October 9, 2023/United Capital Report
Global Markets: Bearish Investors’ Sentiments Dominate the Market
Last week, the US equities market closed mixed as Treasury yields continued their upward trajectory. The 10-yr note yield jumped another 20 basis points last week to 4.78%, and the 2-yr note yield rose two basis points to 5.06%. However, economic releases during the week showed an improvement in labour numbers as Nonfarm payrolls increased to a much more robust than expected 336,000 in September. That news was accompanied by upward revisions to July and August data that summed to 119,000 more jobs than previously thought. At the same time, average hourly earnings growth moderated to 4.2% year-over-year from 4.3% in August. The September ISM Manufacturing PMI checked in at 49.0%, up from 47.6% in August. As a result, investors’ sentiments were mixed, with the DIJA (-0.3% w/w) and Russell 2000 (-2.2%) posting weekly losses while the S&P 500 (+0.7% w/w) and the NASDAQ Composite (+1.6% w/w) recorded modest gains.
The European equities markets recorded weekly losses as yields remained elevated, and economic data signalled that the eurozone economy continued to struggle in Q3-2023. The yield on Germany’s 10-year government bond slipped back below 3.0% but remained near a decade-plus high. French and Italian bond yields ticked up amid cautious sentiment. In the UK, the yield on the benchmark 10-year UK government bond held near its highest levels since August 2008 on signs of sticky inflationary pressures. In addition, the final Composite Purchasing Managers’ Index (PMI) compiled by S&P Global came in at 47.2 in September, marking a fourth consecutive monthly contraction. Furthermore, The EU’s statistics office reported that eurozone retail sales fell more than expected in August, declining 1.2% sequentially due to a sharp drop in gasoline, mail orders, and internet shopping. Thus, significant indexes closed red. The pan-European STOXX Europe 600 Index ended 1.18%, Italy’s FTSE MIB dropped 1.53%, Germany’s DAX declined 1.02%, France’s CAC 40 Index lost 1.05% and the UK’s FTSE 100 Index slid 1.49%.
In Asia, financial markets in China were closed last week for the Mid-Autumn Festival and National Day holiday. Elsewhere, stocks in Japan fell over the week, with the Nikkei 225 Index down 2.7% and the broader TOPIX Index declined by 2.6%. Equities came under pressure amid surging US bond yields and concerns that central banks will remain hawkish for longer period.
In the oil market, crude oil prices fell, posting their steepest weekly losses since March, after another partial lifting of Russia’s fuel export ban, which was compounded with demand fears due to worries that persistently high interest rates will slow global growth and hammer fuel demand, even if supplies are depressed by Saudi Arabia and Russia, who said they would continue supply cuts to year-end. Brent Crude prices declined 11.26% w/w to print at $84.58/bbl.
This week, the spotlight will be on the inflation numbers of the US and Germany. The FOMC meeting minutes will also be released during the week.
Macro Highlight and Outlook
According to the National Bureau of Statistics (NBS), total capital imported fell 9.0% q/q to $1.0bn in Q2-2023 compared to $1.1bn in Q1-2023. On a yearly basis, total capital imported dropped by 32.9% y/y from the $1.5bn recorded in Q2-2022. The main driver of this decrease is the decline in Foreign Portfolio Investment (FPI) inflows, which fell by 83.5% q/q and 85.9% y/y to $106.9mn.
The Ministry of Budget and National Planning (the Ministry) disclosed that it is conducting a mid-term review of the National Development Plan 2021-2025 to ensure it is in line with government’s “Renewed Hope” agenda. The Ministry further iterated that the “Renewed Hope” agenda and eight priorities areas of the current administration were aimed at fast-tracking the goals of the Nigeria Agenda 2050 and the National Development Plan 2021-2025 with a double-digit growth rate and inclusive development.
The Managing Director of the Nigeria Deposit Insurance Corporation (NDIC- or the Corporation), Mr. Bello Hassan, disclosed that the Corporation has paid about N1.08bn to 29,573 depositors of the recently closed Microfinance Banks (MFBs) and Primary Mortgage Banks (PMBs). He further disclosed that depositors with funds exceeding the insured limit (N200,000 for MFBs and N500,000 for PMBs) would get the liquidation dividends after recovery of debts and sale of physical assets of the closed banks.
The Federal Government (FG) has opened the bids submitted by bidders for the procurement of 1.25 million meters financed by the World Bank to the tune of $155.0mn. Senior government officials disclosed that the move was based on the directive of President Bola Tinubu to halt the estimated billing of electricity consumers by power distribution companies across the country.
According to the latest Oil and Gas Industry Report for 2021 released by the Nigeria Extractive Industries Transparency Initiative (NEITI), no fewer than 23 oil blocks managed by both international and local oil companies, which are under crude oil Production Sharing Contracts with the Nigerian National Petroleum Company Limited (NNPCL), failed to produce crude or were inactive.
This week, we expect the macroeconomic environment to be quiet in the absence of any data release.
Domestic Equities: Bullish Sentiments Resumed…ASI up 0.1%
Last week, the local equities market closed in the green zone despite the holiday-shortened week. The holiday was due to the public holiday in honour of Nigeria’s Independence celebration. Notably, the market climbed higher w/w majorly due to bargain-hunting activities in large-cap stocks such as AIRTELAF (+8.5% w/w) and BUACEMEN (+9.9% w/w). As a result, the benchmark All Share Index (NGX-ASI) climbed by 11bps w/w to print at 66,454.6 points. Hence, YTD return strengthened to 29.7%, while market capitalisation rose by N178.6bn to print at N36.5tn. Activity level improved, as the average value and volume of stocks traded climbed by 23.4% w/w and 80.0% w/w to N5.5bn and 602.6mn units, respectively. Investors’ sentiments strengthened to 1.3x from 0.6x, as 70 tickers appreciated while 56 depreciated.
Across sectors, overall w/w performance was mixed as only two (2) sectors under our coverage closed in the red zone. The Insurance sector (-3.1% w/w) led the laggards following losses in CHIPLC (-19.1% w/w) and NEM (-9.1% w/w). Trailing behind was the Industrial goods sector (-1.4% w/w) on account of price depreciations in DANGCEM (-8.6% w/w). On the flip side, the Banking sector (+1.4% w/w) led the gainers due to buy-interests in ACCESSCO (+3.8% w/w), ZENITHBA (+1.8% w/w) and UBA (+2.4% w/w). The Consumer goods sector (+0.2% w/w) closed higher on account of gains in DANGSUGA (+4.8% w/w) and INTBREW (+6.7% w/w). Lastly, the Oil and gas sector closed flat.
On corporate actions, Guinness Nigeria Plc released a statement informing the public it will no longer import or distribute certain Diageo international premium spirits products, including Johnnie Walker, Singleton, and Baileys and others imported items under its 2016 Sale & Distribution Agreement with Diageo Plc. This move is in line with Guinness Nigeria’s long-term growth strategy. In H1-2023, the revenue related to Guinness Nigeria’s portfolio of imported Diageo international premium spirit products was N14.0bn, constituting approximately 6.0% of Guinness Nigeria’s total revenues. This move will help reduce Guinness’ exposure to foreign exchange volatility.
This week, we expect the renewed buy-interests across the equities market to linger. We anticipate investors taking positions ahead of the Q3-2023 earnings season as corporates are set to release impressive financials. Hence, we recommend cherry-picking activities around fundamentally sound stocks with solid performance.
Money Market Review: System Liquidity Drove Buy Sentiments
Last week, the financial system opened very liquid with a balance of N763.8bn. The observed liquidity was as a result of the inflow from FAAC payments (c. N650.0bn). Given the magnitude of the liquidity in the financial system, the CBN debited banks CRR to the tune of N718.2bn. However, the system liquidity remained quite elevated, closing the week with an excess balance of N533.0bn. That said, funding rates remained in the lower region of the single digit terrain, with the weekly average of the Open Repo Rate (OPR) and Overnight Rate (OVN), two (2) measures of funding rates between banks tapering further by 520bps w/w and 522bps w/w to close the week at 1.0% and 1.7%, respectively.
In the secondary NT-bills market, we observed buy-interest as investors explored the elevated yields in the secondary space. However, despite the observed buy interest, the average yield on NT-bills climbed by 6bps w/w to close at 8.00% (previously 7.94%). This was because of the introduction of three (3) one year NT-bills into the market.
This week, we expect system liquidity to play a crucial role in the money market. Owing to the prevailing liquidity we expect funding rates to remain in the lower region of the single digit through the week. As a result, we anticipate FTD and money market rates to be suppressed around current levels, with a stronger likelihood of tapering between 50bps – 150bps.
Bond Market: DMO Bond Calendar Remained Unchanged for Q4-2023
In the secondary bonds market, investors were unsettled despite the Q4-2023 bond auction calendar that was released by the DMO at the start of the week. The DMO elected to leave the offer range between N80 – N100bn across the same 2029s, 2033s, 2038s, and 2053s. Notably, the current disposition of the FG toward borrowing as disclosed by the Minister of Economy, Chief Wale Edun, (which has been obvious in the last two (2) DMO auctions) seemed to stimulate some buy-interest at the shortest end of the bond yield curve. However, there remained some short-selling activities, particularly at the longest end of the bond yield curve (in line with our expectation). That said, the weekly average bond yield declined by 4bps to close at 14.40% (previously 14.44%).
In the Nigerian secondary Eurobonds market, bearish sentiments remained dominant in tandem with SSA Eurobonds, as debt sustainability concerns continue to weigh on sentiments. That said, the average yields in the market closed higher by 79bps w/w to settle at 12.62% (previously 11.83%).
This week, we expect mixed sentiments in the secondary market for bonds. In the Eurobonds market, we expect bearish sentiments to prevail.
Currency Market: Naira Appreciated at the I&E Window
Last week, the Naira appreciated by 1.8% w/w at the Investors & Exporters (I&E) window to close at N741.85/$, from its previous close of N755.27/$. At the parallel market, Naira depreciated further, as we saw offer quotes in the N1005.0/$- N1020.0/$ range. Activities in the I&E window weakened, as average FX turnover fell by 30.9% w/w to settle at $81.6mn. Lastly, Nigeria’s external reserves fell by 3bps to settle at $33.2bn.
This week, we expect continued pressure on the Naira across all market segments, given that FX pressures will persist as Dollar earnings remain weak, and demand outweighs supply.