December 18, 2023/United Capital

Global Markets: Interest Rate Decisions Drive Risk-On Sentiments
Last week we observed broad based bullish sentiments in the Global Equities Market. In the US, equities closed green, posting significant weekly gains.  The impetus behind the prevailing optimistic market sentiments stemmed from Federal Reserve’s final policy meeting of the year. As anticipated, officials opted to maintain rates at the range of 5.25-5.50%. Noteworthy, however, is the revelation within the quarterly “dot plot,” which succinctly encapsulates the anticipated interest rate trajectories of individual policymakers. The median projection outlined a shift, indicating an expectation of 75 basis points in rate reductions for the year 2024. This marked an increase from their prior projection of 50 basis points of easing. Investors also seemed encouraged that Fed Chair, Jerome Powell did not appear to push back on futures markets’ pricing of aggressive cuts next year in his post-meeting press conference. Consequently, the S&P (+2.5% w/w), the Nasdaq (+2.8% w/w), the DJIA (+2.9% w/w) and the Russell 2000 (+5.5% w/w) all posted weekly gains.

In tandem, European equities posted weekly gains following the interest rate decisions by the ECB and the BOE. The European Central Bank left its key deposit rate unchanged at a record high of 4.0% but cut its inflation and growth forecasts for 2023 and 2024.  In a signal potentially hinting at future interest rate cuts, the bank projected inflation to dip below its 2.0% target by 2026. The bank’s outlook anticipates a growth rate of 0.6% for the current year, reflecting a downward adjustment from prior projections. Furthermore, the forecast for 2024 has been revised to 0.8%, down from the previously estimated 1.0%. Similarly, the Bank of England kept its benchmark interest rate at 5.25% for a third month running in November, as expected. However, policymakers reiterated their willingness to increase borrowing costs again if evidence of more persistent inflation were to emerge. Thus, in local currency terms, the pan-European STOXX Europe 600 Index ended the week 0.9% higher as financial markets appeared to increasingly expect key central banks to cut interest rates in 2024. Other major European stock indexes were mixed. France’s CAC 40 Index gained 0.9% w/w, but Germany’s DAX and Italy’s FTSE MIB were modestly lower. The UK’s FTSE 100 Index added 0.3% w/w.

Conversely, the Asian market closed on a bearish note, driven by a sell-off in Chinese equities as deflationary trends continue. China’s consumer price index fell 0.5% in November from the prior-year period, accelerating from October’s 0.2% contraction and marking the steepest drop since November 2020 as lower pork prices weighed on food prices. Meanwhile, the producer price index dropped a bigger-than-expected 3.0% from a year ago, marking the 14th monthly decline. The Shanghai Composite Index fell 0.9% w/w, while the blue-chip CSI 300 declined 1.7% w/w. In Hong Kong, the benchmark Hang Seng Index rose 2.8% w/w amid a global stock rally after the Fed kept interest rates steady and signaled it may start cutting them next year. In Japan the US Fed’s interest rate decision supported equities. The Nikkei 225 Index gained 2.1% w/w and the broader TOPIX Index was up 0.3% w/w.

Last week, crude oil prices posted their first weekly gain in two months as the expectations of US rate cuts next year boosting the economy and crude demand forced the bears to loosen their grip. Thus, Brent Crude rose by 0.9% w/w to print at $76.55/bbl.

This week is poised to feature a series of pivotal economic events that have the potential to significantly impact the markets. Early in the week, attention will be focused on the release of November’s inflation data for both the UK and the Eurozone. Toward the weekend, investors interest will be keenly directed to the releasing of the Q3-2023 GDP figures for both the US and the UK.
 
Macro Highlight and Outlook
According to the National Bureau of Statistics (NBS), Nigeria’s annual inflation rose to 28.20% in November from 27.33% in October. The biggest contributors to the rise in inflation were the Food and non-alcoholic beverages sub-index. Additionally, the continual depreciation of Naira and the high energy costs (due to the removal of fuel subsidy) have eroded consumers’ purchasing power.

In a sign of potential improvement, Moody’s Investors Service upgraded Nigeria’s outlook to positive from stable. Concurrently, Moody’s has maintained Nigeria’s Caa1 long-term foreign currency and local currency issuer ratings, as well as the foreign currency senior unsecured debt ratings. The shift to a positive outlook is indicative of the potential improvement in Nigeria’s fiscal and external position, stemming from the ongoing reform initiatives implemented by the authorities.

The Bureau of Public Enterprises (BPE) is gearing up for a busy 2024, announcing plans to divest government’s remaining 40.0% stake in electricity distribution companies (DisCos) through a capital market sale. Additionally, the BPE has indicated the possibility of bringing four other assets to the market in the same year. These assets comprise Eleme Petrochemicals Company Limited, Nigeria Re-Insurance, Nicon Insurance, and the Nigeria Machine Tools located in Osogbo.

Buoyed by recent economic upticks, the Federal Government is mulling over revisiting the N27.5 trillion 2024 budget to potentially seek a mid-course increase if strong revenue performance persists. This contemplated adjustment underscores the administration’s commitment to fiscal flexibility and its willingness to adapt to changing economic circumstances.

The Central Bank of Nigeria has suspended the processing fees of 2.0% and 3.0% previously charged on cash deposits above N500,000 for individuals, and N3.0mn for corporates with immediate effect. This development followed the lingering cash scarcity that had persisted in different parts of the country. The suspension shall remain in effect until 30 April 2024.

Nigeria’s Value Added Tax (VAT) collection surged past N948 billion in Q3-2023, marking a robust 21.3% increase from the previous quarter, according to the National Bureau of Statistics (NBS). The report attributed this growth to strong performances across all three VAT sources: local payments (N522.1 billion), foreign VAT payments (N204.6 billion), and import VAT (N221.4 billion). This significant rise in VAT collection suggests a potential strengthening of the nation’s tax base and economic activity.

The Federal Government (FG) has declared that Nigeria would meet and surpass the 2024 crude oil budget benchmark of 1.7 million barrels per barrel (mbpd) despite the marginal decline in oil output in Nov-2023. According to the latest figures released by the Nigerian Upstream Petroleum Regulatory Commission (NUPRC), the country’s crude oil production, excluding condensates, dropped by 7.4% m/m to 1.25mbpd in Nov-2023 from 1.35mbpd in the previous month.

The Nigeria Labour Congress (NLC) has kicked against the proposed plans by the Federal Government (FG) to restructure the Transmission Company of Nigeria (TCN). It is believed that the proposed privatisation plan of TCN would portend great danger to the power sector and hold great fear and trepidation for major stakeholders within the sector.

This week, we expect the macroeconomic environment to be quiet in the absence of any data release.

Domestic Equities: Bullish Sentiments Sustained…ASI up 1.2%
Last week, the local equities market continued its bullish run as investors’ appetite remained positively strong toward the market. Notably, price appreciations in large-cap stocks, MTNN (+2.9% w/w), drove the local bourse northwards. Additionally, buy-interests in banking stocks, ACCESSCO (+9.6% w/w), ZENITHBA (+6.0% w/w) and UBA (+7.3% w/w) spurred the rally. As a result, the benchmark All Share Index (NGX-ASI) climbed by 118bps w/w to print at 72,389.23 points. Hence, YTD return strengthened to 41.2%, while market capitalisation rose by N436.8bn to print at N39.6tn. Activity level weakened, as the average value and volume of stocks traded declined by 29.8% w/w and 22.3% w/w to settle at N6.3bn and 376.4mn units. However, investors sentiment weakened to 1.7x from 1.5x, as 53 tickers appreciated while 32 depreciated.

Across sectors, overall w/w performance was mainly bullish as three (3) of the five (5) sectors under our coverage closed in the green zone. The Banking sector (+7.0% w/w) led the gainers due to buy-interests in ACCESSCO (+9.6% w/w), ZENITHBA (+6.0% w/w) and UBA (+7.3% w/w). Trailing behind was the Industrial goods sector (+0.2% w/w) following bargain-hunting activities in BUACEMEN (+0.5% w/w) and WAPCO (+0.5% w/w). The Consumer goods sector climbed by 22bps w/w on the back of price appreciations in NB (+2.3% w/w) and CADBURY (+9.9% w/w). On the flip side, the Insurance sector (-1.0% w/w) due to price depreciation in NEM (-9.3% w/w). This was followed by the Oil & Gas sector (-0.3% w/w) on account of losses in ETERNA (-11.8% w/w) and CONOIL (-3.0% w/w).

Looking into this week, we anticipate investors sentiments in the local equities market to remain strong. We have observed significant interests in the Banking sector, given the impressive performance across all banks and in anticipation of FY-2023 earnings season. However, the downside risk to our prognosis is the likelihood of profit-taking activities following the new highs reached in the market.

Money Market Review: Stop Rates Trend Lower at PMA
Last week, the financial system opened liquid with a balance of N177.4bn. In the absence of any maturity, system liquidity reduced, particularly due to activities in both the NTB and FGN Bonds primary markets. As a result, the financial system closed the week with a deficit of N95.88bn. Consequently, the average Open Repo Rate (OPR) and Overnight Rate (OVN) climbed by 81bps and 111bps w/w to settle at 18.16% and 19.00%, respectively.

In the primary market, the Central Bank of Nigeria (CBN) conducted an NT-bills auction, rolling over a total of N13.6bn maturing bills across the 91-day, 182-day and 364-day bills. At the auction, investors’ demand was strong, as total subscription printed at N1.6tn. Notably, the bulk of the bids were skewed towards the longer-tenured instrument. Notably, the CBN over-allotted at the auction, as total bills sold printed at N263.6bn, implying a bid-to-cover ratio of 6.0x. The stop rates across the 91-day (-275bps), 182-day (-200bps) and 364-day (-225bps) bills declined, settling at 6.25%, 11.0% and 13.50% respectively.

In the secondary NT-bills market, we observed bullish sentiments across the curve as Investors turned to the auxiliary markets to fill unmet bids. As a result, the average yield on NT-bills fell by 272bps w/w to close at 8.3% (previously 11.0%).

This week, we expect the financial system to remain liquid due to FAAC inflows and N139.1bn worth of coupon inflows. Thus, we envisage downward pressure on FTDs and money market rates.

Bond Market: Bullish Sentiments in the Secondary Market
Last week, the Debt Management Office (DMO) conducted its FGN bond Auction for Nov-2023, with N360.0bn worth of papers on offer across the following tenors: APR 2029, JUN 2033, JUN 2038, and JUN 2053. During the auction, there was notable strength in investor demand, particularly directed towards instruments with longer tenures. Consequently, the auction witnessed oversubscription, with the total subscription reaching N501.0bn. However, in a strategic move, the DMO allotted a lower amount of N176.0bn against the available N360.0bn, resulting in a bid-to-cover ratio of 2.8x. Consequently, the marginal rate on the 2029s, 2033, 2038s and 2053s papers declined by 50bps, 100bps, 100bps and 85bps to settle at 15.50%, 16.00%, 16.50% and 17.15%, respectively.

The secondary bonds market was dominated by bullish investor sentiments as the average bond yield fell by c. 50bps to close at 14.4% (previously 14.9%). Similarly, corporate bonds traded on a bullish note, as the average yield on corporate bonds declined by 23bps w/w to 15.5% (previously 15.7%).

In the Nigerian secondary Eurobonds market, we observed buy-interests amongst investors. Thus, the average yields in the market decreased by 55bps w/w to settle at 9.9% (previously 10.5%).

Looking forward, we expect N139.1bn worth of coupon inflows coupled with FAAC inflows to hit the system. Thus, we expect buy interest across fixed income securities during the week.

Currency Market: Naira Appreciated at the I&E Window
Last week, the Naira appreciated by 19.0% w/w at the Nigerian Autonomous Foreign Exchange Market (NAFEM) to close at N889.86/$, from its previous close of N1099.05/$. Meanwhile, at the parallel market, the Naira depreciated by 3.8% w/w to close the week at N1240.0/$ (previously, N1195.0/$). Activities in the I&E window weakened, as average FX turnover fell by 1.4% w/w to settle at $113.3mn. Lastly, Nigeria’s external reserves fell by 5bps to settle at $32.8bn.

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 outweighs supply.