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October 6, 2023/FSDH Research
Nigerian Equities: Four-month-long bullish momentum halted in September
Nigerian equities showed signs of waning momentum in September as the recent four-month rally halted. While activities on Broadstreet kicked September off on a positive note, with the NGX-All Share Index (NGX-ASI) crossing the 68,000 mark, sentiments soured as the Central Bank of Nigeria (CBN) issued a circular requiring banks to use FX revaluation gains to build capital buffers to strengthen against potential volatility, rather than paying them out as dividends. Investor sentiments worsened after FTSE Russell downgraded Nigerian equities to unclassified markets from frontier markets. The downgrade led to Nigerian equities being deleted from the FTSE Frontier Index Series, including the FTSE Frontier 50 Index, FTSE Ideal Ratings Islamic Index Series, FTSE/JSE All Africa Index Series, FTSE Middle East & Africa Extended Index Series and FTSE/MV Exchange Index. This led to selloffs across Nigerian stocks, erasing the gains recorded at the start of the month. Overall, the NGX-ASI lost 0.3% m/m to close September at 66,382.14 points. As a result, the YTD return moderated to 29.5%.
Despite the marginal bearish outcome for the broad equities market in September, sectorial performance indicated a more positive performance. The Consumer goods sector led the gainers for the second consecutive month as gains in NNFM (+26.6% m/m) and CADBURY (+16.7% m/m) propelled the index higher by 6.5% m/m. The Insurance sector followed, gaining 5.3% m/m, following positive momentum in MANSARD (+9.6% m/m) and CORNERSTONE (+15.0% m/m). The Banking index (which includes mainly non-Holdco banks) gained 3.1% m/m, buoyed by gains in UBA (+20.0% m/m), following an impressive H1-2023 financial performance. However, Holdco banks like GTCO (-6.1% m/m), ACCESSCORP (-5.1% m/m), and FBNH (-2.7% m/m) recorded bearish performances in September, as CBN’s policy directive gave investors reasons to book profits during the month. The Industrial goods (-6.9% m/m) and Oil & Gas (-2.8% m/m) sectors were the sectorial losers for the month as selloffs in DANGCEM (-5.6% m/m), BUACEMENT (-11.1% m/m), MRS (-5.0% m/m), and ETERNA (-6.3% m/m) weighed. In addition, losses in large-cap names like MTNN (-3.8% m/m) and PRESCO (-3.3% m/m) further contributed to the negative performance of the local bourse.
Source: NGX, FSDH Research
In our September note, we indicated that investors should adopt a bearish view on Nigerian equities due to a number of factors, including the unlikely return of foreign portfolio investors (due to unchanged FX situation, & capital controls), rising domestic interest rates, overvaluation of Nigerian equities, and bearish technical indicators. We have seen weakness emerge in Nigerian equities as a myriad of factors have forced investors to reconsider their equity allocations. Looking ahead, we do not see a shift in expectations, given most of our underlying drivers remain unchanged. For context, we continue to expect foreign investors to stay away from the Nigerian market, given unresolved FX liquidity challenges with average turnover at the I&E window post-FX reforms now at $107.7m, 1.3% lower than pre-FX reform average in 2023 (see fig 2). Indicative of FPI apathy is the fact that they remain net sellers of Nigerian equities, with data from the NGX’s Domestic & Foreign Portfolio Investment Report showing FPIs were net sellers of Nigerian equities in August to the tune of N9.6bn (see fig 3). In addition, the FTSE Russell downgrade will likely deter the return of FPIs. Furthermore, we believe that the steep decline in trading activities on the local bourse indicates waning optimism and an unwillingness to take more risks.
Source: FMDQ, FSDH Research
Source: NGX, FSDH Research
A new factor we would like to consider is the Q3-2023 earnings season, which is due to start in October. We expect the earnings season to be particularly negative for Consumer goods and Industrial goods businesses. This is mainly based on expectations of weaker aggregate demand following recent inflationary pressures from higher fuel and food prices. This excludes the impact of FX losses on profitability, which we expect to impact a wider group of companies with foreign currency liability exposures (Telecoms, Consumer Goods, Food Processors, Industrial Goods, Construction etc.). We also reiterate that Nigerian equities remain broadly overvalued, trading at a premium to long-run average valuation multiples as well as frontier and emerging market peers. Similarly, evaluating directional indicators on the daily and monthly timeframes shows the equities market remains over-extended to the positive side, indicating a greater chance of downside relative to upside potential.
Overall, our underlying performance drivers remain unchanged and, in some cases, worsened, raising prospects of bearish outcomes for Nigerian equities in the next months. As a result, we continue to recommend reducing equity investment exposure significantly, taking advantage of current pricey valuations.
Global Equities: Hawkish monetary policy outlook steepens equity losses in US and Europe
Last month, US equities faced significant downward pressure due to unfavourable monetary policy tilts and rising yields. In the build-up to the Federal Open Market Committee (FOMC) meeting, a few key macroeconomic data points were released, raising concerns about the likely outlook for monetary policy. For example, the Bureau of Labour Statistics released August inflation data, which showed headline inflation rose to 3.7% from 3.2% in July, the second consecutive month of increase. Noteworthy to highlight, the inflation print of 3.7% was higher than the consensus expectation of 3.6%. The increase in inflation rate was mainly driven by higher energy and gasoline prices following the recent surge in the price of crude oil. Core CPI, which measures price changes excluding food and energy prices, rose 4.3% in August, slower than July’s 4.7% increase, indicating other price pressures continue to abate. Nevertheless, the negative headline inflation outcome spooked investors as selloffs intensified during the month.
In line with our expectations, the FOMC members voted for an unchanged Fed Funds Target Rate (5.25% – 5.50%), but signified monetary policy may remain restrictive for longer. The FOMC raised the outlook for 2024 and 2025 median interest rates to 5.1% (from 4.6% in June) and 3.9% (from 3.4% in June), respectively, indicating interest rates will remain high for longer and the prospect of a rate cut in 2024 is now very slim. As a result, selloffs during the month led to the tech-heavy NASDAQ (-5.1% m/m), S&P 500 (-4.9% m/m), and Dow Jones Industrial Average (-3.5% m/m) closing the month lower.
Source: Bloomberg, FSDH Research
Similarly, European markets closed September lower as tighter monetary policy continued to weaken buying interest in equities. At its September meeting, the European Central Bank (ECB) announced a 25bps increase to its three key interest rates following expectations that inflation will remain higher for longer. This was reflected in the ECB’s inflation projections as it raised its average euro area headline inflation forecast for 2023 and 2024 to 5.6% and 3.2%, respectively, while lowering the 2025 forecast to 2.1%. Investors were further concerned about the impact of the ECB’s interest rate hikes on the euro area’s already fragile growth. Interestingly, the ECB revised its economic growth projections significantly to 0.7%, 1.05, and 1.5% in 2023, 2024, and 2025 respectively. This resulted in weak sentiments across European equities as the pan-European STOXX 600 lost 1.7% m/m. In addition, the German DAX (-3.5% m/m) and French CAC 40 (-2.5% m/m) also closed lower. On the flipside, UK markets were more upbeat during the month after the Bank of England’s (BOE) monetary policy committee opted to leave its policy rate unchanged at 5.25% for the first time in nearly two years. This buoyed optimism that UK interest rates may be at their peak, leading to improved traction for Equities. Consequently, the FTSE 100 gained 2.3% m/m in September.
In our September note, we noted the upside risks to inflation and the possibility of altering the monetary policy pathway over the next six to nine months. Truly, inflation has galloped in the past month on the back of higher crude oil prices. As we highlighted earlier, while the FOMC has indicated it will continue to remain data-driven in its interest rate decisions, we believe the expectation that the US economy will remain strong, combined with a still sturdy labour market (despite recent weaknesses), will set the committee up to remain aggressive with interest rates. We believe this is already reflected in the FOMC’s interest rate projections (highlighted earlier). Thus, with interest rates likely to remain higher for longer and a low likelihood of a rate cut in the next eight months, we believe this would upset sentiments for equities. That said, we note that US equities are treading oversold territory on the daily timeframe, and thus, we expect a mild rebound in the coming days. Nevertheless, over the next months, we see less room for upside and a greater probability of bearish momentum over the next few months.
Given our expectations, we believe the next months could present an attractive opportunity for investors with patient capital to continue to build positions in US equities. We note that the main factor that has upset the inflation outlook is oil prices, and a sudden change in oil price direction (particularly from Jan-2024) could change the FOMC’s policy tilt. Thus, we do not consider it out of place to remain buyers of US equities. However, pertinent attention must be paid to the fact that prices may continue to trend lower for most of the rest of 2023. Thus, investors should not expect the market to reward their investments immediately.
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