the profit of N18.7bn recorded in H1-2022. This is due to the 848.7% y/y growth in net finance costs following the elevated interest rate environment. Similarly, Cadbury and Guinness recorded losses of N14.5bn (down 720.9% y/y) and N18.2bn (down 216.1% y/y) in H1-2023. However, Unilever recorded a PAT growth of 44.8% y/y to print at N2.8bn in H1-2023 (vs N1.9bn in H1-2022) due to the 23.7% y/y increase in its revenue.
For food processors, NASCON recorded an impressive result as the company grew its revenue by 51.9% y/y to settle at N38.2bn in H1-2023 from N25.1bn in H1-2022. Notably, the company’s PAT grew by a whopping 279.2% y/y to print at N5.8bn (vs N1.5bn in H1-2022) in the period under review due to the 316.9% y/y and 128.1% y/y increases in other income and finance income, respectively. Lastly, OKOMU’s PAT declined by 3.8% y/y in H1-2023 to N16.2bn due to a decline of 0.4% in revenue and a 237.4% y/y climb in finance costs.
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 the commencement of the Q2-2023 earnings season to play an important role in the market’s direction.
Money Market Review: Stop Rates Surged At PMA
The financial system has been met with improved liquidity since the advent of the new administration. In the aftermath of the prior week’s DMO bond auction, the financial system went into a deficit region, supported by an over allotted auction. Hence, the financial system opened in the deficit region, with a balance of -N21.8bn. Given the fact that FAAC payments tarried before reflecting in the system, illiquidity kept funding rates (the Open Repo Rate (OPR) and Overnight Rate (OVN)) between banks elevated, after hitting an all-time high of 21.9% and 21.0%, respectively. Nevertheless, the FAAC payments and coupon inflows (N128.9bn) that hit the system during the week, the system closed the week liquid with a balance of N683.6bn. That said, the weekly average of the OPR and OVN tapered by 201bps and 223bps, to print at 9.2% and 9.8%, respectively (previously 11.3% and 12.0%). Meanwhile, during the week, the CBN mandated banks to return to strict compliance with the assigned 60.0% Loan to Deposit Ratio (LDR). The penalty for non-adherence was pegged at 50.0% CRR debit.
At the primary market, the CBN conducted the last NT-bill auction for the month of July, rolling over maturing bills to the tune of N264.3bn. The auction was met with decent demand, relative to the available supply of bills. Investors’ demand summed up to the tune of N398.2bn, implying a bid-to-cover ratio of 1.5x. Given the relatively liquid financial system at the time of the auction, investors’ desire for higher rates materialised. The CBN allotted the exact amount offered for rollover. That said, stop rates across all the tenors surged, climbing by 3.1ppts, 4.5ppts, and 6.2ppts, to print at 6.0%, 8.0%, and 12.2%, the 91-day, 182-day, and 364-day bills respectively.
In the wake of the CBN’s announcement of stringent compliance with the 60.0% LDR, we noticed sell pressures among the banks in the secondary NT-bills market. The selloffs were an effort to increase the amount of available liquidity to fulfill the 60.0% LDR. As a result, the average yield on NT bills surged by 278bps w/w to close at 7.1% (previously 4.3%).
This week, we envisage that liquidity will remain pivotal in the direction of FTD and money market rates, among other fundamentals. In the secondary market for NT-bills, we expect the sell pressure to ease off, with the prevailing liquidity driving buy interests. The demand for money by the banks is likely to remain dampened by the need to comply with the 60.0% LDR.
Bond Market: Investors’ Sentiment was Bearish
The secondary bonds market was relatively bearish, with the average yield on bonds climbing by 41bp to close at 13.1% (previously 12.7%). Similarly, corporate bonds traded on a bearish note, as the average yield on corporate bonds climbed by 60bps w/w to 13.2% (previously 12.6%).
In the Nigerian secondary Eurobonds market, sentiments were bullish as investors showed positive bias toward Nigerian Eurobonds, supported by the liquid financial system. That said, the average yields in the Nigerian Eurobonds market tapered by 34bps w/w to settle at 10.1% (previously 10.5%).
Looking forward, we expect the liquid financial system to remain a key market mover, determining the direction of yields in the fixed-income market. In the absence of any coupon inflow, we expect the FAAC payments received to remain the primary liquidity driver for the week. In the secondary market for bonds, we expect yields to taper slightly, with investors losing bias for fixed-income instruments. At the Eurobonds market, we expect yields to hover around current levels.
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 N775.76/$, from its previous close of N770.17/$1. At the parallel market, we find offer quotes in the N830.0/$1- N855.0/$1 range. Activities in the I&E window worsened, with average FX turnover falling by 5.3% w/w from $83.9mn to $79.4mn. Lastly, Nigeria’s external reserves settled at $33.9bn as at 26-July.
This week, we expect foreign exchange rate in the I&E window to be determined by the market forces.
