September 25, 2023/United Capital
Global Markets Closed Bearish.
Last week, the U.S. stock market posted weekly losses, driven by hawkish forecasts from the Federal Reserve’s (the Fed) latest meeting and rising U.S. Treasury yields. The Fed maintained its short-term lending benchmark at a target range of 5.25% to 5.50%, in line with market expectations. Meanwhile, Policymakers surprised Analysts with an outlook for rates in 2024 that was notably higher than expected (from 4.6% to 5.1%). Similarly, Fed’s interest rate prediction for 2025 also increased from 3.4% to 3.9%. In addition, the Central Bank raised its output growth forecast from 1.0% to 1.9%, an acknowledgement that the economy has been more resilient than expected. Based on some of the pronouncements made by Fed, significant indices such as the Nasdaq Composite (-3.6% w/w), S&P 500 (-2.9% w/w), Dow Jones Industrial Average (-1.9% w/w) and Russell 2000 (-3.8% w/w) posted weekly losses.
Similarly, the European markets recorded bearish outings w/w. The Pan-European STOXX Europe 600 Index lost 2.0% last week as Central Banks signalled that interest rates will stay high for some time. The BoE’s Monetary Policy Committee voted 5-4 to keep the key interest rate unchanged at 5.25% as economic growth slowed due to poor business activity. This was the first “HOLD” since December 2021. However, BoE Governor, Andrew Bailey stressed that borrowing costs could rise again if there is evidence of more persistent inflationary pressures. Meanwhile, the most recent inflation data revealed that annual inflation in the UK slowed from 6.8% reported in July to 6.7% in August. Due to the BoE’s decision, major country stock indexes also fell. France’s CAC 40 (-2.7% w/w), Germany’s DAX (-2.3% w/w) and Italy’s FTSE MIB (-1.1% w/w) all posted losses.
The Asian market had a mixed outing last week. In Japan, investors’ sentiments were dampened by the U.S. Federal Reserve’s pronouncements, signalling that it planned to keep interest rates higher for longer period to combat persistent inflation. Consequently, the Nikkei Index (-3.4% w/w) and the broader TOPIX (-2.2% w/w) closed red. Conversely, Chinese equities rallied as investors became more optimistic about the country’s economic outlook. Thus, the Shanghai Composite Index gained 0.47%, while the blue-chip CSI 300 Index added 0.81%.
In the oil market, crude oil prices fell marginally. Brent crude oil futures declined by 0.7% from $94.43/bbl to $93.27/bbl following profit-taking and as markets weighed supply concerns stemming from Russia’s fuel export ban against demand woes from future rate hikes.
This week, investors will focus on the Euro area inflation numbers and Chinese PMI data to gauge the global economic outlook.
Macroeconomic Highlights and Outlook
The Central Bank of Nigeria’s data on currency in circulation (CIC) revealed that the CIC hits N2.7tn as of the end of August 2023. The currency in circulation previously fell to N982.1bn as of the end of February 2023 due to the Naira redesign policy of the Apex Bank. This rise in CIC has negative implications on the value of the Naira and the country’s fight to tame inflation. Especially, when CIC rises significantly without a corresponding increase in economic activity (output), it can lead to an oversupply of money in the economy.
The Central Bank of Nigeria announced that the 293rd Monetary Policy Committee meeting scheduled for Monday and Tuesday, 25 to 26-Sept has been postponed, a future date is yet to be communicated. The reason for the postponement was not stated, Analysts insinuate that the postponement could be due to the awaited confirmation of the appointment of the new CBN Governor, Mr. Cardoso by the Senate.
Oil marketers have posited that the Federal Government may spend about N1.68tn as a subsidy on Premium Motor Spirit (PMS), popularly called petrol, from September to December this year. This is because documents from the FAAC show NNPC Limited used $220 million (N169.4 billion) from a $275 million dividend by NLNG to pay for subsidies last month. This revelation contradicts claims of subsidy removal.
Devakumar Edwin, Dangote Group Executive Director stated that the Dangote Refinery, with a planned capacity of 650,000 barrels per day (b/d), is set to commence production in phases from next month (Oct-2023). Initially, it will produce 350,000-370,000 b/d of diesel and jet fuel from October, utilizing key units like the crude distillation unit, sulfur block, and hydrogen plant. By 30-Nov, the refinery will begin a phased ramp-up to its full capacity, with approximately half of the production dedicated to gasoline, addressing a significant demand in Nigeria.
According to the World Bank (the Global Bank), the coup d’état in Niger may put additional pressure on Nigeria and other West African nations’ food markets. The Global Bank further noted that the Nigerien coup d’état puts an additional seven million people at risk of falling into severe food insecurity in the region against a backdrop of soaring commodity and staple food prices, and severe food insecurity already affecting 3.3 million people during the lean season.
The Federal Inland Revenue Service (FIRS)stated that it increased Nigeria’s tax-to-GDP ratio from 6.0% to 10.8% in 2022 through its various reforms. Similarly, the Management noted that it is committed to improving the country’s tax-to-GDP ratio from 10.8% to 16.0%, which is Africa’s average, and subsequently 18.0% in the next three years.
In the week ahead, we expect NBS to release Q1 and Q2-2023 Gross Domestic Product Report (Expenditure and Income Approach).
Domestic Equities: Bearish Sentiments Sustained…ASI down 0.1%
Last week, the local equities market closed in the red zone despite pockets of buy-interests in the first two trading sessions of the week. We observed that investors continued to book profits off the previous weeks’ rallies. In addition, the bearish sentiment was driven by the attractiveness of the fixed-income market, following recent increases in money market rates and yields. Notably, the market closed lower w/w majorly due to sell-offs in large-cap stock DANGCEM (-8.5% w/w). In addition, losses in FBNH (-5.1% w/w) and MTNN (-0.4% w/w) drove the local bourse southwards. As a result, the benchmark All Share Index (NGX-ASI) fell by 11bps w/w to print at 67,324.6 points. Hence, YTD return strengthened to 31.4%, while market capitalisation fell N39.0bn to print at N36.8tn. The activity level was mixed, as the average value of stocks traded declined by 36.0% w/w to N6.1bn while the average volume of stocks traded climbed by 33.4% w/w to 782.2mn units. Investors’ sentiments strengthened to 1.3x from 0.8x, as 74 tickers appreciated while 57 depreciated.
Across sectors, overall w/w performance was mainly bullish as four (4) sectors under our coverage closed in the green zone. The Insurance sector (+3.3% w/w) led the gainers, following buy-interests in NEM (+9.1% w/w), SUNUASSU (+32.9% w/w) and CHIPLC (+14.1% w/w). Trailing behind was the Consumer goods sector (+3.0% w/w) due to bargain-hunting activities in BUAFOODS (+6.3% w/w). The Banking, and Oil & gas sectors climbed by 0.6% each on the back of gains in UBA (+6.1% w/w), UBN (+3.8% w/w), MRSOIL (+5.5% w/w) and ETERNA (+7.1% w/w). On the flip side, the Industrial goods sector (-4.8% w/w) was the sole laggard, on account of price depreciations in DANGCEM (-8.5% w/w).
On corporate actions, Oando Plc released its financial results for FY-2021, showing that the company recorded a 68.4% y/y growth in revenue (FY-2021: N803.5bn vs FY-2020: N477.1bn). However, gross profit increased marginally by 2.7% y/y to N41.5bn in FY-2021 (vs N40.4bn in FY-2020). This is due to the bump in the cost of sales, which grew by 74.5% y/y to N761.9bn from N436.6bn. Despite 15.2% y/y and 13.1% y/y increases in administrative expenses and finance costs, the 266.8% y/y gains from the reversal of impairment on financial assets helped to offset these losses and reduce pressure on overall profitability. As a result, Oando’s Profit After Tax (PAT) grew to N32.9bn from a previous loss position of N140.7bn.
This week, we expect mixed investors’ sentiments in the equities market. First, we expect the positive sentiments towards Tier-1 banks to continue, given their strong performance in H1-2023. Similarly, investors may continue to take positions in fundamentally sound stocks. However, we note that some investors may book profits off stocks that have recorded impressive price appreciations.
Money Market Review: System Remains in Surplus
Last week, the financial system opened with a surplus of N110.7bn. During the week, an extra liquidity of c. N185.8bn worth of coupon inflows was released into the system. Despite this, we saw liquidity dropped from a much higher level to a moderate level showing a surplus of N65.6bn at the close of the week. Consequently, both the average weekly Open Repo Rate (OPR) and Overnight Rate (OVN) fell by 14.6ppts w/w to close the week at 7.8% and 8.5%, respectively.
In the secondary NT-bills market, we observed sell pressures as investors anticipate the Primary Market Auction (PMA). As a result, the average yield on NT bills climbed by 48bps w/w to close at 8.46% (previously 7.98%).
This week, the CBN will be looking to rollover c. N242.0bn worth of maturing NT-bills at the primary market. For the rest of the month, we expect suppressed money market rates as we expect a liquid financial system on the back of c. N131.2bn worth of expected coupon inflows.
Bond Market: Bearish Sentiments Persist
In the secondary bonds market, the bearish investors’ sentiment persisted as the average bond yield rose by 30bps to close at 14.70% (previously 14.40%).
In the Nigerian secondary Eurobonds market, sentiments were largely bearish in tandem with SSA Eurobonds. Thus, the average yields in the market closed higher by 21bps w/w to settle at 11.43% (previously 11.22%).
This week, we expect to see a muted bond market as investors trade cautiously in anticipation of the release of the Q4-2023 bond auction calendar. We envisage that the incoming liquidity of N131.2bn worth of coupon payments will not drive much buy interest across the curve. In the Eurobonds market, bullish sentiments will be driven by the expected c. $197.5mn worth of coupon payments as investors seek to reinvest inflows.
Currency Market: Naira Depreciated At The I&E Window
Last week, the Naira depreciated by 3.5% w/w at the Investors & Exporters (I&E) window to close at N722.39/$, from its previous close of N747.76/$. At the parallel market, Naira depreciated further, as we saw offer quotes in the N985.0/$- N995.0/$ range, an all-time low. Activities in the I&E window increased as average FX turnover grew by 129.0% w/w to $128.6mn. Lastly, Nigeria’s external reserves settled at $33.3bn.
This week, we expect continued pressure on the Naira across all market segments, as FX pressures persist due to weak Dollar earnings, and demand outweighs supply.
