October 23, 2023/United Capital Research

Global Markets: Bearish Sentiments Prevailed

Last week, the US equities market started on a strong note (marking the 15th straight Monday of gains for the S&P 500), however closed bearish at the end of the week. The positive opening of the week was seemingly helped by limited negative news flow.  Middle East’s tension, geopolitical concerns, tough talk from Federal Reserve officials, and a rise in long-term bond yields to new 16-year highs appeared to weigh on sentiment and drove the S&P 500 Index to its biggest weekly decline in a month. The Nasdaq Composite Index fared worst among the major benchmarks and nearly moved back into bear market territory, ending the week 19.91% below its early-2022 intraday highs. Relatedly, growth stocks lagged their value counterparts. That said, all the major indices recorded weekly losses, the NASDAQ (-3.2% w/w), S&P 500 (-2.4% w/w), and DJIA (-1.6% w/w).

In local currency terms, the pan-European STOXX Europe 600 Index ended 3.4% lower week-on-week, amid uncertainty about the outlook for interest rates and fears that conflict in the Middle East could escalate. A spate of disappointing earnings reports worsened the risk-off mood. Several European Central Bank (ECB) policymakers, including ECB President Christine Lagarde, Robert Holzmann of Austria, and Yannis Stournaras of Greece, highlighted the inflation risk posed by the rise in oil prices ignited by fighting in the Middle East. Inflation in the UK unexpectedly held steady at an annual rate of 6.7% in September due to rising gasoline prices. Services inflation accelerated to 6.9%. That said, we note that all the major Continental stock indexes also closed in the red. Italy’s FTSE MIB fell 3.1%, Germany’s DAX lost 2.6%, and France’s CAC 40 Index dropped 2.7%. The UK’s FTSE 100 Index declined 2.6%.

The Asian stock market also recorded bearish sentiments from investors. Stocks in China fell sharply as deepening property sector woes offset optimism about a better-than-expected gross domestic product report. The Shanghai Composite Index declined 3.4%. Japan’s stock markets fell over the week, with the Nikkei 225 Index closing lower by 3.3%. This was against a backdrop of a slight easing in inflationary pressure in Japan, although wage growth was in focus amid signs of a move higher in pay demands for next year. Japan’s rate of inflation slowed in September, with the core consumer price index rising 2.8% year on year, down from 3.1% in August. However, price increases remained above the BoJ’s 2.0% target for the 18th straight month, and the BoJ is widely expected to revise up its inflation forecasts at its October meeting.

In the oil market, crude oil prices remained responsive to the war in the Middle East, particularly on matters regarding further escalation of the conflict. Oil prices settled lower on Friday after the Islamist group Hamas released two US hostages from Gaza, leading to hopes the Israeli-Palestinian crisis could de-escalate without engulfing the rest of the Middle East region and disrupting oil supplies. However, Brent crude oil prices remained above the $90.0/bbl mark, gaining 1.4% w/w to settle at $92.2/bbl on Friday. 

This week, we expect the US bureau of statistics to release the country’s Q3-2023 GDP numbers. In UK, we expect consumer credit statistics for September to be released.

Macroeconomic Highlights

Last week, the National Bureau of Statistics (NBS) released the inflation report for September 2023. The report shows that Nigeria’s headline inflation surged by 92bps to print at 26.72% y/y in Sep-2023 from 25.80% y/y in Aug-2023. The significant jump in inflation numbers came on the back of the continued effects of the fuel subsidy removal and as the unification of the Foreign Exchange (FX) market segments continues to weigh on consumer prices given the Naira’s slide to an all-time low against the Dollar.

The Federal Executive Council has proposed a 2024 budget of over N26.0tn, showing a 19.2% y/y increase from 2023. It focuses on infrastructure, human capital, and economic diversification. The budget breakdown includes N10.3tn for recurrent expenditure, N8.0tn for capital expenditure, and N8.3tn for debt service. It assumes an average crude oil price of $73.96/bbl, 1.8mbpd in oil production, and an exchange rate of N700.0/$. Nigeria has not met its revenue targets in the recent past. There may be worries around the assumptions surrounding the 2024 estimated revenue as crude oil exports have been below target due to underproduction and theft.

At the sidelines of the Belt and Road Initiative forum held in Beijing, President Xi Jinping of the People’s Republic of China has pledged that China will provide funds for the Abuja-Kano and Port-Harcourt-Maiduguri railway projects up to completion. This was disclosed by the Senior Special Assistant on Media and Communications, to the Vice President.

The Nigerian Electricity Regulatory Commission (NERC) in its latest Q2-2023 report disclosed that power distributors failed to accept an average of 114.53 megawatts-hour/hour of electricity in Q2-2023 despite its low supply across the country. It also revealed that the power distributors installed 178,864 new meters for consumers during the period.

In the week ahead, we expect NBS to publish the Federation Account Allocation Committee (FAAC) (September 2023 Disbursement).

Domestic Equities: Bearish Sentiments Prevailed…ASI down 0.4%

Last week, the local equities market closed in the red zone despite pockets of buy-interests across banking stocks. Notably, the market closed lower w/w majorly due to sell-offs in STANBIC (-13.1% w/w), GEREGU (-7.2% w/w) and NB (-9.5% w/w). As a result, the benchmark All Share Index (NGX-ASI) fell by 42bps w/w to print at 66,915.4 points. However, YTD return strengthened to 30.6%, while market capitalisation fell N156.3bn to print at N36.7tn. Activity level was mixed, as the average value of stocks traded declined by 0.6% w/w to N4.9bn whereas the average volume of stocks traded climbed by 1.8% w/w to 299.2mn units. Investors’ sentiments weakened to 0.6x from 1.2x, as 28 tickers appreciated while 46 depreciated.

Across sectors, overall w/w performance was mainly bearish as four (4) sectors under our coverage closed in the red zone. The Insurance sector (-1.0% w/w) led the laggards, following price depreciations in CORNERST (-8.4% w/w) and SOVRENIN (-17.5% w/w). Trailing behind were the Consumer goods (-0.5% w/w) and Industrial goods (-0.1% w/w) sectors due to selloffs in NB (-9.5% w/w) and WAPCO (-1.4% w/w). The Oil and Gas sector fell by 0.2% w/w on account of losses in ETERNA (-0.7% w/w). On the flip side, the Banking (+3.5% w/w) on the back of gains in UBA (+8.3% w/w) and ZENITHBA (+3.3% w/w).

On corporate actions, Unilever Nigeria Plc released its 9M-2023 financial results, showing that the company recorded a 26.0% y/y growth in revenue to N81.6bn from N64.8bn in 9M-2022. However, gross profit increased by 12.9% y/y to N19.4bn in 9M-2023 (vs N17.2bn in 9M-2022). This is due to the bump in the cost of sales, which grew by 30.7% y/y to N62.2bn. Despite the 3,285.9% y/y rise in impairment loss, the Profit After Tax (PAT) increased by 579.9% y/y to N1.7bn in 9M-2023 from a loss position of N348.0mns in 9M-2022. This was supported by the 4404.9% y/y growth in the company’s net finance income, which recorded N3.2bn (which was particularly boosted by a massive improvement in company’s Interest on call deposits and bank accounts, which printed at N2.7bn from N886.9mn in 9M-2022). In the power sector, Geregu Power Plc recorded a 42.9% y/y growth to N55.7bn in 9M-2023 from N39.0bn in 9M-2022. Following the 1,826.2% y/y, 112.2% y/y and 100.9% y/y increase in impairment loss, administrative expenses and finance cost, PAT grew marginally by 13.3% y/y to N11.4bn in 9M-2023 from N10.0bn.

This week, we expect mixed investors’ sentiments in the equities market to continue. We anticipate more improvements in positive sentiments as investors look to position ahead of the 9M-2023 earnings season. The weak earnings expectation will remain a downside to the overall rebound of positive sentiments.

Money Market Review: Bearish Sentiments in NT-bill Secondary Markets

Last week, the financial system was relatively liquid, opening with a balance of N617.6bn. During the week, CRR debits reduced liquidity in the financial system; nonetheless, the financial system closed the week with a surplus of N246.5bn. Consequently, the weekly average Open Repo Rate (OPR) and Overnight Rate (OVN) fell by 10bps w/w each to close at 1.09% and 1.70%, respectively.

In the secondary NT-bills market, we observed significant sell pressures. The average yield on NT-bills rose by 40bps w/w to close at 6.92%. Conversely, the average yield on OMO bills fell by 3bps to settle at 12.06%.

This week, The Central Bank of Nigeria (CBN) will roll over c. N108.13bn worth of maturing NT-bills. We envisage the financial system to remain liquid during the week. At the tail end of the week, we expect N142.6bn worth of coupon payments to hit the system. Overall, we project that FTDs and money market rates will remain at current levels.

Bond Market: Marginal Rates Climb at the PMA

In the primary market, the Debt Management Office (DMO) conducted the Oct-2023 FGN bond Primary Market Auction (PMA) with a total offer size of N360.0bn across the 2029s, 2033s, 2038s and 2053s papers. The auction was oversubscribed due to the financial system’s liquidity (at the time of the auction). Total investor demand was N283.1bn, or 1.06x the amount offered. Investors’ interest was skewed towards the 2053s, which accounted for 65.5% of subscriptions. The DMO oversold the auction, and non-competitive allocations made up 10.7% (N40.0bn) of the overall allotments (N374.8bn). Marginal rates on the 2029s (+40bps), 2033s (+30bps), 2038s (+25bps) and 2053s (+35bps) papers climbed to settle at 14.9%, 15.75%, 15.80% and 16.6% respectively.

The secondary bonds market was muted. The average bond yield declined marginally by 1bp to close at 14.45%. Similarly, corporate bonds traded on a bullish note, as the average yield on corporate bonds declined by 4bps w/w to 14.86%.

In the Nigerian secondary Eurobonds market, bearish sentiments returned to the secondary market. We observed selloffs across the curve as perennial macroeconomic challenges persist. Thus, the average yields in the market climbed by 77bps w/w to settle at 12.78%.

This week, we see the secondary FGN bonds market remaining muted, and we envisage that the bearish sentiments in the Eurobond markets will continue to linger.

Currency Market: The Naira continues on Free Fall

Last week, the Naira depreciated by 5.7% w/w at the Investors & Exporters (I&E) window to close at N808.27/$, from its previous close of N764.86/$. At the parallel market, Naira depreciated further, trading at N1,170.00/$ range, a new all-time low. Activities in the I&E window weakened as average FX turnover fell by 39.1% w/w to $86.0mn. Lastly, Nigeria’s gross external reserves stood at $33.2bn.

This week, we expect continued pressure on the Naira across all market segments, as FX pressures persist due to the country’s weak US Dollar inflows, and as US Dollar demand outweighs supply.