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FSDH Top Picks: Global and Domestic Equities Market in Synchronized Rally

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December 4, 2023/FSDH Research

Nigerian Equities: Bullish momentum extended into second consecutive month
In November, Nigerian equities sustained its bullish momentum into the second consecutive month, setting new all-time highs. The positive performance of the benchmark index was mainly due to two factors, namely persistent positive interest from investors in Nigerian banks (due to unabating currency depreciation, which resulted in FX gains as well as surging interest rates) and buy interest in Seplat Energy (due to dividend reinvestment as well as optimism in the company’s acquisition of MPNU’s assets following comments by the Minister of State for Petroleum). In addition, gains in the modestly capitalized banking and oil & gas sectors underpinned the sustained momentum. Overall, the NGX-ASI gained 3.1% m/m to close November at 71,365.25 points, while the YTD return printed at 39.2%.               
 
Across sectors, the Oil & Gas sector was the best performing as gains in SEPLAT (+21.3% m/m) and OANDO (+34.5% m/m) propelled the index higher by 11.8% m/m. The gains in SEPLAT and OANDO were driven by investors’ optimism in acquiring oil & gas assets announced by both firms a while ago, following apparent willingness from the Ministry of Petroleum to resolve the bottlenecks around acquisitions from International Oil Companies (IOCs). The next best-performing sector was the Insurance sector, rising by 8.7% m/m, supported by gains in NEM (+16.8% m/m), MANSARD (+3.1% m/m) and AIICO (+5.6% m/m). The banking sector followed as persistent depreciation in the Naira against the dollar supported expectations of further FX gains, while interest rates at the money markets surged significantly, which is supportive of asset yields and the Net Interest Margins (NIMs) for banks. As a result, we saw healthy buying interest across banking stocks, notably ETI (+13.3% m/m), FIDELITY (+6.6% m/m), UBA (+2.2% m/m), and ZENITHBANK (+2.7% m/m), driving the index higher by 4.4%. In addition, Holdco banks like ACCESSCORP (+5.0% m/m), FBNH (+23.2% m/m), and FCMB (+12.2% m/m) also recorded modest gains during the month.
 
On the other hand, the Industrial goods index led the laggards, losing 1.9% m/m as selloffs in DANGCEM (-2.4% m/m), BUACEMENT (-2.8% m/m), and BETAGLAS (-1.5% m/m) erased positive momentum from gains in WAPCO (+9.7% m/m). The Consumer goods index was the last losing sector in our core five coverage sectors as losses in BUAFOODS (-1.9%), DANGSUGAR (-7.9% m/m), and NASCON (-5.8% m/m) led to a 0.6% m/m decline in the index. Sell pressures in SOVRENINS (-18.4% m/m), NEM (-8.2% m/m), and CUSTODIAN (-7.2% m/m) were the main contributors to the decline.
Source: NGX, FSDH Research
Despite the extended rally in Nigerian equities, Nigeria’s benchmark equity index, the NGX All Share Index (NGX-ASI), trades at a PE ratio of 10.5x, a 9% discount to its long-run average PE ratio, but trades at a 2% premium to the MSCI Frontier market PE ratio. This indicates that while the value may remain in Nigerian equities due to somewhat higher than average fundamentals (Earnings Yield, EPS Growth, and ROE), the discount the index trades at indicates minimal upside in Nigerian equities with a widening downside.
Source: Bloomberg, FSDH Research
Economic and capital market events corroborate the diminishing attractiveness of Nigerian equities. First, interest rates continue to surge significantly, with the average NT-Bill’s discount rate trading at 9.6% and bond yields trading at 15.7%. In addition, the last NT-bill auction conducted by the apex bank regulator in November saw the 91-day, 182-day, and 364-day bills record a stop rate of 8.00%, 12.00%, and 16.75%, respectively. The normalization of interest rates in the fixed-income market continues to make them an attractive alternative for big-ticket investors. We note that we could see an increased rotation out of equities in favour of fixed-income instruments over the next months, particularly if the final dividends announced by major companies (with a focus on banks) do not result in a dividend yield that is competitive with money market realities.
 
Furthermore, the corporate earnings performance outlook is, at best, “okay”. Nigerian banks are set to enjoy record profits when FY-2023 numbers begin rolling in Mar-2024, supported by huge FX gains from the recent currency devaluation. This is likely enough to keep investors interested in Nigerian banks, with expectations of healthy dividend payouts. However, CBN’s policy attempts to ensure banks have a resilient capital base could dampen the ability of some of the smaller banks to pay out record dividends. Also, the recent change in the interest rate environment is a big tick for banks in the medium term. On the contrary, the FX situation would continue to represent a big concern for businesses in the consumer goods and industrial goods sectors. A combination of FX losses, high inflation, and the impact of FX unavailability on raw material cost will likely weigh on earnings. In addition, an increasingly frail consumer base will likely see demand and, consequently, volume growth records decline or stay stagnant at current levels.
 
Lastly, we remain concerned that foreign investors will remain uninterested in Nigeria. Despite the many efforts and public campaigns to woo investors, there are few signs that these investors have been swayed, with only trickles of activities continuing to be recorded. We acknowledge the recent pickup in activities at the Nigerian Autonomous Foreign Exchange Market (NAFEM) following increasingly attractive interest rates in the money market, which could entice trade investors to bring investments into Nigeria. For context, post-FX reforms, the average NAFEM turnover is $114.8mn, up 5.2% from the pre-FX reform average. In addition, the average NAFEM turnover for November was $140.9mn, showing some form of resurgence. However, it remains below pre-Covid peak levels of c.$250mn, which is the level that indicates renewed foreign investor interest in Nigeria’s capital market instruments. As a result, while the November resurgence was impressive, we deem it inadequate to sustain prolonged foreign investor interest in Nigerian equities. Ultimately, stable oil prices around $60 – $70/bbl. and prolonged crude oil production at >1.7mbpd will be needed to generate adequate FX inflows and strengthen external reserves, which would then attract much-needed FPI inflows.
Source: FMDQ, FSDH Research
Given the issues highlighted, we acknowledge the presence of further upside in Nigerian equities, albeit marginal. We see a greater probability for downside movements in the future than for upsides. However, the timing of the change in momentum is likely to be delayed post-FY 2023 financial results. This is because investors will continue to hold equity positions steady in anticipation of dividend payouts, with selloffs likely to intensify post-March 2024. As a result, we advise a cautious approach to constructing portfolios with a gradual reduction in equity exposure.
Global Equities: Favourable monetary policy outcome underpins November rebound
The global equities market rebounded strongly in November, primarily supported by gains in US stocks. Declining global inflation strengthened the expectation of lower interest rates going forward, sparking significant buying interest in equities among global investors. Consequently, the MSCI All-Country World Index (MSCI ACWI) gained 9.1% m/m, nearly erasing all the losses recorded in the previous three months.
 
In the US equity market, the narrative was again dominated by monetary policy considerations, inflation outcomes, treasury yield movements, and a few late-hour earnings releases. The US equity market raced to a strong start at the beginning of the month, with the market-cap weighted S&P 500 recording c.44% of its total gains for the month in the first three trading days of the month. This was following the outcome of the Federal Open Market Committee (FOMC) meeting in which the committee opted to maintain its target range for the federal funds rate at 5.25% to 5.50%. The FOMC’s posture regarding future policy direction was more notable for investors, indicating sustained reliance on data to guide policy direction. In addition, the FOMC acknowledged the impact of the recent restrictive monetary policy, which has led to tighter financial and credit conditions and slower job growth. This indicated to investors that the FOMC will likely be more accommodative with monetary policy in the medium to long term and was reflected by the CME FedWatch tool, which began to price in a rate cut as early as May-2024. Following the monetary policy pronouncement, buying interest in US equities resumed after a recent three-month lull.
 
Investors’ leaning towards a more accommodative FOMC in the medium term was further supported by the October Consumer Price Index (CPI) report, which showed headline inflation moderated to 3.2%, below the consensus forecast of 3.3%, as well as September’s inflation print of 3.7%. Core inflation (which excludes volatile food and energy prices) moderated to 4.0% in October from 4.1% in September. This inflation outturn, combined with the October Retail Sales, the weekly initial jobless claims, and the October Housing Starts data, all seemed consistent with a soft-landing scenario for the US economy. Overall, across our key coverage indices for the US equities market, the tech-heavy NASDAQ led, gaining 10.7% m/m. During the month, the S&P 500 and Dow Jones Industrial Average (DJIA) gained 8.9% and 8.8%, respectively.
Source: Bloomberg, FSDH Research
Similarly, European markets rebounded strongly in November, supported primarily by gains in Germany and France. The gains in broader European equities (excluding UK markets) were underpinned by the European Central Bank’s (ECB) monetary policy leanings. The ECB President stated monetary policy tightening had reached a point where it could consider pausing interest rate hikes to assess the impact of its aggressive tightening cycle on different components of economic data such as economic growth, labour market, and credit conditions. On the contrary, in the UK, Huw Pill, the Bank of England’s (BOE) Chief Economist and Executive Director for Monetary Analysis Research, stated that the BOE cannot afford to relent in its aggressive efforts to combat elevated inflation. According to him, UK inflation remains persistently high and monetary policy must remain restrictive long enough to bring inflation closer to the bank’s objectives. As a result, the UK equity market performance diverged from the broader European markets, with the FTSE 100 recording a modest return of 1.8% in November. Meanwhile, the German DAX and the French CAC 40 gained 9.5% and 6.2% respectively. The pan-European STOXX 600 gained 6.4%.
 
Following the strong rally in US equities in November, we anticipate a pullback as traders look to book profits in the coming weeks. However, we remain positive on the long-term outlook for US equities. The FOMC has signaled its intention to be driven mainly by data focusing on inflation movement. We expect US inflation to sustain its downtrend, barring any negative shock to commodity prices in the near future. We expect the FOMC to continue to hold rates steady until inflation nears its 2.0% target. Thus, we see the first rate cut more likely in H2-2024, where we expect inflation to show a firm descent to the 2.0% range. That said, the CME FedWatch tool indicates a 51.5% probability that the first rate cut will happen in Mar-2024 and would be a 25bps cut. It estimates a 6.6% chance for a 50bps cut in the same month.
 
Furthermore, the US economy continues to remain strong, and all key leading economic indicators support a soft landing for the US economy. Retail sales, weekly jobless claims, non-farm payroll, retail consumption demand, and consumer income data remain resilient despite the aggressive monetary policy cycle. As a result, we expect corporations’ financial performance to remain supportive of a bullish equity market. Overall, we advise investors in healthy profit positions to take some profit off the table as we expect to see a pullback in the coming weeks as the recent rally takes a breather. Nevertheless, we would recommend buying back at lower prices should prices moderate in line with our expectations as we retain a long-term bullish perspective on US equities. Long-term investors who are unconcerned with price fluctuations can elect to hold their positions and average down during any pullbacks.
FSDH Top Stock Picks
FSDH Research

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