October 3, 2023/United Capital Research
Global Markets: Bearish Investors’ Sentiments Dominate the Market
Last week, the global equities market closed on a negative note on the back of price actions in the Treasury market and weaker economic data releases. In the US, consumer confidence for Sept-2023 settled lower at 103.0pts compared to the prior estimate of 108.7pts in Aug-2023. The drop in consumer confidence was driven by weakening expectations for future business conditions, job availability and consumer income. Additionally, rising long-term rates in the Treasury market led to sell-offs across the US equities market as investors shifted their asset classes to attractive rates in the fixed-income market. The 10-YR note yield jumped 13bps this week and 48bpts this month to 4.57%. Similarly, the yield on the 2-YR note climbed by 18bps this month to 5.04%. As a result, the US indices closed mostly bearish as the DIJA (-1.3% w/w) and S&P 500 (-0.7% w/w) closed the week lower. Meanwhile, the NASDAQ Composite (+0.1% w/w) recorded modest gains.
In tandem, the European markets recorded w/w losses on expectations that central banks will maintain their hawkish stance for a longer period. In the UK, the Gross Domestic Product (GDP) grew by 0.6% y/y in Q2-2023, up from a preliminary estimate of 0.4% y/y and the 0.5% y/y growth recorded in Q1-2023. However, the market did not react positively to this, as traders remained focused on the possibility of a prolonged period of elevated interest rates. Also, rising global energy prices reignited concerns about spiking inflation numbers in the coming months. Notably, the Bank of England (BoE), despite maintaining its interest rates at its Sept-2023 meeting, signalled its commitment to keeping interest rates elevated for an extended period if needed. That said, the UK FTSE 100 declined by 1.0% w/w. Elsewhere in Europe, the annual inflation rate in the Euro Area slowed to 4.3% y/y in Sept-2023 from 5.3% y/y in Aug-2023. However, the economic sentiment in the region dipped slightly to 93.3pts in Sept-2023, down from 93.6pts in the previous month. This marked the lowest reading since Nov-2020, reflecting the ongoing impact of inflationary pressures within the region and the European Central Bank’s (ECB) aggressive policy tightening, which continued to dampen overall consumers’ morale. Thus, the France’s CAC (-0.7% w/w), Germany’s DAX (-1.1% w/w) and Europe’s STOXX (-0.7% w/w) declined last week.
The Asian market closed in the red zone as surging oil prices and government bond yields dented investors’ sentiments towards the market. In China, the Caixin General Manufacturing Purchasing Managers’ Index (PMI) declined to 50.6pts in Sep-2023 from 51.0pts in Aug-2023. Similarly, the Caixin General Services PMI dropped to 50.2pts in Sept-2023 from 51.8pts in the previous month, as demand remained weak despite a string of support measures. As a result, the capitalisation-weighted Shanghai Composite Index fell by 0.7% w/w. Investors also reacted to data showing the Japanese consumer confidence index declined to a six-month low of 35.2pts in Sept-2023 from 36.2pts in the previous month. Lastly, India’s external debt increased by $4.7bn in Q2-2023, settling $629.1bn at the end of Jun-2023, marking an all-time high and equivalent to 18.6% of the country’s GDP. That said, the Japanese NIKKEI (-1.7% w/w) and Indian SENSEX (-0.3% w/w) closed lower.
In the oil market, crude oil prices climbed amid fresh worries over low supply, raising risks that gasoline costs and higher energy bills may entrench higher inflation in other areas of the economy, thus prolonging the period of restrictive monetary policy by major central banks. As a result, oil prices closed higher on a weekly basis, with Brent Crude gaining 2.2% w/w to print at $95.31/bbl. (previously, $93.27/bbl.).
This week, the spotlight will be on the speeches made by several Fed officials. Additionally, investors’ attention will be focused on the Purchasing Managers’ Index (PMI) and foreign trade data reports. Elsewhere, market participants will be keen on the unemployment rates for Canada and the Euro Area.
Macroeconomic Highlights
In apparent reflection of the depreciation in the value of the Naira coupled with the sustained inflationary pressure, the cost of raw material input for consumer goods companies rose by 18.5% in the first half of 2023, a development which undermined companies’ profitability. The severity of this trend is reflected in the increased cost of producing consumer goods, which are mostly essential commodities used regularly by households. These include foods and beverages, toiletries, over-the-counter medicines, cleaning and laundry products, plastic goods, and personal care products, amongst others.
Three of the major brewers in Nigeria posted losses in the first half of this year as their borrowing costs swelled on the back of rising interest rates and Naira devaluation. Out of the four beer makers listed on the Nigerian Exchange Limited, three swung to loss while one saw a sharp decline in its profit. Nigerian Breweries Plc, International Breweries Plc, and Guinness Nigeria Plc suffered a combined loss of N89.4bn in H1-2023, compared to a profit of N34.7bn in the same period of last year. Champion Breweries reported a significant decline in profit by 3,600.1% to N29.1 million.
The African Export-Import Bank (Afreximbank) is currently tapping some oil traders to enable the financing of the $3 billion emergency cash-for-crude oil repayment loan to the Nigerian National Petroleum Company Limited (NNPCL), a loan that was adjudged central to the country’s efforts to support the falling Naira. Ultimately, the deal is expected to boost foreign exchange liquidity in the country, thus propping up the value of the Naira against the Dollar, particularly in the short term.
Nigeria’s trade with the rest of Africa increased by 40.8% Year-on-Year (YoY) in the first half of 2023 to N1.8trn from N1.3trn recorded in the corresponding period of 2022. This represents a reversal in the declining trend of the nation’s intra-African trade over the same period since 2020, in terms of value. The trend generally implies a slow start to the recently signed African Continental Free Trade Area (AfCFTA). Apparently, Nigeria is not part of the African countries which have commenced trading under the Guided Trade Initiative (GTI) of the AfCFTA, because the country is yet to meet the minimum requirements.
No fewer than 3,567 jobs were lost in the manufacturing sector in the first half of 2023 according to figures obtained from the Manufacturers Association of Nigeria (MAN). MAN disclosed this in its half year review of the economy, which was released on Tuesday, 26 September 2023. According to the report, employment generation in the manufacturing sector declined to 6,428 in the first half of 2023. This represents a 32.8% reduction in employment generation capacity when compared with 9,559 jobs generated in the first half of 2022.
According to MAN, manufacturers spent at least N60.4bn on alternative energy sources in the first half of 2023, down by N16.2bn or 21.2% compared to N76.7bn recorded in the same period of 2022. MAN attributed the decrease in manufacturers’ expenditure on alternative energy sources to the rise in electricity supply to the industries from the national grid in the first half of this year to 11.3 hours per day from 10.2 hours recorded in the same period of 2022.
The Federal Government plans to achieve a target of 350 gigawatts of electricity-generating capacity by 2043. The Minister of Budget and Economic Planning, Abubakar Bagudu, disclosed that the power sector is the most important among all the assets listed in the National Integrated Infrastructure Master Plan.
The Federation Account Allocation Committee says it shared N1.1tn among the three tiers of government for August 2023. The total figure shared in September represents a significant increase of N133.99bn compared to the N966.11bn shared for July 2023, and it is the highest this year. The increase is attributed to foreign exchange gains, which boosted the government’s income.
The statement showed that the N1.1tn total distributable revenue comprised distributable statutory revenue of N357.4bn, distributable Value Added Tax revenue of N321.94bn, Electronic Money Transfer Levy revenue of N14.10bn, Exchange Difference revenue of N 229.57bn and Augmentation of NN177.09bn. It was also disclosed that of the total N1.1tn total distributable revenue, the Federal Government received a total of N431.25bn, the State governments received N361.19bn and the local government Councils received N266.54bn.
On Sunday morning, the President, Bola Ahmed Tinubu (GCFR) disclosed in a speech that “Henceforth monetary policy shall be to the benefit of all, not to the exclusive province of the powerful and the wealthy”. He affirmed that Nigeria’s monetary policy regime onwards will be fair to all.
On 1 October 2023, BUA Cement Plc announced a slash in the ex-factory price of its cement from N5,500/bag to N3,500/bag. The price change is disclosed to effective from 2 October 2023. This adjustment was made in line with the cement producer’s objective to to support the Federal Government in its efforts to lower the price of cement.
This week, we expect the macroeconomic space to be quiet in terms of statistical data releases from the National Bureau of Statistics (NBS). However, we still anticipate communication from the CBN with regards to September’s postponed monetary policy committee meeting.
Domestic Equities: Bearish Sentiments Persist… ASI down by 140bps w/w.
Last week, the local equities market posted weekly losses with bearish sentiments lingering. Selloffs in Large Caps such as BUAFOODS (-11.1% w/w), MTNN (-1.9% w/w) and ACCESSCO (-1.9% w/w) resulted in the local bourse ending the week in the red. As a result, the benchmark All Share Index (NGX-ASI) declined by 140bps w/w to print at 66,382.14 points. Hence, YTD return weakened to 29.52%, while market capitalisation lost c. N500.0bn to print at N36.34tn. Activity levels worsened, with the average value and volume traded falling by 26.3% w/w and 57.2% w/w to N4.5bn and 334.7mn units, respectively. Investors’ sentiments weakened from 1.2x to 0.6x, as 26 tickers appreciated while 45 depreciated.
Across sectors, overall w/w performance was mixed as all three (3) sectors under our coverage declined. The Banking sector (-4.2% w/w) lead the losers due to selloffs in ACCESSCO (-8.7% w/w), ZENITHBA (-3.2% w/w) and UBA (-0.8% w/w). The Industrial index (-3.0% w/w) declined due to price depreciations in BAUCEMEN (-11.1% w/w), BERGER (-8.6% w/w) and TRIPPLEG (-10.0% w/w). The Oil & Gas sector posted weekly losses of 1.2% due to selloffs in CONOIL (-10.0% w/w) and ETERNA (-5.1% w/w). Leading the gainers was the Insurance sector (+2.8% w/w) due to buys in CORNERST (+17.52% w/w), CHIPLC (+20.0% w/w) and LINKASSU (+6.7% w/w). Similarly, the Consumer Goods Sector (+1.6% w/w) gained due to bargain hunting in BUAFOODS (+3.1% w/w), NB (+3.4% w/w) and FLOURMIL (+3.2% w/w).
This week, we expect to see investors taking positions in anticipation of the Q3-2023 earnings season. Investors will continue cherry-picking activities around fundamentally sound stocks with a preference to companies that have posted strong results in the first half of the year.
Money Market Review: Stop Rates Tapered at PMA
Last week, the financial system opened with a balance of N85.6bn. In the course of the week, a combination of coupon payments to the tune of c. N131.2bn and FAAC payments bolstered the system liquidity. As a result, funding rates tapered to the lower region of the single digit terrain. Ultimately, the week was wrapped up with improved liquidity closing with a balance of N405.2bn, in line with our expectations. That said, the weekly average of the Open Repo Rate (OPR) and Overnight Rate (OVN), two (2) measures of funding rates between banks tapered significantly by 118bps w/w and 124bps w/w to close the week at 6.6% and 7.3%, respectively.
In the primary market, the Central Bank of Nigeria conducted an NT-bills auction, rolling over a total of N177.1bn maturing bills across the 91-day, 182-day and 364-day bills. At the auction, investors’ demand was strong, as the total subscription printed at N786.8bn, implying a bid-to-cover ratio of 4.4x. Unsurprisingly, the CBN allotted the same amount that was on offer. Given the demand for bills versus the supply of bills at the auction, the CBN had more pricing power. As a result, stop rates across all the bills (91-day, 182-day and 364-day bills) declined by 156bps, 45bps and 161bps to settle at 4.99%, 6.55% and 11.37%, respectively.
In the secondary NT-bills market, we observed buy-interest as investors unmet bids at the Primary Market Auction (PMA) trickled into the market. As a result, the average yield on NT-bills declined by 52bps w/w to close at 7.94% (previously 8.46%).
This week, we expect system liquidity to play a crucial role in the money market. Owing to the prevailing liquidity, bolstered by FAAC payments, we believe funding rates will continue to hover around the lower region of the single digit through the week. As a result, we anticipate NT bill yields, FTD and money market rates to be suppressed around current levels, with a strong likelihood of tapering between 50bps – 150bps.
Bond Market: Investors Reinvested their Coupon Inflows…
In the secondary bonds market, investors’ were observed with bullish sentiments, in a bid to reinvest their coupon inflows, given the elevated bond yields. As a result, the weekly average bond yield declined by 26bps to close at 14.44% (previously 14.70%).
In the Nigerian secondary Eurobonds market, despite the inflow of $145.2mn coupon payments, bearish sentiments were dominant in tandem with SSA Eurobonds, as debt sustainability concerns continue to outweigh. Also, the increased speculation activities in the FX market also underpinned the observed bear sentiments. That said, the average yields in the market closed higher by 40bps w/w to settle at 11.83% (previously 11.43%).
This week, we expect mixed sentiments in the secondary market for bonds, as investors continue to anticipate the release of the Q4-2023 bond auction calendar. In the Eurobonds market, we expect bearish sentiments to prevail.
Currency Market: Naira Appreciates at the I&E Window
Last week, the Naira depreciated by 2.0% w/w at the Investors & Exporters (I&E) window to close at N755.3/$, from its previous close of N740.4/$. At the parallel market, we continued to find offer quotes in the N980.0/$1- N1010.0/$1 range. Activities in the I&E window decreased, with average FX turnover falling by 8.2% w/w from $128.6mn to $118.1mn. Lastly, Nigeria’s external reserves tapered by 0.1% w/w ($34.3mn) to settle at $33.7bn.
As the market anticipates the $3.0bn NNPC loan from Afrexim Bank, alongside other short-term cushions yet to act on the situation of the FX market, we anticipate continued pressure on the Naira this week.
