January 29, 2024/United Capital
Global Markets: Positive Sentiments Outweighed the Negatives
US stocks recorded another week of gains, bringing the Dow Jones Industrial Average and the S&P 500 Index to new all-time highs and marking the 12th weekly advance out of the last 13 for the latter. The gains were relatively broad, although the small-cap Russell 2000 Index remained nearly 20.0% below its all-time intraday high. Meanwhile, manufacturing activity in the Mid-Atlantic region was weaker than expected, but the S&P Global flash manufacturing index reached its highest level (50.3) since October 2022. Additionally, the S&P Global services index reached its best level (52.9) since June 2022. These readings indicate economic expansion, as the flash manufacturing index and services index both reached new highs. Thus, the DJIA (+0.6% w/w), S&P 500 (+1.1% w/w), and NASDAQ (+0.09% w/w) ended the week higher.
In Europe, the pan-European STOXX Europe 600 Index ended 3.1% higher on encouraging corporate results and China’s announcement of additional stimulus measures. Stocks also received a lift after the European Central Bank (ECB) left interest rates unchanged and appeared to signal a more dovish outlook. Most major stock indexes rose, with France’s CAC 40 Index climbing 3.5%, Germany’s DAX advancing 2.4%, and Italy’s FTSE MIB tacking on 0.3%. The UK’s FTSE 100 Index added 2.3%. In further context, The ECB maintained key interest rates at record highs and emphasized the need for monetary policy to remain restrictive to reduce inflation to the 2.0% target. President Christine Lagarde emphasized that policy decisions will be influenced by incoming economic and financial data and acknowledged the effectiveness of the disinflation process. Financial markets anticipate the ECB to begin cutting rates in April or June.
In Asia, equities recorded mixed sentiments. Chinese stocks advanced after Beijing stepped in with forceful measures to support the economy. Hence, the Shanghai Composite Index rose by 2.7%, while the blue-chip CSI 300 gained 1.9%. In Hong Kong, the benchmark Hang Seng Index advanced 4.2%, according to FactSet. The People’s Bank of China (PBOC) will cut its reserve ratio requirement (RRR) by 50 basis points for most banks on 05 February, marking its first cut this year. Additionally, the bank will lower interest rates by 25 basis points for refinancing and rediscounting loans to support agriculture and small businesses from 25 January. Elsewhere, Japan’s Nikkei 225 Index fell by 0.6% and TOPIX Index 0.5% over the week. The Bank of Japan maintained its ultra-accommodative stance, but Governor Kazuo Ueda emphasized the BoJ’s progress in achieving sustained inflation. However, a softer-than-anticipated Tokyo area inflation print tempered expectations, indicating a shift in monetary policy.
Last week, oil prices rose for a second week in a row and settled at their highest in nearly two months on Friday as positive US economic growth and signs of Chinese stimulus boosted demand expectations, while Middle East supply concerns added support. Thus, Brent crude futures rose by $4.99, or 6.3% w/w, to settle at $83.55/bbl., their highest close since 30 November 2023. In the same stride, the US’ West Texas Intermediate crude (WTI) climbed by $4.60 or 6.2% w/w to print at $78.01, also the highest close since November 2023.
This week, we expect the US Fed to hold its first meeting in the new year 2024. The meeting will be held on the 30th and 31st of January 2024. We expect the Fed to HOLD its benchmark interest at the current restrictive level (5.25 – 5.50%). Also, we expect the US nonfarm payroll report (an important report that provides insights into the overall health of the US labor market) to be released this week. For Europe, we expect the Bank of England (BoE) to meet on 1st February 2024 (its first meeting for the year 2024) to decide on interest rates. We expect the BoE’s rate decision to reflect the outcome of the Fed’s meeting.
Macroeconomic Highlights
Data from the Central Bank of Nigeria (CBN) disclosed that banks’ net credit to the government dropped to a record low between June and November 2023 after the Federal Government securitised N22.7trn of its overdrafts, known as Ways and Means debt, six months ago. For context, net credit to the government declined by 83.5% to N5.2trn in November 2023 from N31.2trn in June 2023. Ways and Means Advances is a loan facility used by the Central Bank to finance the government in periods of temporary budget shortfalls, subject to limits imposed by law.
Furthermore, the CBN plans to replace the external members of the Monetary Policy Committee (MPC), who claim they have been marginalized prior to an upcoming meeting next month, amidst an ongoing restructuring of the CBN. To provide context, four of the five external members of the 12-seat MPC, who spoke anonymously to Bloomberg, said they have not been paid since August 2023, also, had last communication from the CBN in September 2023, and have been excluded from the usual pre-planning activities for the 26 – 27 February meeting. The fifth member did not respond to requests for comment.
After a bilateral meeting with President Bola Tinubu at the Presidential Village, Abuja, the United States Secretary of State, Antony Blinken, on Tuesday, disclosed the readiness of US companies to invest in the Nigerian economy. He iterated the importance of “repatriation of capital” in a bid to maximise the potential investment opportunities.
According to statements from Standard Bank Group’s “African Markets Revealed” report, the CBN is likely to gradually clear its huge foreign currency obligations with funds obtained from the recent Federal Government of Nigeria and the Nigerian National Petroleum Company Limited (NNPCL) deal. Hopefully, clearing off this humongous backlog would restore the stability of the Naira and perhaps increase investor confidence in a currency that has lost more than 65.0% of its value since President Bola Ahmed Tinubu harmonised the FX market. The bank further predicted that, on the back of clearing this backlog, the Naira should exchange for N1,171 for USD at the official market by December this year.
The Presidential Enabling Business Environment Council (PEBEC) Outlook for 2024 indicate that the Federal Government through the PEBEC is to facilitate over 20.0% increase in annual total tax remittances as well as foreign exchange earnings, among others.
The PEBEC had introduced the ‘Business Champions Programme’ as part of its workstream for 2024, to provide direct support to businesses and minimise bottlenecks in accessing government services. Under this new programme, the expected impacts include achieving 20.0% or more annual growth in revenues, tax remittances, foreign exchange earnings, and job creation.
Nigeria’s Incentive-Based Risk Sharing System for Agricultural Lending Plc (NIRSAL) has kicked off an initiative to boost wheat production in collaboration with the Federal Ministry of Agriculture & Food Security to enhance Nigeria’s food security agenda. The initiative focuses on training extension agents and farmers under the National Agricultural Growth Scheme and Agro Pocket (NAGS-AP)/Jigawa Wheat Cluster Project.
According to Doris Uzoka-Anite, Minister of Industry, Trade and Investment, the Federal Government has promised to resuscitate the Nigeria Rubber Industry as one of its strategic plans to develop the non-oil sector in line with the President’s Eight Point Agenda. The government is also set to host the International Rubber Study Group (IRSG) 55th Annual Assembly and the 2024 Rubber Summit scheduled to be held from 20 – 24 May 2024 in Nigeria.
This week, we do not expect any major report releases on the macroeconomic front. We expect the National Bureau of Statistics to release the Selected Petroleum Statistics: Oil and Gas Production Report (Half Year 2023).
Domestic Equities: Bullish Sentiments Sustained…ASI up 8.3%
Last week, the local equities market closed in the green zone following the dominance of the bulls in the market. Despite profit-taking activities across board (majorly the financial services sector), buy-interests in heavily weighted stocks were sufficient to ensure an overall positive performance of the local bourse. Notably, price appreciations across large-cap stocks, DANGCEM (-28.8% w/w), BUACEMEN (+21.0% w/w) and BUAFOODS (+13.3% w/w) spurred the rally in the market. As a result, the benchmark All Share Index (NGX-ASI) climbed by 832bps w/w to print at 102,401.88 points. Hence, YTD return strengthened to 36.9%, while market capitalisation fell by N4.3tn to print at N56.0tn. Activity level declined, as the average value and volume of stocks traded fell by 25.6% w/w and 42.4% w/w to settle at N11.6bn and 596.35mn units.
Across sectors, overall w/w performance was mainly bullish as only three (3) out of the five (5) sectors under our coverage closed in the green zone. The Industrial goods sector (+23.2% w/w) led the gainers, following buy interests in DANGCEM (+28.8% w/w), and BUACEMEN (+21.0% w/w). Trailing behind was the Oil & Gas sector (+11.6% w/w) due to price appreciations in SEPLAT (+21.0% w/w). The Consumer goods sector (+5.3% w/w) gained on the back of bargain-hunting activities in BUAFOODS (+13.3% w/w). On the flip side, the Insurance (-4.1% w/w) led the laggards owing to losses in AIICO (-11.3% w/w) and CORNERST (-15.5%). Lastly, the Banking sector (-1.6% w/w) declined on the back of selloffs in ZENITHBA (-4.4% w/w) and ACCESSCO (-4.7% w/w).
On corporate disclosures, the earning season commenced with several corporates releasing their financial reports. FCMB posted an impressive 82.6% y/y increase in gross earnings from N283.0bn in FY-2022 to N516.8bn. This was mainly driven by the whopping 1612.9% y/y climb in other income emanating from trading activities and FX gains. As a result, FCMB recorded a 206.9% y/y growth in Profit After Tax (PAT) to settle at N95.5bn in FY-2023 (previously, N31.1bn in FY-2022).
In the consumer goods sector, Honeywell Plc and Flourmills Plc recorded a 9.0% y/y and 40.0% y/y growth in revenue to N124.0bn and 1.6tn in 9M-2023. Unlike Honeywell which recorded a post-tax loss of N9.2bn in 9M-2023, Flourmills’ PAT settled at N258.0mn in 9M-2023, albeit lower than the N10.0bn recorded in 9M-2022. Elsewhere, Cadbury Plc posted a 46.0% y/y growth in its revenue from N55.2bn in FY-2022 to N80.4bn in FY-2023. Although gross profit inched up by 130.0% y/y to N17.8bn during the period, Cadbury recorded a post-tax loss of N27.6bn owing to increased net finance costs in FY-2023.
Lastly, Guinness’ revenue printed at N142.6bn in H1-2024, up 20.4% y/y compared to its print of N118.5bn in H1-2023. However, the company recorded a post-tax loss position of N5.2bn in H1-2024 from a profit position of N4.0bn in the corresponding period of 2023. This is due to the 255.8% y/y increase in finance costs owing to losses on remeasurement of foreign exchange balances.
This week, we expect positive investors’ sentiments to dominate the local equities market as the FY-2023 earning season comes to full swing. This will essentially be subject to the financial performance of listed corporates in FY-2023. We strongly anticipate impressive outings among banks given the impact of the Foreign Exchange (FX) revaluation gains and elevated interest rate environment in 2023. Thus, we expect an increased appetite among investors for corporates in the financial services sector, particularly the Banks.
Money Market Review: Stop Rates Climbed at PMA
Last week, the financial system opened in a N131.6bn deficit. Although there was an inflow of N216.6bn from coupon payments, it was not sufficient to bolster liquidity in the financial system in part due to primary market activity. As a result, the financial system closed the week with a deficit of N56.0bn. That said, the weekly average of funding rates between banks remained around previous levels, with the weekly average of the Open Repo Rate (OPR) declining by 24bps w/w to record at 19.35%. The weekly average of the Overnight Rate (OVN) recorded an uptick, climbing by 9bps w/w to settle at 20.48%.
In the primary market, the Central Bank of Nigeria (CBN) conducted an NT-Bill auction with an offer size of N231.82bn across the 91-day, 182-day and 364-day bills. At the auction, investors’ demand was strong, as total subscription printed at N1,086.35bn. The bids were skewed towards the longer-tenured instrument. Notably, CBN sold just the amount on offer, implying a bid-to-cover ratio of 4.69x. Thus, the stop rates across the 91-day, 182-day and 364-day bills rose by 256bps, 293bps and 314bps to settle at 5.00%, 7.15% and 11.54%, 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 334bps w/w to close at 6.73% (previously 3.39%). On the other hand, the average yield on OMO bills fell marginally by 1bp to settle at 8.39%.
This week, we expect bullish sentiments at the secondary market for NT-bills, as investors take advantage of the elevated yields from the aftermath of last week’s NT-bill primary market auction. We expect FAAC inflow to support system liquidity. Lastly, we expect FTD and money market rates to remain around current levels, with a likelihood of tapering by the end of the week.
Bond Market: Bearish Sentiments Prevail in the Bonds Market.
The secondary bonds market was dominated by bearish investor sentiments amid concerns relating to the direction of the interest rate within the economy. Thus, the average bond yield rose by 23bps to close at 13.79% (previously 13.56%). Similarly, corporate bonds traded on a bearish note, as the average yield on corporate bonds increased by 46bps w/w to 15.00% (previously 14.54%). Noteworthy is, the DMO released its January 2024 bond offer circular (instead of Q1-2024 calendar expected by the market) with a total offering of N360.0bn (N90.0bn each) through the re-issuance of the 2027, 2029, 2033, and 2038 bonds. Consequently, the 2053 bond has been retired, making the 2038 bond the longest-dated auction paper compared to the preceding auction.
In the Nigerian secondary Eurobonds market, we observed mild selloffs amongst investors amid lingering debt sustainability and Foreign Exchange (FX) volatility concerns. That said, the average yields in the market climbed by 8bps w/w to settle at 10.07% (previously 9.99%).
Looking into the week, we expect mixed sentiments in bond markets, with bearish sentiments to possibly outweigh, underpinned by legitimate concerns about the country’s fiscal health and the efficacy of its monetary policy. On the other hand, we expect FAAC inflow to stimulate some buy-interest. Overall, we expect bond yields to remain at current levels. For the Eurobonds market, we expect a positive correlation with the outcome of the Fed’s meeting.
Currency Market: Naira Appreciated Against the Dollar
Last week, the Naira appreciated by 1.2% w/w at the Nigerian Autonomous Foreign Exchange Market (NAFEM) to close at N891.90/$, from its previous close of N902.45/$. At the parallel market, the Naira depreciated by 4.0% w/w to close the week at N1,420.00/$ (previously, N1,365.00/$). Activities in the I&E window declined, as average FX turnover fell by 20.7% w/w to $90.3mn (previously, $113.9mn). Lastly, Nigeria’s external reserves rose by 23bps to settle at $33.4bn.
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 in the local economy.
