October 16, 2023/United Capital Research

Global Markets: Mixed Sentiments Continue

Last week, the global equities market witnessed an improvement in investors’ sentiment. In the US, inflation was higher than forecast in September, raising the prospect that the Federal Reserve (Fed) may raise interest rates following similarly robust recent data on the strength of the jobs market. According to the Bureau of Labor Statistics, the US consumer price index (CPI) rose 3.7% y/y, the same pace as the previous month (August). A modest fall was what economists had predicted. On a monthly basis, inflation decelerated from 0.6% to 0.4%, thanks in part to lower pressure from energy prices. However, “core” inflation, which strips out volatile energy and food prices, remained steady at 0.3% m/m. That said, the minutes from the Fed’s September policy meeting seemed to confirm a paradigm shift in the monetary policy stance of the Fed. While “all the officials agreed that rates should stay restrictive for some time,” they also agreed that the “Fed should shift communications from how high to raise rates to how long to hold rates.” By the end of the week, federal funds futures were pricing in only a 5.7% chance of a rate hike at the next Fed meeting in November versus 27.1% the previous week, according to the CME FedWatch Tool. As a result, major US indices closed mixed as investors weighed the inflation data against dovish signals from Federal Reserve officials. Large-cap value stocks outperformed, helped by earnings beats from Citigroup, Wells Fargo, and JPMorgan Chase. The banking giants kicked off the unofficial start to third-quarter earnings reporting season on a positive note, as their profits got a boost from higher interest rates. The prospect of a widening war in the Middle East following last weekend’s Hamas attacks against Israel boosted energy shares and defense stocks while weighing on airlines and cruise operators. That said, the DIJA (+0.8% w/w) and S&P 500 (+0.4% w/w) closed the week higher. Meanwhile, the NASDAQ Composite (-0.2% w/w) mild losses.

The pan-European STOXX Europe 600 Index ended 0.95% higher, snapping three weeks of losses after dovish comments from Fed policymakers and reports that China was considering more economic stimulus measures. That said, major stock indexes were mixed. Italy’s FTSE MIB rose 1.5% w/w, UK’s FTSE 100 Index climbed 1.41% w/w, Germany’s DAX slipped 0.3% w/w, and France’s CAC 40 Index fell 0.8% w/w.

Similarly, the Asian market closed mixed. Financial markets in China declined in the first full week of trading after the Golden Week holiday, as softer inflation and trade data renewed concerns that the economy may slip back into deflation. China’s CPI remained unchanged in September from a year earlier, following August’s 0.1% rise, largely due to weaker food prices. Consequently, the capitalisation-weighted Shanghai Composite Index fell by 0.7% w/w. Japan’s stock markets gained over the week, with the Nikkei 225 Index up 4.3% w/w and the broader TOPIX Index rising 2.0% w/w, continuing their strong year-to-date gains as historic weakness in the yen lent ongoing support.

In the oil market, oil prices were in a lull in the first three trading sessions of the week, as conflict in the Middle East had little impact on global oil and gas supplies, because Israel is not a big producer. A large build in US crude stockpiles outweighed expectations that US interest rates had peaked, also weighing on investors sentiments toward risky asset classes. Surprisingly, oil prices leapt nearly 6.0% on Friday, with Brent posting its highest weekly gain since February, as investors priced in the possibility that the conflict in the Middle East could widen as Israel began ground raids inside the Gaza Strip. As a result, oil prices closed higher on a weekly basis, with Brent Crude gaining 7.5% w/w to print at $90.89/bbl. (previously, $84.58/bbl.).

This week, some important economic data expected in the US include the US retail sales report and housing starts report which tracks the number of new housing units (or buildings) that have been started. These reports are important because they are considered by the Fed in the monitoring of consumer spending in the US. In the UK, we expect the country’s September CPI Inflation report to be released. In Germany, we expect the country’s Q3-2023 GDP report to be released.

Macro Highlight and Outlook

The Central Bank of Nigeria (CBN) disclosed in a press release that importers of all the 43 items previously restricted by the 2015 Circular referenced TED/FEM/FPC/GEN/01/010 and its addendums are now allowed to purchase foreign exchange in the Nigerian Foreign Exchange Market.

The International Monetary Fund (IMF) has downgraded Nigeria’s economic growth forecast for 2023 by 30bps to 2.9% from the previous estimate of 3.2%. IMF cited that the downgrade was a result of weaker oil and gas production within the nation. Additionally, surging inflationary pressures are expected to slow down Nigeria’s economic growth for 2023.

Nigeria relied on foreign borrowing ($1.21bn) to boost its capital importation in the first six months of 2023. This is because twenty-eight (28) states failed to attract any foreign investments in the time under review. Insecurity and a difficult business environment continue to impact foreign direct investment flows into Nigeria. Meanwhile, Lagos state remained the top destination in Q2 2023 with US$778.06 million, accounting for 75.52% of total capital, followed by Abuja (FCT), with US$194.28 million (18.86%).

The Nigerian Upstream Petroleum Regulatory Commission (NUPRC, or the Commission) has unveiled seven additional draft regulations to improve operational and regulatory efficiency in the upstream sub-sector of the oil and gas industry. The Commission unveiled the draft regulations and engaged stakeholders in Abuja at the fourth phase of consultations to obtain their inputs in finalising the laws.

Power Generation Companies have grown the power capacity of the national grid from 13,000 Megawatts (MW) recorded a few years ago to about 14,000 MW. The increase was due to the addition of a $1.3bn Niger state-based 700MW Zungeru hydroelectric plant, which came on stream in the second quarter of the year.

This week, we expect the National Bureau of Statistics (NBS) to release September 2023 Inflation Numbers.

Domestic Equities: The Bulls Prevailed… ASI up by 112bps w/w.

Last week, the local equities market posted weekly gains as the Bulls prevailed in four (4) out of the five trading sessions. Sustained buy-interest in BUACEMEN (+12.6% w/w) greatly influenced the bourse’s northward close. That said, the benchmark All Share Index (NGX-ASI) trended higher by 112bps w/w to print at 67,200.69 points. Hence, YTD return strengthened to 31.12%, while market capitalisation closed at N36.8trn. Activity levels declined, as the average volume and value traded tapered by 7.8% w/w and 32.7% w/w to settle at 292.6mn units and N4.9bn, respectively. Investors’ sentiment was stable at 1.1x, as 37 tickers appreciated while 33 depreciated.

Across sectors, overall w/w performance was bullish as four (4) out of the five (5) sectors under our coverage recorded gains. The Industrial sector (+5.0% w/w) led the gainers owing to sustained buy-interest in BUACEMEN (+12.6% w/w). The Consumer goods (+1.4% w/w), Insurance (+0.9% w/w), and Oil & Gas (+0.3% w/w) trailed behind owing to gains in DANGSUGA (+7.4% w/w), NB (+9.1% w/w), CHIPLC (+12.8% w/w), WAPIC (+4.9% w/w), and MRSOIL (+5.7% w/w). Conversely, the Banking sector (-0.8% w/w) was the only sector that recorded losses, with the negative close driven by share price depreciation in ETI (-5.3% w/w), ACCESSCO (-1.3% w/w), STERLINGNG (-5.1% w/w), and FIDELITY (-1.8% w/w).

On corporate disclosures, Oando Plc (Oando or the Company), notified the public that the Federal High Court, Lagos Division (the Court) further adjourned the hearing of the petition filed on March 25, 2021, by fourteen (14) shareholders of the Company to November 28, 2023. The adjournment to November 28, 2023 is to enable the Company to provide a further report of compliance with the Court’s order dated June 7, 2022, which directed the Company to file its Scheme of Arrangement document with the Securities and Exchange Commission and the NGX within 30 days, among other orders.

This week, we expect investors sentiment to continue to improve, particularly toward stocks with pending corporate actions and fantastic H1-2023 financial performance.

Money Market Review: Stop Rates Declined at PMA

Last week, the financial system opened liquid with a balance of N510.1bn following the residue of the inflows from FAAC payment. The Apex Bank debited banks Cash Reserve Requirement (CRR) to the tune of N430.4bn during the week. However, this was not reflected in the system as liquidity remained reflated. As a result, the financial system closed the week slightly lower, with a balance of N448.8bn. Consequently, the average Open Repo Rate (OPR) and Overnight Rate (OVN) fell by 40bps w/w each to close at 0.93% and 1.63%, respectively.

In the primary market, the Central Bank of Nigeria conducted an NT-bills auction, rolling over a total of N36.6bn maturing bills across the 91-day, 182-day and 364-day bills. At the auction, investors’ demand was strong, given the excess liquidity in the system. As a result, the total subscription printed at N321.1bn, implying a bid-to-cover ratio of 8.8x. Notably, the CBN allotted the exact amount that was on offer. Thus, the stop rates across all the 91-day, 182-day and 364-day bills climbed by 132bps, 144bps and 212bps to settle at 3.67%, 5.11% and 9.25%, respectively.

In the secondary NT-bills market, we observed significant buy pressures across the curve as investors sought to fulfil unmet bids from the Primary Market Auction (PMA). As a result, the average yield on NT bills fell by 148bps w/w to close at 6.5% (previously 8.0%). In tandem, the average yield on OMO bills fell by 2bps to settle at 12.1%.

This week, we expect system liquidity to continue to play a crucial role in the direction of rates in the money market. A total of N46.4bn worth of coupon payments to hit the system. However, we expect system liquidity to get tighter in the aftermath of the DMO auction. Overall, we project that FTD and money market rates will remain at current levels with a possibility of trending higher by 50 – 100bps.

Bond Market: Mild Bearish Sentiments in the Secondary Market

The secondary bonds market was dominated by bearish investor sentiments as the average bond yield rose by 5bps to close at 14.5% (previously 14.4%). Similarly, corporate bonds traded on a bearish note, as the average yield on corporate bonds increased by 14bps w/w to 14.9%.

In the Nigerian secondary Eurobonds market, we observed buy interests amongst investors due to cherry picking activities. Thus, the average yields in the market declined by 61bps w/w to settle at 12.0% (previously 12.6%).

Looking forward, we expect the Debt Management Office (DMO) to conduct the Oct-2023 bond auction across the 2029s, 2033s, 2038s and 2053s papers. The offer on each paper ranges between N80.00 – N100.00bn. In line with the Federal Government’s (FG) disposition towards lesser borrowings, we anticipate the DMO will under-allot the auction. In addition, we expect marginal rates at the auction to trend lower. For the Eurobonds market, we expect bearish sentiments to return.

Currency Market: Naira Depreciated at the I&E Window

Last week, the Naira depreciated by 3.1% w/w at the Investors & Exporters (I&E) window to close at N764.86/$, from its previous close of N741.85/$. Similarly, at the parallel market, Naira depreciated further as we saw offer quotes in the N1020.0/$ – N1050.0/$ range. Activities in the I&E window weakened, as average FX turnover rose by 55.7% w/w to settle at $136.8mn. Lastly, Nigeria’s external reserves fell marginally by 1bps 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 for FX continue to outweigh supply.