Dangote Cement, MTNN Drags Nigerian Bourse to 4.2% Weekly Loss

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Selloffs of DANGCEM (-10.0%) and MTNN (-10.0%) were the major drivers of this week’s loss. Thus, the All-Share Index declined by 4.2% w/w to close at 101,088.07 points.

February 23, 2024/Cordros Report

Global Economy
 
According to the recently released data from Eurostat, consumer prices in the Eurozone eased marginally by 10bps to 2.80% y/y in January 2024 (December 2023: +2.90% y/y). Specifically, prices for food, alcohol & tobacco (+5.60% y/y vs December 2023: +6.10% y/y) moderated to the lowest level in 22 months, while the core inflation basket (+3.30% y/y vs December 2023: +3.40% y/y) maintained its downtrend for the sixth consecutive month. Nonetheless, there was upward pressure from energy prices (-6.10% y/y vs December: +6.70% y/y) due to a softer pace of decline. On a month-on-month basis, consumer prices contracted by 0.40% in January 2024 (December 2023: +0.20% m/m). We anticipate inflation in the Eurozone will continue its downward trend in February, primarily driven by favourable base effects from last year. Overall, the data print suggests that the European Central Bank (ECB) may consider implementing monetary policy easing in the near term. As a result, the financial market is currently pricing in the probability of a rate cut at the April policy meeting.
 
At the February monetary policy meeting, the People’s Bank of China (PBoC) voted to cut the five-year loan prime rate by 25bps to 3.95% (Previously: 4.20%) after eight consecutive months of leaving the rate unchanged. We attribute this move to the government’s intentions to (1) boost confidence in the economy, (2) promote investment and consumption, and (3) ease the pressure on the real estate market. Meanwhile, the country’s apex bank voted to maintain the one-year loan prime rate at 3.45% for the seventh consecutive month, diverging from market expectations (3.30%). Looking ahead, we expect the reduction in the five-year-prime rate to pave the way for a reduction in the loan prime rate over the short to medium term. Our assessment suggests that monetary easing will persist, given the primary policy stance in the near term, aimed at further stimulating consumption and supporting investment recovery. As a result, the general consensus is a 20bps rate cut in 2024FY.
 
Global Equities
 
This week, corporate earnings took center stage in the global equities markets as investors shrugged off expectations of a longer wait till US Fed rate cuts. Additionally, sentiments were buoyed by increased bets on Chinese stimulus and enthusiasm surrounding artificial intelligence (AI) firms. Accordingly, US equities (DJIA: +1.1%; S&P 500: +1.6%) edged higher as Nvidia’s upbeat results and strong sales outlook for Q1-24 provided fresh momentum for an AI-led rally in tech stocks. European equities (STOXX Europe: +0.7%; FTSE 100: -0.4%) were mixed as investors weighed better-than-expected Eurozone PMI data and mixed corporate earnings. Meanwhile, Asian markets (Nikkei 225: +1.6%; SSE: +4.8%) were broadly upbeat, with the Japanese market buoyed by (1) more robust corporate earnings, (2) a weaker yen benefiting exporters and (3) increased foreign investors’ interest. Similarly, the Chinese market surpassed the 3,000-point mark, boosted by government measures to stimulate economic growth and restore market confidence, such as a larger-than-expected benchmark mortgage rate cut to boost housing demand. The Emerging market (MSCI EM: +1.3%) and Frontier market (MSCI FM: +1.0%) indices traded positively, driven by gains in China (+4.8%) and Vietnam (+1.0%), respectively.
 
Nigeria
 
Domestic Economy
 
According to the recently released data by the National Bureau of Statistics (NBS), domestic economic activities sustained growth momentum for the third consecutive quarter, as real GDP grew by 3.46% y/y in Q4-23 (Q3-23: +2.54% y/y). Analysing the breakdown, we highlight that the oil sector regained momentum after 14 consecutive quarters of contraction, increasing by 12.11% y/y (Q3-23: -0.85%) – the highest print since Q1-18 (+14.02% y/y). We attribute the growth of the oil sector to the higher crude oil production volumes (1.53mb/d vs Q3-23: 1.43mb/d | Q4-22: 1.35mb/d) in line with the renewed effort by the FG to curb crude oil theft and pipeline vandalism. At the same time, the non-oil sector sustained its growth trend, expanding by 3.07% y/y (Q3-23: +2.75% y/y), driven by the expansion across the Finance & insurance (+29.78% y/y vs Q3-23: +28.21% y/y), Agriculture (+2.10% y/y vs Q3-23: +1.30% y/y), and Manufacturing (+1.38% y/y vs Q3-23: +0.48% y/y) sub-sectors, amid a slowdown in Trade sub-sector (+1.40% y/y vs Q3-23: +1.53% y/y). Overall, real GDP settled at +2.74% y/y in 2023FY (2022FY: +3.10% y/y). We expect the real GDP to remain resilient in Q1-24, driven by improvement in the oil sector. Simultaneously, we expect the non-oil sector to maintain its growth trajectory underpinned by a sustained growth in the services sector. Nonetheless, we think the lingering impact of naira depreciation will pose a downside risk to overall growth prospects. Overall, we project real GDP to settle at 3.32% y/y in 2024FY.
 
According to the data released by the National Bureau of Statistics (NBS), capital importation into Nigeria increased by 2.6% y/y to USD1.09 billion in Q4-23 (Q4-22: USD1.06 billion). Analyzing the breakdown, we highlight increases across foreign direct investments (+118.4% y/y to USD183.97 million) and portfolio investments (+8.6% y/y to USD309.76 million), amid a decline in other investments (-14.0% y/y to USD594.75 million). However, on an annual basis, capital importation declined for the fourth consecutive year, dipping by 26.7% to USD3.91 billion in 2023FY (2022FY: USD5.33 billion). We believe the persistent slowdown in capital importation reflects foreign investors’ lacklustre interest in the country given the (1) lingering FX liquidity constraints, (2) uncompetitive domestic interest rates and (3) the adverse macroeconomic environment. We anticipate that foreign investors will adopt a cautious stance in the near term, closely monitoring the activities of the apex authorities in improving FX liquidity and ensuring sustainability. At the same time, we envisage an improvement in foreign participation over the medium term, to be driven by (1) the complete clearing of the FX backlog, (2) substantial inflows from foreign sources through multilateral borrowings or Eurobond issuances, and (3) meaningful intervention and support of forex liquidity by the CBN.
 
Capital Markets
 
Equities
 
This week, the local stock market remained downcast due to bearish sentiments, as investors continued adjusting their portfolios towards the fixed-income market due to higher yields. Particularly, selloffs of DANGCEM (-10.0%) and MTNN (-10.0%) were the major drivers of the weekly loss. Thus, the All-Share Index declined by 4.2% w/w to close at 101,088.07 points. Consequently, the MTD and YTD returns moderated to +0.9% and +36.5%, respectively. Activity levels remained subdued as trading volume and value decreased by 11.2% w/w and 13.0% w/w, respectively. Sectoral performance was mixed, with declines observed in Insurance (-8.9%), Industrial Goods (-7.9%) and Banking (-2.1%) indices while the Consumer Goods (+2.0%) index advanced. The Oil and Gas index closed flat.
 
Next week, we anticipate cautious trading in stocks due to uncertainty surrounding the upcoming MPC meeting scheduled for 26 and 27 February. We expect limited bargain-hunting activity in the near term due to prevailing negative sentiments driven by movements in fixed income market yields and uninspiring earnings releases.
 
Money market and fixed income
 
Money market
 
The overnight (OVN) rate expanded by 882bps w/w to 25.8%, as the settlements for the FGN bond auction (NGN1.49 trillion) and net NTB issuances (NGN1.32 trillion) outstripped inflows from CRR refunds (NGN1.23 trillion) and FGN bond coupon payments (NGN112.67 billion). However, banks’ exposure at the CBN’s SLF window on Friday (NGN1.18 trillion) buoyed the average system liquidity to close at a net long position of NGN373.34 billion (vs. a net long position of NGN302.20 billion in the previous week).
 
Barring any significant outflows next week, we envisage the OVN rate will likely decline as we expect the inflows from FAAC disbursements (NGN742.54 billion) to support system liquidity.
 
Treasury bills
 
Proceedings in the T-bills secondary market remained bearish, driven by the tight system liquidity this week. As a result, the average yield across the market expanded by 91bps to 16.9% – average yield increased by 119bps to 16.7% in the NTB segment but declined by 6bps to 17.8% in the OMO secondary market. At this week’s NTB auction, the CBN offered instruments worth NGN265.50 billion – NGN11.96 billion for the 91-day, NGN10.21 million for the 182-day and NGN243.33 billion for the 364-day – to market participants. Demand at the auction was higher than the previous PMA, as the total subscription level settled at NGN2.24 trillion (previous auction: NGN1.98 trillion). The auction ended with the CBN allotting bills worth NGN1.59 trillion – NGN331.01 billion for the 91D, NGN66.25 million for the 182D and NGN1.19 trillion for the 364D – at respective stop rates of 17.00% (previously: 17.24%), 18.00% (previously: 17.50%), and 19.00% (previously: 19.00%).
 
In the upcoming week, we anticipate higher demand for instruments in the Treasury bills secondary market following our expectation of surplus liquidity in the financial system. Thus, we believe yields in the market would likely trend lower.
 
Bonds
 
Similarly, the FGN bonds secondary market closed on a bearish note, as the average yield across all instruments advanced by 68bps to 16.8%. Across the benchmark curve, the average yield increased at the short (+89bps), mid (+480bps), and long (+15bps) segments, following sell pressures on the MAR-2025 (+392bps), FEB-2031 (+1841bps), and MAR-2036 (+154bps) bonds, respectively. At this month’s auction, the DMO offered instruments worth NGN2.50 trillion to investors through new issuances of the 18.50% FGN FEB 2031 (Bid-to-offer: 0.9x; Stop rate: 18.50%) and 19.00% FGN FEB 2034 (Bid-to-offer: 0.7x; Stop rate: 19.00%) bonds. The subscription level settled at NGN1.90 trillion, translating to a bid-to-offer ratio of 0.8x (vs bid-to-offer ratio of 1.7x at last month’s auction). Eventually, the DMO allotted instruments worth NGN1.49 trillion, resulting in a bid-to-cover ratio of 1.3x.
 
Based on our analysis of the factors expected to influence market direction in 2024E, including (1) expected money policy administration globally and domestically, and (2) sustained imbalance in the demand and supply dynamics, we anticipate yields in the FGN bonds secondary market will remain elevated over the short term.
 
Foreign Exchange
 
Nigeria’s FX reserves recorded further accretion this week, as gross reserves level increased by USD151.79 million w/w to close at USD33.45 billion (21 February). Meanwhile, the naira depreciated by 7.7% to NGN1,665.50/USD at the Nigerian Autonomous Foreign Exchange Market (NAFEM). Midweek, the CBN reinstated the two-way FX quote system with trading hours between 10am – 2am. In addition, the apex bank set a standard transaction size of USD100,000.00 and bid/offer spread of NGN50.00 (+/-5.0% of prior day’s NAFEX rate). At the NAFEM, total turnover (as of 22 February 2024) decreased by 40.8% WTD to USD643.01 million, as trades were consummated within the NGN1,050.00 – NGN1,851.00/USD range. In the Forwards market, the naira rates recorded for the 1-month (-4.9% to NGN1,582.69/USD), 3-month (-4.7% to NGN1,618.38/USD), 6-month (-4.7% to NGN1,673.52/USD), and 1-year (-5.1% to NGN1,793.78/USD) contracts decreased.
 
Notwithstanding the recent policy actions by the CBN, the currency has remained under pressure given that the market supply remains frail. We are encouraged by the pace of reforms within the market as well as the renewed interventions by the apex bank. In our view, (1) following through with recently implemented reforms alongside (2) continued efforts to clear the FX backlog may lead to improved liquidity over the medium-term.

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