February 26, 2024/United Capital Research
Global Markets: Broad-Based Bullish Sentiments
Last week, the US equities market was met with a strong positive performance. Hence, equity indexes in the US generally moved higher during a week shortened by the Presidents’ Day holiday on Monday. However, the small-cap Russell 2000 Index lost ground at the close of the week. The S&P 500 Index and the Nasdaq Composite Index both reached new intraday highs on Thursday, with the Nasdaq Composite Index recording its most significant daily gain in approximately a year. This surge occurred as NVIDIA contributed a record $277.0 billion to its market capitalization. After Wednesday’s trading session, the chipmaker reported strong quarterly revenue and earnings that topped Wall Street estimates. The company also increased its full-year guidance on robust demand for its chips, which are used in artificial intelligence applications. In remarks delivered on Thursday, Federal Reserve Board Governor Christopher Waller articulated his perspective within the Federal Reserve’s framework. He noted that the higher-than-expected inflation observed in January, coupled with the robust jobs market and the economy’s strength in the fourth-quarter strength, underscored the necessity to confirm the sustainability of the progress made on inflation during the latter half of 2023. Nevertheless, Waller expressed confidence that inflation is “likely” to revert to the Federal Reserve’s 2.0% target. But he also cautioned that he would like at least a few more months of data to see “whether January was a speed bump or a pothole.” That said, major US indexes like the S&P 500 (+1.7% w/w), NASDAQ Composite (+1.4% w/w), and DIJA (+1.3% w/w) recorded strong w/w gains.
By the same token, the pan-European STOXX Europe 600 Index climbed to a record level, ending the week 1.15% higher. The benchmark rose as stellar quarterly results from NVIDIA stoked a global rally and demand for technology stocks. France’s CAC 40 Index gained 2.6% w/w, Italy’s FTSE MIB added 3.1% w/w, and Germany’s DAX advanced 1.8% w/w. The UK’s FTSE 100 Index was little changed, reflecting weakness in mining and energy stocks. Meanwhile, early PMI data for February suggested that the Eurozone economy could be stabilizing, helped by a recovery in the services sector. A provisional estimate of the HCOB Eurozone Composite PMI for output rose to 48.9 from 47.9 in January, indicating an eight-month high but still in contractionary territory. (PMI readings below 50.0 indicate that business activity shrank.). Despite this, the composite PMI for Germany’s economic output declined for the eighth month in a row, with output also experiencing a decline in France. Nevertheless, output in the rest of the Eurozone expanded for a second consecutive month running. On the monetary side, Bank of England (BoE) Governor, Andrew Bailey told a parliamentary committee that he was “comfortable” with investors betting on rate cuts this year, although he also asserted that the economy was “showing distinct signs of an upturn” after a recession last year. He added: “We do not endorse the market curve. We are not making a prediction of when or by how much [we will cut rates]. But…it’s not unreasonable for the market to think that.”
In Asia, we witnessed similar sentiments, with financial markets in China recording gains as recovery hopes rose following buoyant holiday spending during the prior week’s Lunar New Year holiday. The Shanghai Composite Index rose by 4.9% w/w, while the blue-chip CSI 300 gained 3.7% w/w. Meanwhile, in Hong Kong, the benchmark Hang Seng Index advanced by 2.4% w/w. In light of recent monetary policy updates, the People’s Bank of China (PBoC) injected RMB 500 billion into the banking system via its medium-term lending facility, balancing against RMB 499 billion in maturing loans. As anticipated, the lending rate remained unchanged. According to PBoC, the operation was targeted at maintaining ample liquidity in the banking system. Elsewhere in Japan, Thursday saw Japanese equities climbing a new all-time high, with the Nikkei 225 Index breaking the previous record set more than 30 years ago in December 1989. Concurrently, the broader TOPIX also finished at its highest level since February 1999, reflecting Japan’s sustained return to economic growth and robust corporate profitability which have bolstered investor confidence. The optimism surrounding Japanese equities was further buoyed by Bank of Japan Governor Kazuo Ueda’s assurance of the likelihood of continued moderate inflation alongside wage growth. As financial markets remain vigilant, attention is keenly focused on the Central Bank’s timeline for concluding its negative interest rate policy and transitioning away from years of exceptionally loose monetary policy.
In the oil market, oil prices posted a weekly decline after a US Central Bank policymaker indicated interest rate cuts could be delayed by at least two more months. Despite this, there are indications that a healthy fuel demand and supply concerns could revive prices in the coming days. Notably, the Fed has held its policy rate steady in a 5.25% to 5.5% range since last July. Minutes of its meeting last month show most central bankers were worried about moving too quickly to ease policy. That said, Brent crude and WTI crude oil prices declined by 2.2% w/w and 3.4% w/w to close at $81.62/bbl. and $76.49/bbl. respectively.
This week in the US, notable economic releases include the Personal Consumption Expenditures (PCE) Inflation data (this data is closely watched by the Fed as it discloses further information on the direction of Inflation in the US) and the ISM manufacturing PMI report (which calculates manufacturing activities in the US, a strong indicator of economic resilience through increasing productivity). We expect mixed sentiments toward global equities, with large-cap stocks poised to continue in bullish strides (particularly technology-based stocks).
Macroeconomic Highlights
Nigeria’s real Gross Domestic Product (GDP) grew by 3.46% y/y in real terms in Q4-2023 compared to 3.52% recorded in Q4-2022. The Q4-2023 readings is lower than that of Q4-2022, however higher than 2.54% recorded in Q3-2023. Despite the ongoing challenges posed by the macroeconomic environment, including persistent global and domestic inflationary pressures, a depreciating Naira, and elevated importation costs, the economy showed resilience in Q4-2023. On an annual basis, Nigeria’s real GDP advanced by 2.74% in FY-2023 relative to the 3.10% growth recorded in FY-2022.
KPMG has been commissioned by the Nigerian Communications Commission (NCC) to carry out a cost-based study for the telecoms industry. The study will reflect the current economic conditions on both voice and data services of telecoms operators. Similarly, KPMG is expected to recommend the most appropriate pricing structure for the industry. Consequently, there may be a hike in the cost of telecom services depending on the recommendations of the ongoing study by KPMG.
According to a report by the National Bureau of Statistics (NBS), Nigeria’s monthly petrol import has reduced by about 1bn litres since fuel subsidy was removed in June by President Bola Ahmed Tinubu. The report showed that Nigeria did not produce a litre of Premium Motor Spirit (PMS) locally in 2021, 2022, and in the first half of 2023. Stated in the Petroleum Products Distribution Statistics Half Year 2023, PMS truck out stood at 11.48bn litres, indicating a 5.83% decrease when compared to 12.19bn litres recorded in the first half of 2022.
In January 2024, government coffers saw a rise in total revenue to N2.07 trillion, as reported by the Federal Allocation Accounts Committee (FAAC). Out of this sum, N1.15 trillion was disbursed to the Federal Government, States, and Local Government Area Councils. Bawa Mokwa, the Director of Press and Public Relations at the Office of the Accountant-General of the Federation, noted that this amount distributed is N29 billion less than the N1.44 trillion disbursed in January 2023.
Nigeria’s broad money supply reached a historic peak of N93.72 trillion in January 2024, as reported by the Central Bank of Nigeria (CBN). This figure marks a remarkable 76.0% surge from the N53.14 trillion recorded in January 2023, indicating a significant year-on-year growth of N40.48 trillion. In comparison to December 2023, which stood at N78.74 trillion, this represents a substantial 19.0% increase, amounting to N14.98 trillion.
This week, we expect the macroeconomic environment to be quiet in the absence of any major economic releases.
Domestic Equities: Bearish Sentiments Resumed…ASI down 3.4%
Last week, the local equities market closed in the red zone as negative investors sentiments dominated the market. Investors remained biased towards risky assets given the high rates and yield offerings in the money market and bonds market, respectively. Notably, share price depreciation in large-cap stocks, DANGCEM (-10.0%) and MTNN (-10.0%) weighed on the local bourse. As a result, the benchmark All Share Index (NGX-ASI) declined by 344bps w/w to print at 102,088.30 points. Hence, YTD return weakened to 36.5%, while market capitalisation fell by N2.0tn to print at N55.9tn. Activity level declined, as the average value and volume of stocks traded fell by 13.5% w/w and 11.7% w/w to settle at N6.3bn and 275.4mn units.
On a sectorial level, performance was mainly bearish as three (3) of the five (5) sectors under our coverage closed in the red zone. The Insurance sector (-8.9%) led the laggards due to share price depreciations in MANSARD (-10.2%), CORNERST (-12.4%) and NEM (-14.3%). Trailing behind were the Industrial goods (-7.9%) and Banking (-2.1%) sector following selloffs in DANGCEM (-10.0%), ACCESSCOR (-6.9%), UBA (-4.0%), ETI (-7.0%) and STERLING (-18.7%) On the flip side, the Consumer goods sector (+2.0%) led the gainers owing to buy-interests in BUAFOODS (+6.3%) Lastly, the Oil & Gas sector climbed by 1bp on account of gains in ETERNA (+0.3%).
On corporate action, Access Holdings Plc announced the change in the name of its insurance brokerage subsidiary “Megatech Insurance Brokers Limited” to “Access Insurance Brokers Limited” following the receipts of required regulatory approvals. The name change is meant to align the subsidiary’s identity with the Access brand and drive optimisation of business opportunities. The subsidiary will continue to operate within the regulatory framework set by the National Insurance Commission.
This week, we anticipate the bearish sentiments amongst investors to persist in the local equities market given the recent developments in the fixed-income market. The impact of the high yields in the fixed-income market will continue to drive sell-offs as investors switch their asset classes to less risky assets. Other headwinds to the equities market are the uncertainties surrounding interest rate decision and the possible “HIKE” in Monetary Policy Rate (MPR) by the Monetary Policy Committee (MPC) at their meeting scheduled for the 26th-27th February, 2024.
Money Market Review: System Liquidity Tightens Further
Last week, the financial system opened liquid with a surplus balance of N402.0bn. Due to the Debt Management Office’s primary market activity via the FGN bond auction, liquidity squeezed further. Consequently, the financial system closed the week with a N964.8bn deficit. Therefore, the average Open Repo Rate (OPR) and Overnight Rate (OVN) rose by 8.7ppts w/w and 8.8ppts w/w to settle at 24.91% and 25.75% respectively.
Similarly, on 21-Feb, the Central Bank of Nigeria (CBN) rolled over N265.5bn worth of maturing NT-bills across the 91-day, 182-day and 364-day bills. At the auction, investor bids totaled N2,237.95bn, indicating a 8.4x bid-to-cover ratio. The CBN sold N1,589.4bn worth of bills. The stop rate on the 91-day and 182-day bills fell to 17.0% (-24bps) and 17.0% (-100bps), respectively. The stop rate on the 364-day bill remained unchanged at 19.0%.
In the secondary NT-bills market, we observed bearish sentiments across the curve. As a result, the average yield on NT-bills rose by 120bps w/w to close at 16.67% (previously 15.47%). On the other hand, the average yield on OMO bills fell by 6bps w/w to settle at 17.76%. (previously 17.82%).
This week, in the absence of any maturity during the week, we anticipate depressed liquidity in the financial system. Thus, FTDs and money market rates will trend higher this week. Also, given our expectation of an aggressive rate hike at the Monetary Policy Committee (MPC) meeting scheduled for the 26th and 27th of February, we expect renewed interest in fixed income instruments, particularly NT-bills.
Bond Market: Bearish Sentiments Continue to Dominate the Secondary Market
On 19-Feb, the Debt Management Office (DMO) conducted an FBN Bond auction with an offer size of N2.5tn across the newly issued 2031 (7-YR) and 2034 (10-YR) papers. Investor bids fell short of the offer, totaling N1.9tn. The DMO opted to sell N1.4tn, a 1.3x bid-to-cover ratio. Thus the 2031 and 2034 closed with marginal rates of 18.5% and 19.0%, respectively.
The secondary bonds market was dominated by bearish investor sentiments amid concerns relating to the direction of the interest rate in the build-up to the Monetary Policy Committee (MPC) meeting. Thus, the average bond yield rose by 68bps to close at 16.80% (previously 16.12%). As expected, bearish sentiment resumed in the Nigerian secondary Eurobonds market. Thus, the average yields in the market rose by 20bps w/w to settle at 9.87% (previously 9.67%).
Looking forward, In the secondary bonds market, we expect the bearish sentiments to persist in line with market trends. Lastly, we expect the bearish sentiments to return to the Eurobonds market as the nation’s debt sustainability issues and FX volatility drive sell offs.
Currency Market: Naira Depreciated at the I&E Window
Last week, the Naira depreciated by 8.3% w/w at the Nigerian Autonomous Foreign Exchange Market (NAFEM) to close at N1,665.50/$, from its previous close of N1,537.96/$. At the parallel market, the Naira depreciated by 8.4% w/w to close the week at N1800.0/$ (previously, N1660.0/$). Activities in the I&E window improved, as average FX turnover fell by 17.9% w/w to settle at $178mn. Lastly, Nigeria’s external reserves rose by 60bps 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.
