FSDH Top Picks: Bullish Outcomes Across Global and Domestic Equity Markets

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August 8, 2023/FSDH Research

Nigerian Equities: Equity rally sustained into 3rd consecutive month
The northward momentum in Nigerian equities continued for a third consecutive month as the benchmark NGX-All Share Index (NGX-ASI) gained 5.5% m/m to close the month at 64,337.52 points, bringing YTD return on the benchmark to 25.5%. The rally in Nigerian equities was supported by a series of events across different sectors. Investor sentiment remains influenced by optimism around the new administration’s pro-market reforms, in addition to the impact of the earnings season.
 
The Oil & Gas sector was the best-performing sector for the month, gaining 20.1% m/m. The gains in the Oil & Gas sector were underpinned by i) increased fuel pump price of PMS, keeping in line with the subsidy removal, providing a boost to downstream oil & gas companies and ii) the rally in oil prices (Brent gained 14.2% in July) and persistent depreciation of the naira supported interest in upstream oil & gas business (as they earn in USD). The Industrial Goods sector followed, gaining 14.2% m/m, broadly supported by an uptick in DANGCEM (+23.5% m/m) after the company announced the continuation of its share buyback program during the month. The Banking index gained 3.8% as a broad-based rally across banking stocks was driven by solid H1-2023 earnings, as banks recorded healthy FX revaluation gains. On the other hand, the Insurance (-5.9% m/m) and Consumer Goods (-4.6% m/m) sectors suffered losses during the month. The selloffs in the Consumer Goods sector were triggered by huge FX losses recorded by bellwether names within the sector. Following the naira devaluation, businesses with huge FX liability exposure (payables & debt obligations)  had to revalue their exposures, leading to huge FX losses, given the steep devaluation.
Source: NGX, FSDH Research
In line with our outlook for the equities market, we have seen the bullish momentum in the equities market sustained, particularly in the banking and oil & gas sectors. However, we remain cautious and expect that the tide for the Nigerian equities market will turn from the end of Q3-2023 into Q4-2023. First, we expect domestic investors who have been very bullish to begin to reduce exposure to Nigerian equities as the reality of lack of interest from foreign investors begins to trickle in. The shift towards a market-determined FX policy has not led to substantial improvement in FX liquidity as average turnover at the I&E window since the announcement of a change in the FX regime is $110.0m, a marginal 0.8% improvement on the pre-reform 2023 average of $109.1m. In addition, according to data from the Nigerian Exchange Group (NGX), foreign investors remained net sellers of Nigerian equities as foreign outflows (N23.0bn) outpaced foreign inflows (N22.7bn) in June. That said, we note the sizable increase in foreign inflows into equities for May and June.
Source: FMDQ, FSDH Research
Source: NGX, FSDH Research
Furthermore, we think the recent cocktail of policy actions by the Federal Government (FG), including PMS subsidy removal and exchange rate float, as well as other government agencies decisions, such as an increase in education costs is imposing devastating impacts on household consumption expenditure (which contributes >60% of the nation’s demand). We expect the impacts to be fully measurable in Q3-2023 and portend a slump in aggregate economic demand with a consequent impact on the earnings of listed companies. Nevertheless, we expect Banking stocks to continue to thrive on the benefit of higher interest rates on investment securities and FX revaluation gains.
 
Overall, we recommend investors in non-banking stocks take advantage of the current valuation to reduce their exposures. At best, we think the downside potential in non-banking Nigerian equities outweighs the upside potential. For context, the NGX-ASI currently trades at a PE ratio of 12.9x, a 6.5% premium above the long-run average PE ratio of 12.1x. As we have stated previously, we continue to retain our bullish tilt on Nigerian equities.
Source: Bloomberg, FSDH Research
Global Equities: Bullish surprise greets US & European markets
Last month, the US equities market extended its bullish momentum into the second consecutive month as uplifting macroeconomic outcomes and a strong Q2-2023 earnings season boosted investor sentiments. Despite the bullish performance in July, the month started on a shaky note as fears of a possible economic recession (due to ISM Manufacturing PMI falling to 46.0 points in June) re-surfaced, while uncertainty regarding the Fed’s likely decision at the July Federal Open Market Committee (FOMC) meeting unsettled investors. This gave investors reason to take some profits off the table. However, positive inflation numbers for June, which showed headline and core inflation declined to 3.0% and 4.8% (from 4.0% and 5.3% in May), respectively, resuscitated buying interest as it raised optimism that the FOMC will opt for a 25bps hike in the Fed Funds Target Rate. Truly, the US Fed decided to raise its policy rate range by 25bps, in line with consensus expectations and our July forecast of two additional 25bps hike in the rest of the year. As a result, we saw renewed buying interest, reversing the bearish start to the month.
 
The bullish sentiments were further bolstered by a positive economic growth surprise in the US, as the US economy expanded by 2.4%, ahead of consensus projections of 1.8% as well as Q1-2023’s 2.0%. Lastly, the earnings season has also been broadly positive for listed US companies, reinforcing investor optimism. Overall, the NASDAQ 100 led among US equity indices we track, gaining 3.8% for the month. The Dow Jones Industrial Average and the S&P 500 also closed the month northwards, gaining 3.4% and 3.1%, respectively. 
   
Investors appear to have been buoyed by the strong macroeconomic outcomes, particularly after the robust economic growth recorded in Q2-2023. In addition, leading economic indicators; retail sales growth, wage growth, job creation, and business investments remain strong, eliminating fears of a possible recession in the US. Meanwhile, a positive surprise in June inflation numbers indicates the US Fed may be nearing the end of its hawkish monetary policy cycle if inflation continues its descent. We see room for one more 25bps hike in the rest of 2023. As a result, we see room for sustained cautious optimism on US equities in the long run. However, we expect some profit-taking over the next weeks as short-term traders look to cash in on the recent uptrend. Nevertheless, we view this as an opportunity for investors with a medium to long-term horizon to take positions on softer prices.
Source: Bloomberg, FSDH Research
In Europe, sentiments were broadly similar as we saw upticks across all the indices we track within the region. Akin to developments in the US, at the start of the month, investors in European equities were unsettled by concerns regarding inflation, the ECB policy direction, and the growth outlook for the European economy. As a result, we saw steep selloffs in the early parts of the month. However, the European inflation outcome for June provided some succour for investors as Euro Area inflation fell to 5.5% (from 6.1% in May). In addition, inflation in the UK cooled significantly in June, printing at 7.9% (from 8.7% in May), lower than the consensus expectation of 8.2%. This gave investors hope that the European Central Bank (ECB) and the Bank of England (BOE) will remain within consensus expectations for monetary policy. In line with expectations, the ECB and BOE announced a 25bps rate hike to bring their key policy rates to 3.75% and 5.25%, respectively. That said, while the ECB did not offer any forward guidance on the pathway for future interest rate decisions, the biggest highlight for investors was the ECB’s acknowledgment of the possibility of a potential pause in rate hikes in its September meeting. On the back of this, we saw renewed buy interest in European equities.
 
We also highlight that BOE has ruled out the likelihood of a recession in the UK over the next two years on the back of a very strong labour market, fueling higher wages and consumer demand. We believe this further reinforced investors’ appetite for UK equities. Overall, the pan-European STOXX 600 gained 2.0% in July. Across countries we track within Europe, the UK’s FTSE 100 gained the most, edging higher by 2.2% m/m, while Germany’s DAX (+1.9% m/m) and France’s CAC 40 (+1.3% m/m) all trailed.
FSDH Top Stock Picks
FSDH Research

 

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