November 20, 2023/United Capital

Global Markets: Global Equities Rally on Positive Economic Data

Last week, the US equities market was met with a strong positive performance, underpinned by positive economic data. Slowing inflation boosts hopes of an end to the Fed’s rate hikes, on Tuesday, the Labor Department reported that its headline consumer price index had remained unchanged in October, driven in part by a sharp drop in energy costs. Core (less food and energy) prices rose 0.2%, bringing the year-over-year increase to 4.0%, the slowest pace in two years. Wednesday’s retail sales report from the Commerce Department may have also encouraged investors. Retail sales (which are unadjusted for inflation) fell 0.1% in October, less than expected and due in part to a drop in gasoline and auto sales. While home-related spending on furniture and building materials continued to decline, consumers continued to increase spending at bars and restaurants and online. That said, the S&P 500 Index (+2.2% w/w) built on its strong gains over the previous two weeks and moved above the 4,500 barrier for the first time since September. Other major US Indices like the NASDAQ Composite (+2.4% w/w), and DIJA (+1.9% w/w) were all met with strong w/w gains.

In the European markets , the pan-European STOXX Europe 600 Index ended 2.8% w/w higher as financial markets increased bets on central banks cutting interest rates soon. Major stock indexes also rose sharply. Germany’s DAX climbed 4.5% w/w, Italy’s FTSE MIB gained 3.5% w/w, and France’s CAC 40 Index added 2.7% w/w. The UK’s FTSE 100 Index advanced 2.0% w/w. European Central Bank (ECB) President Christine Lagarde said at a Financial Times event that policymakers expected inflation to pick up at the start of next year as base effects drop out of the annual comparison. Lagarde hinted, however, that even if inflation accelerates again, another interest rate increase may not be required: “We are at a level where we believe that, if kept long enough—and this long enough is not trivial—will take us to the 2.0% medium-term target.” European government bond yields declined as data indicated that inflationary pressures cooled. Annual consumer price inflation in the UK slowed more than expected to 4.6% in October from 6.7% in September. The yield on the 10-year German government bond ticked lower on the view that central banks might need to embark on rate cuts next year. Swiss, French, and Italian sovereign bond yields also eased. Meanwhile, the yield on the 10-year UK government bond slipped toward 4.1%.

In Asia, we witnessed similar sentiments, with financial markets in China recording gains as speculation that U.S. interest rates may have peaked offset broader concerns about the country’s slowing growth. The Shanghai Composite Index rose 0.5% w/w. Mixed economic data in China led the blue-chip CSI 300 Index to a -0.5% w/w loss. Official data for October offered a mixed picture of China’s economy. Industrial production and retail sales grew more than forecast last month from a year earlier, while fixed asset investment growth missed estimates due to a dip in infrastructure growth and real estate investment. Unemployment remained steady from September. Separately, new bank loans rose an above-consensus RMB 738.4 billion in October but plunged from September’s RMB 2.31 trillion, largely driven by a seasonal downturn in corporate lending. Japan’s stock markets rose over the week, with the Nikkei 225 Index generating a 3.1% w/w return and the broader TOPIX Index up 2.3% w/w. Gains were supported by upside earnings surprises to date in the earnings season, while weak third-quarter gross domestic product (GDP) data failed to dent sentiment. Risk appetite was boosted by the latest U.S. inflation data, which undershot expectations, signaling that an economic soft landing may be imminent and raising hopes that interest rates may have peaked.

In the oil market, oil prices jumped more than 4.0% on Friday, rebounding from a four-month low of $77.42/bbl hit in the previous session, as investors who had taken short positions took profits and while U.S. sanctions on some Russian oil shippers lent support. Some of the losses were offset after the U.S. imposed sanctions this week on maritime companies and vessels for shipping Russian oil sold above the Group of Seven’s price cap. Still, both benchmarks (Brent Crude and WTI Crude) ended the week more than 1.0% lower, their fourth straight weekly decline, mostly weighed down by a rise in U.S. crude inventories and sustained record high production. China’s deepening property crisis and slowing industrial growth also weighed. That said, Brent crude and WTI crude oil prices declined by 1.0% w/w and 1.7% w/w to close at $80.61/bbl and $75.89/bbl, respectively.

This week, we expect the bullish sentiments across the global markets to remain unabated, due to expectations of a holt to Fed rate increases backed by  positive economic data and  shared  sentiments across major central banks in advanced economies providing some buffer for risk-on sentiments.

Macroeconomic Highlight and Outlook

According to the most recent CPI report published by the National Bureau of Statistics (NBS), headline inflation in Nigeria grew by 27.33% in October 2023 compared to a year ago, mainly due to the continued depreciation of the naira and higher food and fuel prices. Examining month-on-month basis, headline inflation decelerated by 37 bps, recording at 1.73% in October 2023 compared to 2.10% in September 2023. This indicates that the rate of increase in the average price level was less pronounced in October than in the preceding month.

According to Bloomberg, the federal government has concluded plans to withdraw civil claims totalling $1.1 billion against Eni SpA, ending a long battle in Italian courts over allegations of corruption in an oil field deal. The Ministry of Justice will waive the claims before Italy’s highest court “unconditionally” and “with immediate effect” no later than 17-Nov.

Nigeria’s crude oil production (excl. condensates) improved marginally in Oct-2023 by 0.3% to print at 1.351mbpd from 1.347mbpd in Sept-2023. This indicates a sustained effort by the FG and NNPC to shore up the country’s crude oil output, via tackling oil thefts and other legacy inhibitions.

In the week ahead, we expect several important economic releases. Most crucially, the NBS is set to release the Q3-2023 GDP report. The Q3-2023 Foreign Trade in Goods Statistics and the Federation Account Allocation Committee (FAAC) (Oct-2023 Disbursement) will be released on 22-Nov.

Domestic Equities: Bullish Sentiments Prevailed…ASI up 0.4%

Last week, the local equities market closed in the green zone following the dominance of the bulls in the market. Notably, price appreciations in large-cap stocks, MTNN (+2.4% w/w), SEPLAT (+7.4%) and AIRTELAF (+1.1%) spurred the rally in the market. As a result, the benchmark All Share Index (NGX-ASI) climbed by 37bps w/w to print at 71,112.99 points. Hence, YTD return strengthened to 38.8%, while market capitalisation fell N182.9bn to print at N39.1tn. Activity level declined, as the average value of stocks traded declined by 38.9% w/w and 19.8% w/w to settle at N5.5bn and 404.9mn units. Investors’ sentiments strengthened to 1.8x from 0.9x, as 54 tickers appreciated while 30 depreciated.

Across sectors, overall w/w performance was mainly bullish as three (3) sectors under our coverage closed in the green zone. The Oil & Gas sector (+2.6% w/w) led the gainers, following buy interests in SEPLAT (+7.4% w/w). Trailing behind were the Insurance (+0.9% w/w) and Consumer goods (+0.2% w/w) sectors due to price appreciations in PRESTIGE (+22.2% w/w), CHIPLC (+7.9% w/w), NB (+5.3% w/w) and NASCON (+4.3% w/w). On the flip side, the Industrial goods sector (-1.2% w/w) led the laggard owing to losses in BUACEMEN (-2.8% w/w). Lastly, the Banking sector declined by 4bps w/w on the back of selloffs in FIDELITY (-3.8% w/w) and STERLING (-2.7% w/w).

On corporate actions, C & I Leasing Plc announced a bonus issue of two (2) ordinary shares for every three (3) ordinary shares held at the close will be credited to shareholders whose names appear in the Register of Members as at the close of business on Thursday, 4 January 2024.

Also, Airtel Africa Plc has confirmed the default currency and options on currency election for the proposed interim dividend recommended by the Board to be 2.38 cents per ordinary share payable on 15 December 2023 to shareholders. The currency exchange rate applicable for the dividend payment are $1.0 = N858.24 and $1.0 = £0.8190.

Additionally, Union Bank of Nigeria Plc (the Bank) has notified that the Bank is finalising the process of obtaining approval to delist the Bank’s shares from the Nigerian Exchange (NGX), upon which shareholders of the Bank will receive a scheme consideration of N7.70 per share.

Lastly, Fidson Healthcare Plc officially signed a strategic cooperation agreement in Yangzhou, China. The agreement aims to promote and address medical challenges through the use of innovative drugs especially in the treatment of over 1.9 million HIV-infected people in Nigeria.

This week, we expect the bullish sentiments in the local equities market to continue, driven by movements in large-cap stocks, as investors remain positively biased to fundamentally sound stocks. The market has shown resilience and maintained its upward trajectory despite the rising yield in the fixed-income environment. However, a downside risk to our projection is that there may be pockets of profit-taking activities as some investors look to crystallise gains.

Money Market Review: Bullish Sentiments in Secondary Markets

Last week, the financial system opened liquid with a balance of N228.9bn. During the week, inflows totalling 30.0bn from OMO maturities hit the system. Nonetheless, the financial system closed the week less liquid, with a balance of N79.5bn. Consequently, both the weekly average Open Repo Rate (OPR) and the average Overnight Rate (OVN) rose by 99bps to 17.4% and 20.8%, respectively.

In the secondary NT-bills market, we observed buy interests across the curve. As a result, the average yield on NT-bills fell by 61bps w/w to close at 12.75%. In tandem, the average yield on OMO bills fell by 115bps to settle at 14.72%.

This week,. Late CBN will be rolling over N211.7bn worth of NT-bills. We envisage stop rates would print higher at the auction.

Bond Market: Marginal Rates Increase at the Primary Market

Last week, in the primary market, the Debt Management Office (DMO) conducted the Nov-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, and the total investor demand was N445.30bn, or 1.2x the amount offered. Investors’ interest was skewed towards the 2053s, which accounted for 74.17% of subscriptions. The DMO oversold the auction alloting N434.5bn. Marginal rates on the 2029s (+110bps), 2033s (+125bps), 2038s (+170bps) and 2053s (+140bps) papers climbed to settle at 16.00%, 17.00%, 17.50% and 18.0% respectively.

Bearish investor sentiments dominated the secondary bonds market as the average bond yield rose by 6bps w/w to close at 15.73%. However, corporate bonds traded flat, as the average yield on corporate bonds remained unchanged at 16.98%.

In the Nigerian secondary Eurobonds market, we observed buy interest amongst investors in line with SSA Eurobonds as yields continue to decline globally in advanced economies. Thus, the average yields in the market fell by 53bps w/w to settle at 10.96%.

This week, c. N23.5bn worth of coupons will hit the system. However, we see bearish sentiments in the auxiliary bonds market following the indefinite postponement  of the MPC meeting.

Currency Market: Naira depreciates at the Official Window.

Last week, the Naira fell by 1.5% w/w at the Nigerian Autonomous Foreign Exchange Market (NAFEM) to close at N791.75/$, from its previous close of N780.14/$. At the Parallel Market, the Naira traded at N1,135.0/$. Activities in the NAFEM window improved as average FX turnover grew by 14.0w/w to $158.6mn (previously $139.1mn). Lastly, Nigeria’s external reserves declined by 20bps to settle at $33.3bn (previously $33.4bn).

This week, we expect sustained pressure on the Naira to continue given the acute supply-demand imbalance of the Naira against the US Dollar.