January 22, 2024/United Capital
Global Markets
US equity markets ended the week mostly green, predominantly growth stocks recorded gains over the holiday-shortened week. Markets were closed on Monday in observance of Martin Luther King, Jr., holiday. Technology stocks outperformed, aided by a rally in semiconductor shares. The ICE Semiconductor index was up by 8.0% w/w. However, within the S&P 500, 6 of 11 sectors ended the week lower. Outside of the tech heavy sectors, the financial sector was the only sector with meaningful gains, up by 0.9% w/w. The fourth-quarter earnings reporting season remained in its early stages, with only 23 companies in the S&P 500 releasing fourth-quarter earnings reports during the week. The common theme has been pressure on net interest income going forward. Generally, expenses have been held in check, loan demand remains tepid and there continues to be provisioning and reserve builds to prepare for a worsening credit environment but nothing that is overly alarming at this point. Consequently, the DJIA rose 1.3% w/w, the S&P 500 up 1.2% w/w. and the NASDAQ up 2.3% w/w.
In Europe, most major market indexes ended the week modestly lower. This was as ECB President Christine Lagarde signaled it was “likely” that interest rates would be cut in summer, not spring as the market had increasingly come to expect. There were also negative economic data releases. According to a preliminary estimate, Germany’s economy shrank by 0.3% y/y in 2023. Also, the Office for National Statistics (ONS) published the UK’s inflation data, showing an unexpected rise. The UK’s CPI rose to 4.0% y/y in Dec-2023 from 3.9% y/y in Nov-2023, the first increase in 10 months. The ONS attributes this in part to higher tobacco prices and growth in wages (excluding bonuses). Thus, the pan-European STOXX Europe 600 Index ended the week lower by -1.58% w/w, France’s CAC 40 Index fell -1.25% w/w, Germany’s DAX declined -0.89% w/w, and the UK’s FTSE 100 index fell -2.14% w/w.
Meanwhile, emerging markets were under pressure last week, hit by a mix of commodity weakness and US Dollar strength. In China, stocks declined following uninspiring economic data. China’s GDP expanded by 5.2% y/y, meeting the official annual growth target of 5.0% y/y but lower than investors’ expectations. However, other economic data highlighted economic weakness. Retail sales, for instance, rose by 7.4% y/y in Dec-2023, down from 10.1% y/y in Nov-2023, lower than expected. Therefore, the Shanghai Composite Index fell -1.72% w/w, its 8th weekly drop in the last 9 weeks, according to Bloomberg.
On commodities, oil markets remained volatile on a day-to-day basis driven primarily by geopolitical headlines. Also, inventory builds have been bigger than expected. Last week, the International Energy Agency (IEA) released the December-2023 Oil Market Report, revising global oil demand down by 400 thousand barrels per day. Also, non-OPEC supply has been outpacing market expectations due to an increase in US production. Thus, Brent Crude was up by 0.3% w/w to $79.10/bbl.
This week, we expect a significant increase in the number of earnings releases as more companies publish their financial results. Therefore, investors will keenly pay attention to earnings calls throughout the week, seeking insights into economic landscape from companies that grapple with the brunt of market forces. The week’s notable economic data releases will be the S&P Global Composite PMIs (Flash), US Q4-2023 and FY-2023 GDP (Advance Estimate), the US Personal Consumption Expenditure Price (PCE) Index, and Interest Rate Decisions by the Bank of Japan and the European Central Bank. Importantly, the US Fed FOMC has begun its Media Blackout (20-Jan to 01-Feb).
Macroeconomic Highlights
According to the Finance Minister, Wale Edun, Nigeria is seeking $1.5bn aid from the World Bank for budgetary support and to tackle the severe Dollar shortage contributing to the decline of the Naira. The minister further noted that the Nigerian economy may also issue a Eurobond in late 2024, adding that with the current economic reforms, the country deserves support.
According to the Organisation of the Petroleum Exporting Countries (OPEC), Nigeria’s crude oil production rose by 100mbpd to 1.418mbpd in December 2023 from 1.319mbpd in November 2023. The increase in crude oil output came despite cases of oil theft and illegal refining sites in the Niger Delta.
Nigeria expects to significantly boost revenue collections this year as plans to overhaul its tax system start to pay dividends. The Federal Inland Revenue Service forecasts revenue to increase 57.0% in 2024 to N19.4trn ($20.3bn), compared with last year, according to a document seen by Bloomberg. That will comprise N9.96trn in tax revenue from oil and N9.45trn of non-oil revenue, according to the document.
The Nigerian National Petroleum Company Limited (NNPCL) concluded plans to hand over the Port Harcourt oil Refinery to private operators, just as the government refinery comes to life. The NNPCL said it is seeking to engage reputable and credible operations and maintenance companies to operate and maintain the Port Harcourt Refining Company.
The Minister of Budget and Economic Planning, Sen. Atiku Bagudu, said Nigeria needs at least $100.0bn in investments to achieve Nigeria Agenda 2050, with over 80.0% expected from the private sector. The “Agenda 2050”, launched by former President Muhammadu Buhari, envisions Nigeria achieving a per capita GDP of $33,328 per annum, positioning it among the world’s top middle-income economies by 2050.
The African Export-Import Bank (Afrexim) and the United Bank for Africa (UBA) have disbursed $2.25bn of the $3.3bn oil-for-cash loan facility arranged by the Nigerian National Petroleum Company Limited (NNPCL). The second tranche of $1.05bn is expected to be disbursed subsequently in coming months.
This week, we do not expect any major report releases on the macroeconomic front. We expect the National Bureau of Statistics to release the Dec-2023 Selected food prices and Transport Fare watch. These will be a gauge of inflation in those two categories. We also expect the publication of the Q3-2023 Rail Transport Data.
Domestic Equities: Bullish Sentiments Prevailed…ASI up 13.8% w/w
Last week, the Nigerian Exchange Limited (NGX) continued its northward trajectory, with hopes of recording a stellar year. The Bulls continued making tactful moves, in a bid to consolidate positions across fundamentally sound corporates. That said, we note that share price appreciation across key large-cap cement corporates, DANGCEM (+53.9%) and BUACEMEN (+45.8%), drove the overall positive performance of the bourse. Hence, the benchmark All Share Index (NGX-ASI) climbed by 13.84% w/w to print at 94,538.12 points. As a result, YTD return strengthened to record at 26.43%, while market capitalisation closed at N51.7tn. Activity level declined, as the average value and volume of stocks traded declined by 12.5% w/w and 8.9% w/w to settle at N15.4bn and 1.0bn units. In tandem, investors sentiment as measured by the market’s breadth regressed to 1.4x from 3.3x, as 81 tickers appreciated while 58 depreciated.
Across sectors, overall w/w performance was broadly bullish as four (4) of the five (5) sectors under our coverage closed in the green zone. The Industrial goods sector (+46.9% w/w) led the gainers due to buy-interests in DANGCEM (+53.9% w/w) and BUACEMEN (+6.0% w/w). Trailing behind were the Insurance sector (+14.9% w/w), Oil & Gas (+8.8% w/w) and Consumer goods (+8.2% w/w), following bargain-hunting activities in NEM (+39.1% w/w), AIICO (+20.8% w/w), MANSARD (+9.3% w/w), SEPLAT (+10.0% w/w), ETERNA (+38.2% w/w), CONOIL (+10.0% w/w), BUAFOODS (+5.5% w/w), and DANGSUGA (+23.7% w/w). On the flip side, the Banking sector declined 12bps w/w on account of losses in GTCO (-4.7% w/w), STANBIC (-4.4% w/w), FBNH (-5.0% w/w), FIDELITY (-3.0% w/w) and FMCB (-3.6% w/w).
In January 2024, we expect the Bulls to prevail, as bargain hunting continues as the order of the day. 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 selloffs, albeit insignificant.
Money Market Review: System Liquidity Tightens into Deficit
Last week, the financial system opened liquid with a balance of N229.8bn. Although there was an inflow of N65.4bn from coupon payments, it was not sufficient to bolster liquidity in the financial system. Due to the mop-up activity via the OMO auction conducted by the CBN, the financial system became deflated. As a result, the financial system closed the week with a deficit of N528.0bn. Consequently, the average Open Repo Rate (OPR) and Overnight Rate (OVN) climbed by 674bps and 612bps w/w to settle at 19.59% and 20.38%, respectively.
In the primary market, the Central Bank of Nigeria (CBN) conducted an OMO auction with an offer size of N300.0bn across the 92-day, 183-day and 365-day bills. At the auction, investors’ demand was strong, as total subscription printed at N519.9bn. The bulk of the bids were skewed towards the longer-tenured instrument. Notably, the CBN sold just the amount on offer, implying a bid-to-cover ratio of 1.7x. Thus, the stop rates across all 92-day, 183-day and 365-day bills declined by 50bps, 50bps and 25bps to settle at 10.0%, 13.5% and 17.5%, respectively.
In the secondary NT-bills market, we observed bearish sentiments across the curve. As a result, the average yield on NT-bills rose by 11bps w/w to close at 3.39% (previously 3.28%). On the other hand, the average yield on OMO bills fell marginally by 1bp to settle at 8.40%.
This week, we expect system liquidity to improve, driven by scheduled inflows into the financial system. These inflows will emanate from coupon payments on FGN bonds amounting to N216.6bn. As result, we project that FTDs and money market rates will remain at current levels, with a likelihood of climbing higher. Lastly, we anticipate the CBN to conduct an NT-bills auction, reopening maturing bills with a total value of N231.8 billion. During the auction, we foresee an increase in stop rates.
Bond Market: Bearish Sentiments Dominate in the Secondary Market
The secondary bonds market was dominated by bearish investor sentiments amid concerns relating to the direction of the interest rate within the economy and the delayed bond offer circular. The Monetary Policy Committee (MPC or “the committee”) announced that they will be holding their first meeting of the year on the 26th-27th of February 2024. This will be the first meeting under the leadership of the new CBN Governor, Yemi Cardoso, following two consecutive postponements of the meeting in 2023. Thus, the average bond yield rose by 28bps to close at 13.56% (previously 13.28%). Similarly, corporate bonds traded on a bearish note, as the average yield on corporate bonds increased by 22bps w/w to 14.54% (previously 14.32%).
In the Nigerian secondary Eurobonds market, we observed sell-offs amongst investors amid Nigeria’s debt sustainability concerns and Foreign Exchange (FX) volatility. Thus, the average yields in the market climbed by 9bps w/w to settle at 9.99% (previously 9.90%).
Looking forward, we expect cautious trading amongst investors to persist given the uncertainties in the fixed-income environment. We expect selloffs in the bonds market as investors await the release of the 2024 bond calendar. Lastly, we expect mixed sentiments in the Eurobonds market given the indications that Nigeria is struggling to redeem N283.5bn promissory notes.
Currency Market: Naira Depreciated Against the Dollar.
Last week, the Naira depreciated by 1.3% w/w at the Nigerian Autonomous Foreign Exchange Market (NAFEM) to close at N902.45/$, from its previous close of N890.54/$. At the parallel market, the Naira depreciated by 2.3% w/w to close the week at N1,365.00/$ (previously, N1265.00/$). Activities in the I&E window declined, as average FX turnover fell by 14.4% w/w to $113.2mn. Lastly, Nigeria’s external reserves rose by 39bps to settle at $33.2bn.
This week, we expect continued pressure on the Naira across all market segments, given that Dollar earnings remain weak, and demand for Dollar outweighs supply.
