January 8, 2024/United Capital

Global Markets: Broad-Based Bearish Sentiments
Last week, the global equities market closed the first trading week of the year 2024 on a negative note, halting the last nine consecutive weeks of gains from the previous year. Notably, profit-taking activities across mega-cap stocks, and other stocks that outperformed last year, contributed to the downbeat performance of the US market.

Additionally, rising US treasury yields also contributed to the negative bias in the US equities market, as the yield on the 10-YR and 2-YR notes climbed by 16bps and 14bps to 4.04% and 4.39%, respectively. Concerns about the Federal Reserve’s (Fed) potential timing and depth of interest rate cuts led to a rise in treasury yields. Extracts from the minutes of the Dec-2023 Federal Open Market Committee (FOMC) meeting revealed the Federal Fund rate was at or near its peak of tightening.

However, the Fed noted that if the need arises, it might still have to raise rates again. The probability of a 25bps rate cut to 5.00-5.25% at the next FOMC meeting (in Mar-2024) is 68.3% versus the 88.5% prospect as of last week. On the data front, the S&P Global Manufacturing Purchasing Managers’ Index (PMI) was revised lower to 47.9pts in Dec-2023 from a preliminary estimate of 48.2pts compared to 49.4pts recorded in Nov-2023. Output declined, reflecting weaknesses in both domestic and external demand conditions.

Lastly, the ISM Services PMI fell to 50.6pts in Dec-2023, the lowest reading in seven months, compared to the 52.7pts in Nov-2023 and market forecasts of 52.6pts. As a result, the US indices closed on a negative note as the DIJA (-0.6% w/w), NASDAQ (-3.2% w/w) and S&P 500 (-1.5% w/w) closed the week lower.

In tandem, the European markets recorded w/w losses as investors are now less confident that the ECB will actually cut rates in March 2024. The markets dropped because investors became less sure that the ECB would implement more relaxed monetary policies, specifically an initial rate cut in March 2024. On the data front, the inflation rate in the Euro Area rose to 2.9% y/y in Dec-2023, climbing from an over two-year low of 2.4% y/y reading in Nov-2023.

It was the first uptick in inflation since April-2023 and was primarily propelled by energy-related base effects. This raised concerns amongst market participants that stubborn inflationary pressures may drive the ECB to prolong its stance of hawkish policy. In addition, the HCOB Eurozone Services PMI settled at 48.8pts in Dec-2023, signalling the fifth consecutive contraction in services’ output across the area. This is due to lower demand for Eurozone services and slower employment growth. Elsewhere in Europe, Germany’s unemployment rate rose to 5.9% in Dec-2023 (previously 5.8% in Nov-2023), marking the highest level since May-2021. Consequently, France’s CAC (-1.6% w/w), Germany’s DAX (-0.9% w/w), UK’s FTSE (-0.6% w/w) and Europe’s STOXX (-0.5% w/w) declined this week.

In the same vein, the Asian market closed bearish as economic and policy uncertainties in China dampened investors’ sentiments. Concurrently, fleeting hopes that authorities would introduce fresh stimulus this year to support the nation’s growth. As a result, the capitalisation-weighted Shanghai Composite Index fell by 1.5 % w/w. Elsewhere, Japanese shares declined as the country continued to reel from an earthquake on New Year’s Day and a collision at Tokyo’s Haneda airport. That said, the Japanese NIKKEI (-0.3% w/w) and Indian SENSEX (-0.3% w/w) declined. This performance was dragged by heavyweight IT stocks, due to weak earnings outlook and lower expectations regarding early rate cuts by the Fed.

In the oil market, crude oil prices roe booted by signs of underlying strengths in the US economy, as well as the potential for global supply disruptions in the crucial Middle East region. Economic data released showed that the US economy added more jobs than expected in Dec-2023, as non-farm payrolls increased by 216,000, rising from a downwardly revised mark of 173,000 in Nov-2023. As a result, oil prices closed higher, with Brent Crude climbing by 223bps w/w to print at $78.76/bbl. (previously, $77.04/bbl.).

This week, the main focus will be on the US consumer and producer prices for the month of Dec-2023. In addition, the market will anticipate speeches by the Fed officials, as well as the foreign trade statistics. In China, we expect the release of consumer & producer prices for Dec-2023, and foreign trade data. Lastly, in the Euro Area, the UK is set to release its Nov-2023 GDP growth rate and industrial production figures. The outcome of these data releases will shape the direction of the global equities market for the week.

Macro Highlight and Outlook
According to the latest Purchasing Managers Index (PMI) figure, business environment in Nigeria recorded an improvement in December 2023 as PMI rose to 52.7pts from 48.0pts in November 2023. The increase represents the highest reading since June 2023 when the index stood at 53.2pts. The rise in PMI denotes a healthy improvement in the private sector space despite the current macroeconomic challenges.

The Central Bank of Nigeria (CBN) noted that Nigeria’s external reserves recorded a drop of 0.3% m/m from $33.0bn in November 2023 to $32.9bn in December 2023. The decline is due to the lingering foreign exchange instability in the country and low supply of Dollars in the country.

Mr. Wale Edun stated Nigeria is moving away from the controversial practice of Central Bank financing to cover its budget shortfall. Having accumulated at least $33 billion in borrowings from the Central Bank, the government priotises “introducing discipline into public debt”, Edun emphasised during the 2024 budget signing ceremony in Abuja.

The pricing of petrol and the volatility in the foreign exchange market are pulling the plug on marketers’ efforts to join the Nigerian National Petroleum Company Limited (NNPC) in the importation of the product into the country. Oil marketers told BusinessDay on Wednesday that they have stopped importing the product, citing the inability to sell at market-driven prices as the NNPC has left the pump price unchanged for months.

National Bureau of Statistics’ Capital Importation report indicates that, foreign investments in Nigeria’s manufacturing sector nosedived by $326.0mn (or 54.0%) to $279.5mn in the third quarter of 2023 from $605.0mn. The report further showed that despite the significant decline, the production sector had the highest capital importation in Q3 2023.

The Manufacturers Association of Nigeria (MAN) has urged the Federal Government to overhaul the country’s power sector and prioritise forex and credit allocation to manufacturers to drive growth in the country’s industrial sector.

As part of efforts to industrialise Nigeria through the steel industry, the Federal Government has commenced discussions with a Chinese Company, Luan Steel Holding Group, to build a new Steel plant in Nigeria and commence the construction of military hardware at the Ajaokuta Steel Plant. The collaboration with financial institutions was to seek the best financing options to re-start the light Steel Mill in Ajaokuta and kick-start iron rod production.

The Federal Government has released N108.5bn out of the N217.0bn set aside for the emergency repairs of 260 roads in the 36 states of the federation and the Federal Capital Territory, Abuja. This was disclosed by the Minister of Works, David Umahi, during a meeting with all Directors of the ministry on Thursday in Abuja.

Sola Obadimu, Director-General of the Nigerian Association of Chambers of Commerce, Industry, Mines, and Agriculture, said the 2024 manufacturing outlook remains dim as long as the government fails to stabilise the Naira and deal with security issues.

According to the Federal Government (FG), Nigerian electricity companies are short of an estimated N2.0tn ($2.5bn) in capital and need new investors to revive the industry that can barely supply power to its estimated 200 million residents.

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

Domestic Equities: Bullish Sentiments Prevailed…ASI up 6.5%
The Nigerian Exchange Limited began the year on a positive note, with the Bulls tactfully taking advantage of the broad-based bullish sentiment toward risk assets, in tandem with global developments. However, resilient financial performance by corporates in the financial services sector has been the primary driver of a sustained appetite for banks and insurance companies. That said, the benchmark All Share Index (NGX-ASI) climbed by 654bps w/w to print at 79,664.66 points. Hence, YTD return printed at 6.5%, while market capitalisation closed at N43.6tn. Activity level improved, as the total value and volume of stocks traded climbed by 32.9% w/w and 179.0% w/w to settle at N41.8bn and 3.3bn units. In tandem, investors sentiment as measured by the market’s breadth improved to 5.2x from 2.7x, as 88 tickers appreciated while 17 depreciated.

Across sectors, overall w/w performance was broadly 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).

In January 2024, we expect the Bulls to prevail, as bargain hunting continues. Given the global developments across major central banks in advanced economies, high base expectations for inflation, and improved economic growth prospects, we expect the local bourse to record a positive performance this new week. Investors may continue to cherry-pick stocks with strong fundamentals, (value or growth). However, value stocks may be choice for dividend scouting investors, ahead of FY-2023 earnings season. At different intervals, we expect mild sell-offs, albeit insignificant.

Money Market: Bullish Sentiments Prevailed
Last week, the financial system opened relatively liquid with a balance of N155.4bn. During the week, the financial system remained in surplus in the absence of any mop up activity. Thus, the financial system closed the week liquid with a balance of N862.8bn. Therefore, the Open Repo Rate (OPR) and Overnight Rate (OVN) declined by 81bps w/w and 57bps w/w to close at 14.25% and 14.90% respectively.

In the secondary market, we saw significant bullish sentiments dominate. As a result, the average NT-bills yield fell by 34bps w/w to close at 5.95% (previously 6.29%).

In the week ahead, we expect supply and demand fundamentals to be the key driver of money market rates. System liquidity will continue its background role, stimulating further interest at the short end of the curve, while activities at the CBN’s Standing Deposit Facility (SDF) window will also underpin system liquidity. That said, we expect money market rates to remain around current levels, albeit volatile, with the strong likelihood of closing lower towards the tail-end of the month.
 
Bond Market: Bullish Sentiments Prevailed
A wave of buying interest swept through the secondary market, spurred by investors’ eagerness to take advantage of the attractive returns offered by elevated bond yields, further fueled by ample liquidity in the system. That said, yields on sovereign bonds declined to print at 13.73%, a 40bps w/w decrease from 14.13% in the previous week. Conversely, yields in the secondary market for Eurobonds increased by a significant 83bps w/w to print at 10.45% at the close of the week (previously 9.62%).

This week, we expect mixed sentiments to prevail in the Bonds market. We foresee that the signals from the Central Bank of Nigeria as conveyed by the CBN Governor during the November 2023 CIBN meeting, will continue to support increased buy interest. Elsewhere, we expect Nigerian Eurobonds to resume their bullish run as yields adjust lower in advanced economies, making SSA Eurobonds more attractive to investors.
 
Currency Market: Naira Appreciated at the I&E Window
Last week, the Naira appreciated by 4.2% w/w at the Nigerian Autonomous Foreign Exchange Market (NAFEM) to close at N869.39/$, from its previous close of N907.11/$. Meanwhile, at the parallel market, the Naira depreciated by 2.2% w/w to close the week at N1237.0/$ (previously, N1210.0/$). Activities in the I&E window weakened, as average FX turnover fell by 44.5% w/w to settle at $76.3mn (previously $137.4mn). 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.