February 5, 2024/United Capital
Global Markets: Mixed Sentiments Prevailed
Major US indices ended the week mixed amid a slew of significant earnings reports and economic data. The S&P 500 Index and Dow Jones Industrial Average moved to intraday highs, but the small-cap indexes recorded losses. The fourth-quarter earnings reporting season saw a busy week with tech giants’ releases driving major benchmarks, with the S&P 500 and Nasdaq Composite Index falling sharply on Wednesday, following lower-than-anticipated earnings guidance from Microsoft, Google parent Alphabet, and chipmaker Advanced Micro Devices. The benchmarks recovered much of their losses on Thursday, following upside earnings surprises from Amazon.com, Facebook parent Meta Platforms, and Apple. In another update, the Federal Reserve’s policy meeting on Wednesday left short-term interest rates unchanged, but Fed Chair, Jerome Powell said it’s unlikely to cut rates in March. Futures markets now estimate a 20.5% chance of a rate cut at the next meeting, down from 47.7% the previous week. Chances of a rate cut seemed to diminish further on Friday, after the Labor Department reported that employers had added 353,000 nonfarm jobs in January, nearly double consensus estimates, while labor gains for November and December 2023 were also revised higher, due in part to an annual benchmark revision. Therefore, the DJIA (+1.4% w/w), S&P 500 (+1.4% w/w), and NASDAQ (+1.1% w/w) ended the week higher.
In Europe, The STOXX Europe 600 Index ended the week flat due to mixed economic data. The Eurozone economy remained stable in Q4-2023, with GDP unchanged from the prior quarter but0.1% higher than the previous year. Quarterly expansions in Spain and Italy offset Germany’s contraction. Annual consumer price inflation in the Eurozone continued to move in the right direction, with the headline rate slowing to 2.8% in January 2024 from 2.9% in December 2023. The core rate, which excludes volatile food, energy, alcohol, and tobacco prices, also slipped lower to 3.3%. The Bank of England (BoE) maintained its key interest rate at 5.25%, a 16-year high, but may consider lowering it for the first time since consumer price inflation accelerated after the pandemic. The BoE dropped its warning that rates could rise again and is now “kept under review.” However, mixed sentiments from the BoE and a struggling Eurozone economy led to profit booking activities across major European indices. Hence, France’s CAC 40 Index fell by 0.6% w/w, Germany’s DAX lost 0.3% w/w, and the UK’s FTSE 100 Index declined by 0.3% w/w. Italy’s FTSE MIB, however, gained 1.1% w/w.
Similarly, in Asia, equities recorded mixed sentiments. Stocks in China retreated as downbeat economic data and property sector headlines fueled investors’ pessimism about the country’s growth outlook. Consequently, the Shanghai Composite Index fell by 6.2% w/w, marking its worst week since 2018, while the blue-chip CSI 300 sank by 4.6% w/w, indicating its biggest weekly loss since 2022. Both benchmarks are trading at five-year lows. In Hong Kong, the benchmark Hang Seng Index lost 2.6% w/w. January’s economic data provided a mixed picture of China’s economy. The official manufacturing purchasing managers’ index (PMI) rose to 49.2 in Jan-2024 from 49.0 in Dec-2023 amid improved production growth, but still lagged the 50-mark threshold separating growth from contraction. The nonmanufacturing PMI ticked up to an above-consensus 50.7 from 50.4 in Dec-2023. On the other hand, the private Caixin/S&P Global survey of manufacturing activity remained steady at 50.8 in Jan-2024, beating expectations and marking its third straight month of expansion. China Evergrande, which was formerly the biggest property developer in the nation, was ordered to be liquidated by a Hong Kong court after the business was unable to come to a restructuring arrangement with its creditors following its December 2021 offshore bond default. The majority of Evergrande’s assets are in mainland China, which has a different legal system, so the question now becomes whether the verdict will be upheld there. Analysts are also worried that the decision to liquidate Evergrande, which some estimates put in debt as high as USD 327 billion, might further erode trust in the housing sector and threaten China’s banking system. According to the China Real Estate Information Corp, the value of new home sales by the country’s top 100 developers fell by 34.2% in January 2024 from the prior-year readings, roughly even with the 34.6% drop in December. Elsewhere in Japan, equities recorded positive performance over the week, with the Nikkei 225 Index gaining 1.1% w/w and the broader TOPIX Index up by 1.7% w/w. A robust corporate earnings season lent support, with higher prices and strong tourism having provided a boost to domestically focused firms in particular.
Last week, oil prices ended the week deep in the red as growing optimism over an extended ceasefire in the Israel-Hamas war cooled the supply risks premium baked into prices. Multiple media reports suggest Israeli and Hamas leaders were considering a ceasefire that many expect to mark a severe de-escalation in military tensions in the Middle East, which have been a key point of support for oil prices in recent months. On Friday, oil prices sank by about 2.0% after US jobs data shrank the odds of imminent interest rate cuts in the world’s largest economy, which could dampen crude demand. Faltering growth in China also weighed down oil prices. Subsequently, Brent crude futures lost $6.22, or 7.4% w/w, to settle at $77.33/bbl. In same stride, the US West Texas Intermediate crude (WTI) fell by $5.73 or 7.3% w/w to print at $72.28/bbl.
This week, the important data expected to be released in the US includes the ISM services PMI reading (which helps traders and investors gain insight economic conditions in the US) and consumer credit data (which provides insights to the degree to which people in the US take on credit to pay for goods and services). For Europe, important data expected to be released include the Industrial Producer Price Index report (which will add more color to the state of inflationary pressure in Europe).
Macro Highlight and Outlook
The International Monetary Fund (IMF) has predicted a decline in Nigeria’s inflation rate to 23.0% in 2024 and 15.5% in 2025. This is on the back of the expectation that the monetary policy stance of the Apex Bank would help reduce headline inflation rate. The IMF further noted that the government should prioritise revenue mobilisation and widen its tax base to provide social support in order to ease the burden of rising costs for the citizens. Lastly, the IMF, in its revised World Economic Outlook for 2024 and 2025, slashed its forecast for Nigeria’s economic growth for 2024 from 3.1% declared in October 2023 to 3.0%, representing a 0.1% decline.
Meanwhile, data from the Central Bank of Nigeria (CBN or the Apex Bank)’s money and credit statistics indicate that, Nigeria’s broad money supply increased to N78.74tn as of December 2023, the highest ever recorded in the country. This represents an increase of N26.58tn or 51.0% y/y when compared to N52.16tn recorded in 2022. This increase in money supply signals a probable escalation in inflation, which could erode Nigerians’ purchasing power.
In another update, the CBN has established a minimum operating capital requirement for International Money Transfer Operators (IMTOs) at $1 million for foreign entities and an equivalent amount for local IMTOs. According to the revised guidelines for the operation of IMTOs, applicants must adhere to the CBN’s guidelines on anti-money laundering, combating the financing of terrorism, and countering proliferation financing of weapons of mass destruction regulations.
The Apex Bank has introduced a limit on banks’ net open positions of 20.0% of shareholders’ funds for short positions and a zero limit for long positions. Banks have been ordered to harmonise their reporting accordingly. The Apex Bank noted that the excess net open Dollar positions on banks’ balance sheets have created an incentive for lenders to hold foreign currency, thereby exposing them to currency and other risks.
The Central Bank of Nigeria, in a circular, announced that it would be ceasing daily Cash Reserve Requirement (CRR) debits for banks and will be adopting an updated CRR mechanism henceforth. This is intended to facilitate capacity for planning, monitoring, and aligning records with the CBN.
In a move to boost Nigeria’s gas industry, Chinese contractor, Wison New Energies, has begun pre-front-end engineering and design (pre-FEED) work for two major Floating Liquefied Natural Gas (FLNG) projects. This marks a crucial step towards unlocking the potential of Nigeria’s vast natural gas reserves and boosting its energy export capabilities.
This week, we expect the macroeconomic front to be quiet in absence of any major data releases.
Domestic Equities: Bullish Run Sustained…ASI up 2.0% w/w
The Nigerian Exchange Limited closed the week on a positive note despite the bearish sentiments across board in the first three trading days of the week. However, in the last two trading session, investors sentiments towards the equities market became renewed as more corporates released impressive FY-2023 earnings results. Additionally, the announcement by the Fed to hold its Fed fund target rate at 5.25% – 5.50% level spurred improved sentiments in the market. Notably, share price appreciations in stocks with strong fundamentals drove the local bourse northwards. The benchmark All Share Index (NGX-ASI) climbed by 197bps w/w to print at 104,421.23 points. Hence, YTD return improved to 39.7%, while market capitalisation closed at N57.2tn. Activity level improved, as the total value and volume of stocks traded climbed by 64.4% w/w and 30.6% w/w to settle at N19.0bn and 778.5bn units, respectively. However, investors sentiment as measured by the market’s breadth weakened to 0.4x from 0.5x, as 27 tickers appreciated while 64 depreciated.
Across sectors, overall w/w performance was broadly bearish as only two (2) of the five (5) sectors under our coverage closed in the green zone. The Industrial goods sector (+6.4% w/w) led the gainers. This was followed by the Consumer goods sector (+1.3% w/w). On the flip side, the Banking sector (-4.5% w/w) led the laggards. Trailing behind was the Insurance sector (-4.1% w/w). Lastly, the Oil & Gas sector (-2.5% w/w) declined at the end of the week.
On corporate disclosures, several corporates released their financial reports. In the banking sector, FIDELITY, FBNH, WEMA and STANBIC recorded a 205.7% y/y, 127.4% y/y, 105.8% y/y, 74.2% y/y growth in their Profit After Tax (PAT) to settle at 142.8bn, 310.0bn, 23.4bn and 140.6bn, respectively, in FY-2023. This is on the back of increased income from trading activities and Foreign Exchange Revaluation (FX) gains.
In the consumer goods sector, UACN posted a 295.4% y/y growth in PAT from a loss position of N4.0bn in FY-2022 to N7.8bn in FY-2023. This was supported by the 1070.2% y/y and 228.2% y/y climb in other operating income (N8.7bn) and net finance income (N2.7bn), respectively.
For the brewers, International Breweries (INTBREW) reported a revenue growth of 20.9% y/y from N218.7bn in FY-2022 to N264.3bn in FY-2023. Nevertheless, INTBREW posted a post-tax loss of N59.5bn in FY-2023, 175.0% higher than the loss of N21.6bn recorded in the corresponding period of 2022.
Lastly, Geregu Power recorded a total revenue of N82.9bn in FY-2023, up 74.1% y/y compared to the N47.6bn print in FY-2022. The company’s PAT inched up by 57.8% y/y from N10.2bn in FY-2022 to N16.1bn in FY-2023 despite the 2038.7% y/y climb in net finance costs during the period. Consequently, the company declared a final dividend of N8.0 per ordinary share to be paid 28th March, 2024.
Looking ahead, we expect positive sentiments to dominate the market, supported by the commencement of the FY-2023 earning season. We expect bargain-hunting activities across stocks with strong fundamentals and impressive earnings releases. We anticipate increased buy-interests towards corporates in the financial services sector due to expectations of strong top-bottom line growth. Meanwhile, dividend scouting investors can also cherry-pick stocks ahead of full-year dividend declarations.
Money Market Review: System Liquidity Tightening Continues
Last week, the financial system had a N362.6bn opening balance at the start of the week. The surplus position was due to FAAC inflows at the close of the week ended 26-Jan. However, primary market activity via Open Market Operations and FGN Bond Auctions moped up the excess liquidity. As a result, in the absence of significant inflows, the financial system closed the week with a N307.7bn deficit. Consequently, the Open Repo Rate (OPR) rose by 262bps w/w to close at 20.2%, while the Overnight Rate (OVN) rose by 237bps w/w to settle at 21.2%.
In the secondary NT-bills market, we observed bearish sentiments across the curve. As a result, the average yield on NT-bills rose by 293bps w/w to close at 9.66% (previously 6.73%). Similarly, the average yield on OMO bills rose by 124bps to settle at 9.63%.
This week, we expect bearish sentiments in the secondary market for NT-bills in line with market trends. In the absence of any coupon payments, we expect system liquidity to remain in a deficit. Lastly, we expect FTD and money market rates to remain elevated around current levels.
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 14.77% (previously 13.79%). Similarly, corporate bonds traded on a bearish note, as the average yield on corporate bonds increased by 46bps w/w to 16.12% (previously 15.00%).
In the primary market, an FGN Bond auction was conducted by the DMO with an offer size of N360.0bn across the 2027, 2029, 2033 and 2038 bonds. At the auction, investors’ demand was strong, as total subscription printed at N604.6bn. A total of N604.6bn worth of bonds was sold. This implied a 1.45x bid-to-cover ratio. Thus, the marginal rates across the 2027, 2029, 2033 and 2038 bonds settled at 15.0%, 15.5%, 16.0% and 16.5%, respectively.
In the Nigerian secondary Eurobonds market, we observed buy-interest amongst investors as they sought to take advantage of the high yields offered by Nigerian Eurobonds as a positive response to the US Fed’s decision to hold its interest rate. This is amid Nigeria’s lingering debt sustainability and Foreign Exchange (FX) volatility concerns. Therefore, the average yields in the market climbed by 8bps w/w to settle at 9.89% (previously 10.07%).
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. Overall, we expect bond yields to remain at current levels. For the Eurobonds market, we foresee positive sentiment to continue into the new week.
Currency Market: Naira Depreciated at the I&E Window
Last week, the Naira depreciated by 61.0% w/w at the Nigerian Autonomous Foreign Exchange Market (NAFEM) to close at N1,435.53/$, from its previous close of N891.90/$. At the parallel market, the Naira depreciated by 1.1% w/w to close the week at N1435.0/$ (previously, N1420.0/$). Activities in the I&E window improved, as average FX turnover rose by 116.8% w/w to settle at $195.7mn. Lastly, Nigeria’s external reserves fell by 5bps to settle at $33.4bn.
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.
