October 30, 2023/United Capital
Global Markets: Investors’ Sentiments Remain Weakened
Last week, the global equities market closed on a negative note on the back of disappointing Q3-2023 earnings results of corporates and weaker-than-expected economic data releases. In the US, the core Personal Consumption Expenditure (PCE) price index (the Federal Reserve’s preferred gauge to measure inflation) rose by 3.7% y/y in Sep-2023 from the previous month’s estimate of 3.8% y/y. However, on a monthly basis, core PCE prices advanced by 0.3% from 0.1% m/m in Aug-2023. This signals that inflationary pressures in the region remain sticky, and the Federal Reserve (Fed) may not be cutting rates anytime soon. On economic activities, the US economy expanded by 4.9% y/y in Q3-2023, compared to the 2.1% y/y growth in Q2-2023. This is the highest level of growth since Q4-2021, indicating the resilience of the US economy despite recession woes. The increase in economic activities was supported by higher consumer spending due to higher wages from a tight labour market. However, market participants did not react positively to the solid economic growth, as this provides more room for the Federal Reserve to be hawkish and keep interest rates elevated. Lastly, geopolitical angst contributed to the overall negative sentiments throughout the week following reports that the US carried out airstrikes against Iranian-backed targets in Syria. As a result, the US indices closed bearish as the DIJA (-2.1% w/w), NASDAQ (-2.6% w/w) and S&P 500 (-2.5% w/w) closed the week lower.
In tandem, the European markets recorded w/w losses following interest rate decisions and weak economic data releases. The European Central Bank (ECB) kept its interest rate at 4.5% during its Oct-2023 meeting, marking a significant shift from its 15-month streak of rate hikes and reflecting a more cautious “wait-and-see” stance. The decision was influenced by the gradual easing of price pressures and concerns about an impending recession in the region. The central bank reiterated its determination to ensure that inflation returns to its 2.0% target over the medium term, stating that it will maintain interest rates at high levels for a sufficiently extended period until it achieves that objective. On the data front, the Eurozone Composite Purchasing Managers’ Index (PMI) dropped to 46.5pts in Oct-2023, down from the previous month’s estimate of 47.2pts. The reading marks the fifth consecutive month of falling business activities, as both service and manufacturing activities continued to contract. In the UK, the S&P Global Composite PMI dropped to 48.6pts in Oct-2023, signalling a reduction in private sector output for a third consecutive month. Thus, the France’s CAC (-0.3% w/w), Germany’s DAX (-0.8% w/w), and Europe’s STOXX (-1.0% w/w) declined this week.
In another jurisdiction, the Asian market closed mixed. In China, the government announced it would introduce stimulus measures and pledged to issue 1.0tn yuan in supplementary bonds for disaster relief and infrastructure enhancement efforts. These fresh stimulus measures from Beijing could support China’s economy and boost its markets. Additionally, industrial profits in the country rose by 11.9% m/m in Sep-2023, adding to signs of stabilisation in the economy. As a result, the capitalisation-weighted Shanghai Composite Index climbed by 1.2% w/w. Elsewhere in Asia, Tokyo’s core inflation rate, a leading indicator of nationwide price trends, accelerated to 2.7% y/y in Oct-2023 from 2.5% y/y in the prior month. This keeps the Bank of Japan (BoJ) under pressure to phase out decades of massive monetary policy stimulus ahead of its meeting. That said, the Japanese NIKKEI (-0.8% w/w) and Indian SENSEX (-2.5% w/w) closed lower.
In the oil market, crude oil prices fell on signs that Israel was acceding to international calls to hold back from a ground invasion of Gaza, as world powers worked to limit casualties and negotiate the release of some 200 Israeli hostages held by Hamas. As a result, oil prices closed lower on a weekly basis, with Brent Crude declining by 1.8% w/w to print at $90.48/bbl. (previously, $92.16/bbl.).
This week, the spotlight will be on the Fed’s interest rate decision and the US labour market report. Also, the Bank of England (BoE) and the Bank of Japan (BoJ) will meet to decide on their interest rates direction. Lastly, investors’ attention will be focused on the Q3-2023 Gross Domestic Product (GDP) and inflation reports in the Euro Area, Germany, and France.
Macroeconomic Highlights
According to the Minister of Finance, Wale Edun, Nigeria is expecting $10.0bn in new foreign currency inflows in the next few weeks to ease liquidity in the foreign exchange market. Mr. Edun said that the President, Bola Tinubu, had signed two executive orders to support the currency market, which has been on a freefall due to chronic Dollar shortages.
In line with plans to automate the foreign exchange market, the Federal Government (FG) will make the National Identification Number (NIN) and the Bank Verification Number (BVN) a key requirement for its foreign exchange transactions soon (the date was not disclosed). The key driver behind this development is to ward off market speculators, who seek to exploit the loopholes in Nigeria’s currency market.
Two separate bills demanding greater transparency in the operations of the Central Bank of Nigeria (CBN) passed a second reading in the Senate on Wednesday. The first bill titled Central Bank of Nigeria (Establishment Amendment) Bill 2023″ was sponsored by Senator Steve Karimi and is seeking to prevent a person occupying the office of Central Bank Governor from participating in partisan politics.
The second one, titled “A Bill to amend the Central Bank of Nigeria Act 2007, and for matters connected therewith, 2023”, which was sponsored by Senator Darlington Nwokocha, is seeking amendments to enhance transparency in the operations of the apex bank.
The Presidential Fiscal Policy and Tax Reforms Committee, chaired by Taiwo Oyedele, recommended “the imposition of excise tax on foreign exchange transactions outside the official market”. The proposal to introduce excise taxes on parallel foreign exchange market transactions in Nigeria has been met with strong criticism, with some economists warning it could fuel the country’s FX crisis, having unintended consequences, such as driving more FX transactions to the black market and making it even more difficult for businesses and individuals to access foreign currencies.
The Federal Executive Council (FEC) has approved the application for a $3.45bn World Bank loan to finance five items. These items include projects in the power sector, renewable energy, states’ resource mobilisation programme, adolescent girls’ initiative for learning and empowerment and a women’s empowerment project. The loan is at zero interest, payable within 40 years with a 10-year moratorium, meaning payments would begin from 2033.
The Nigerian Exchange Limited’s report on Domestic Foreign Portfolio Investment shows that total foreign transactions, which rose to N110.4bn in August 2014, plummeted to N37.2bn as of August 2023, a 66.3% decline. The sustained capital flight over the period is spurred by macroeconomic challenges, insecurity, and a foreign exchange crisis.
Furthermore, last week, Nigeria secured one of its most significant legal wins ever in a tussle that has lasted for over a decade. With a staggering sum of $11 billion at stake, Nigeria faced off against Process & Industrial Developments Ltd (P&ID). Justice Robin Knowles of the Commercial Courts of England and Wales has ruled in favour of Nigeria on the ground that the ill-fated gas processing contract was obtained by fraud.
The Federal Government has signed a $463.0m power distribution lines upgrade contract with a Chinese consortium. While making the announcement in Abuja on Thursday, the government explained that the contract would be financed by the China Exim Bank, as it had both off-shore and significant on-shore content.
In oil related matters, Ninety percent of depots operated by independent oil marketers are currently closed on the back of a lack of supplies caused by currency volatility and difficulties in the local distribution channel. Mohammad Salaudeen, Executive Director of Northwest Petroleum and Gas Limited, said less than 10 percent of the marketers licensed to import petrol since deregulation could not because of the cost of operations.
In the week ahead, we expect the macro environment to be quiet, in terms of economic data. However, the overall market will continue to expect more clarity from the CBN in terms of policy normalisation, release and implementation of initiatives in the FX space.
Domestic Equities: Q3-2023 Earnings Spur Mixed Sentiments
Last week, the local equities market closed green due to price appreciations across board. Notably buy interests in GEREGU (+20.6% w/w), SEPLAT (+3.7% w/w) and NESTLE (+2.9% w/w) drove the local bourse northwards. As a result, the benchmark All Share Index (NGX-ASI) rose by 33bps w/w to print at 67,136.6 points. Hence, YTD return strengthened to 31.0%, while market capitalisation climbed over a N180.0bn to print at N36.9tn. Activity level was mixed, as the average value of stocks traded climbed by 4.7% w/w to N5.1bn while the average volume of stocks traded fell by 3.4% w/w to 289.2mn units. Investors’ sentiments improved to 0.9x from 0.6x, as 39 tickers appreciated while 42 depreciated.
Across sectors, overall w/w performance was mainly bearish as three (3) out of five (5) sectors under our coverage closed in the red zone. The Oil & Gas (+2.1% w/w) rallied due to gains in SEPLAT (+3.7% w/w). The Banking Sector was green due to buy interest across ACCESSCO (+3.0% w/w), ZENITHBA (+0.8% w/w) and JAIZBANK (+7.0% w/w). The Insurance sector (-1.1% w/w) closed red due to price depreciations in CHIPLC (-10.4% w/w), AIICO (-4.3% w/w) and SUNUASSU (-10.0% w/w). The Industrial sector (-0.2% w/w) declined due to selloffs in WAPCO (-2.6% w/w) and CAP (-4.7% w/w). The Consumer good (-0.04% w/w) declined marginally due to losses in NB (-5.1% w/w), INTBREW (-8.7% w/w) and DANGSUGA (-0.8% w/w).
On corporate actions, the Q3-2023 earning season has entered full swing with corporates releasing their 2023 nine months unaudited results. Nigeria Breweries Plc posted a 2.1% marginal increase in revenues to N401.8bn and posted a loss after tax of N57.2bn. Similarly, Cadbury Nigeria Plc posted losses after tax of N10.2bn. On the other hand, Dangote Cement Plc grew its topline by 28.7% to N1.5tn and its PAT by 30.2% to N277.5bn. Access Bank grew its Revenues and PAT by 75.8% and 83.1% to N1.5tn and N250.4bn respectively.
This week, we expect mixed investors’ sentiments in the equities market to persist as corporates continue to release earnings.
Money Market Review: Surprise Uptick in Stop Rate at PMA
Last week, the financial system was relatively liquid, opening with a balance of N238.9bn. During the week, FAAC inflows for the month of September, and N142.6bn in coupon payments significantly bolstered liquidity in the financial system. Therefore, the financial system closed the week with a surplus of N849.2bn. However, the weekly average Open Repo Rate (OPR) and Overnight Rate (OVN) rose by 583bps w/w and 576bps w/w to close at 6.9% and 7.5%, respectively.
In the primary market, the Central Bank of Nigeria (CBN) conducted NT-Bill auction with a total offer size of N108.1bn across the 91-day, 182-day and 364-day bills. The auction was oversubscribed due to the financial system’s liquidity (at the time of the auction). Total investor demand was N638.1bn, or 5.9x the amount offered. Investors’ interest was skewed towards the 364-day bill, with subscriptions totaling N349.5bn. The CBN oversold the auction, selling N370.3bn. However, stop rates rose on the 91-day (+233bps to 6.0%), the 182-day (+389bps to 9.0%) and the 364-day (+375bps to 13.0%) bills from their previous stop rates.
In the secondary NT-bills market, we observed bearish sentiment. The average yield on NT-bills rose by 23bps w/w to close at 7.15%.
This week, we envisage the financial system to remain liquid during the week. As in previous weeks, this is expected to be the main driver of investor demand in the money market. However, we project that FTDs and money market rates will remain at current levels.
Bond Market: Bearish sentiment drove the market
The secondary bonds market closed bearishly due to sell-pressure across the curve. Therefore, the average bond yield climbed by 43bps w/w to close at 14.9%. Similarly, corporate bonds closed bearishly, as the average yield on corporate bonds rose by 33bps w/w to 15.2%. However, In the Nigerian secondary Eurobonds market, bullish sentiments returned as the average yields in the market climbed by 80bps w/w to settle at 12.0%.
This week, we expect investor demand for FGN bonds to remain weak, thus keeping yields elevated. Pricing power is set to remain in the hands of investors, given the expected N26.0trn budget for 2024, whose deficit will most likely come majorly from the local debt market. But given the FG’s growing propensity to turn to external debt sources, boost crude receipts, and gain control over the Nigerian Foreign Exchange Market (NAFEM), we see some upside for the FG in the medium run when it comes to financing the budget deficit with external debt, bolstered by some stability in the NAFEM. A firm grip on the NAFEM will significantly improve the monitoring of autonomous transactions, also improving the liquidity of the NAFEM. For the Eurobonds market, we foresee more bullish sentiments, underpinned by the envisaged stability of the Naira in the wake of the the formalisation of the NAFEM.
Currency Market: The Naira gains at NAFEM
Last week, the Naira appreciated by 2.3% w/w at the Nigerian Autonomous Foreign Exchange Market (NAFEM) window to close at N789.94/$, from its previous close of N808.27/$. At the parallel market, Naira depreciated further, trading at N1,170.00/$ range, a new all-time low. Activities in the NAFEM window improved as indicated by the 4.9% w/w climb in the average FX turnover to $90.3mn. 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 weak inflows of the US Dollar, and excessive demand for Dollar which outweighs the supply of Dollar in the country.
