March 4, 2024/United Capital Research
Global Markets: Broad-based Bullish Sentiments
Last week, the global equities market closed higher as positive sentiments on the back of stronger-than-expected economic data releases, dominated the market. In the US, the equities market recorded weekly gains driven by a tech rally as concerns lessened regarding the Federal Reserve (Fed) delaying interest rate cuts. The gains this week were largely driven by mega-cap and semiconductor-related stocks, nevertheless, many other stocks participated in upside moves. Small-cap stocks also outperformed the broader market, leading the Russell 2000 to gain 3.0%. Price actions in the US treasury market also supported the stock market rally last week. On the data front, the US core Personal Consumption Expenditure (PCE) price index, the Fed’s preferred gauge to measure inflation, rose by 2.8% y/y in Jan-2024, the lowest reading in almost three years. The result was in line with market expectations and marked a slight slowdown from the previous month’s print of 2.9% y/y. The PCE inflation report provided some relief on inflationary pressures, easing concerns and sparking speculation of a more accommodative approach from the Fed in June. Additionally, the S&P Global US Manufacturing Purchasing Managers’ Index (PMI) was revised upward to 52.2pts in Feb-2024, surpassing a preliminary estimate of 51.5pts and January’s print of 50.7pts. This latest reading indicated the swiftest expansion in the country’s manufacturing sector since Jul-2022, with increases in output and total new orders. As a result, the US indices closed on a positive note as the NASDAQ (+1.7% w/w) and S&P 500 (+0.9% w/w) closed the week higher. Meanwhile, the DIJA declined by -0.1% w/w.
In tandem, the European markets recorded w/w gains spurred by impressive economic data releases. According to Eurostat, consumer price inflation rate in the Euro Area declined to 2.6% y/y in Feb-2024, down from 2.8% y/y in the previous month. This represents the lowest rate in three months and is broadly in line with European Central Bank (ECB) President Lagarde’s previous comments that disinflation would continue in the Eurozone. Additionally, the unemployment rate in the Euro Area edged lower to 6.4% in January 2024, the lowest on record, from 6.5% in December 2023, matching market forecasts. Consequently, the Germany’s DAX (+1.8% w/w) and Europe’s STOXX (+0.1% w/w) climbed last week. Elsewhere, the UK equities market closed lower, as stronger-than-expected PMI data led investors to adjust their expectations for the Bank of England’s (BoE) rate cuts, with markets now pricing in the possibility of the first rate cut not occurring until Aug-2024. The S&P Global UK Manufacturing PMI was revised up to 47.5pts in Feb-2024, up from the preliminary estimate of 47.1pts. Despite this uptick, the PMI reading signals the 19th consecutive month of contraction due to the ongoing crisis in the Red Sea leading to disruptions in production and vendor delivery schedules. Thus, the UK’s FTSE declined by 0.3% w/w.
In the same vein, the Asian market closed bullish amid a strong rally in technology stocks and on firm expectations that major central banks will pivot to interest rate cuts this year. In another update, the Caixin China General Manufacturing PMI increase to 50.9pts in Feb-2024 from 50.8pts in the prior month, surpassing market estimates of 50.6pts. This marks the fourth straight month of growth in factory activity and the strongest pace since Aug-2023, in contrast with official data that showed an extended decline. In Japan, the annual inflation rate dropped to 2.2% y/y in Jan-2024 from 2.6% y/y in the prior month, pointing to the lowest figure in almost two years, as increases in food prices slowed. Lastly, the Indian economy expanded by 8.4% y/y in Q4-2023, the strongest growth since Q2-2022, compared to an upwardly revised 8.1% y/y in Q3-2023. As a result, the capitalisation-weighted Shanghai Composite Index (+1.7% w/w), Japanese NIKKEI (+2.1% w/w) and Indian SENSEX (+0.8% w/w) recorded weekly gains.
In the oil market, crude oil prices rose driven by speculation that OPEC+ will extend supply cuts amid lingering tensions in the Middle East. Also, the uncertainties surrounding the ceasefire talks between Israel and Hamas, as well as ongoing Houthi attacks on Red Sea shipping supported the increase in oil prices. As a result, oil prices closed higher, with Brent Crude climbing by 236bps w/w to print at $83.55/bbl. (previously, $81.62/bbl.).
This week, investors will closely track the US labour report for Jan-2024 and speeches by several Federal Reserve officials, including Fed Chair, Powell’s semi-annual monetary policy reports to the Congress. Additionally, the release of key US indicators such as the Institute of Supply Management (ISM) Services PMI, Job Openings and Labor Turnover Survey (JOLTS), factory orders, and foreign trade data. Elsewhere, the ECB and the Bank of Canada will meet this week to determine the direction of interest rates. Finally, trade data for major exporters such as Germany, France and China will also be key highlights for the week. The outcome of these data releases will shape the direction of the global equities market for the week.
Macroeconomic Highlights
The President of the Association of Bureau De Change of Nigeria (ABCON), Aminu Gwadebe, has announced that members of the association would consider mergers if the proposed guidelines for their operations go into effect. Late last week, the Central Bank of Nigeria (CBN) proposed an increase in the share capital of Bureau De Change operators to N2.0bn and N500.0m for Tier 1 and Tier 2 licences respectively. The ABCON President further added that the proposed cautionary deposit is not global practice neither are BDCs engaging in deposit-taking operations.
The Monetary Policy Committee (MPC) has voted to increase the benchmark interest rate by 400 basis points to a record 22.75% from 18.75%. The MPC also made a bold move to restrict money supply by increasing the Cash Reserve Ratio to 45.0%, maintaining a liquidity ratio at 30.0% while the Asymmetric Corridor was also raised to +200/-700, but the CRR was retained at 32.5%.
The CBN, in a circular issued and signed by the Director, Trade and Exchange Department, Hassan Mahmud, on Tuesday announced its decision to sell foreign exchange worth $20,000 to each eligible Bureau De Change operator across the country. The Apex bank further added that the allocation will be sold at a rate of N1,301/$ reflecting the lower band rate of executed spot transactions at the Nigerian Autonomous Foreign Exchange Market as of the previous trading day.
The Governor of the CBN, Olayemi Cardoso, during an investors call has said that foreign exchange backlogs have been cleared in all the banks except for five of them and they would be cleared in the next few days. He further added that Nigeria had attracted $2.0bn in foreign portfolio inflows this year.
Out of the $1.3 billion owed to gas companies by the Federal Government for supplying gas to operate gas-fired power plants nationwide, $120 million has been disbursed. Nigeria faces reduced power supply due to fewer gas suppliers and some discontinuing supply to power-generating firms because of outstanding debts. Meanwhile, the Federal Government is subsidizing electricity costs by covering the expenses of gas utilized in power generation.
This week, we expect the National Bureau of Statistics to release Selected Banking Sector Data: Sectorial Breakdown of Credit, ePayment Channels and Staff Strength (2022-Q3 2023), and also CPI and Inflation Report for February 2024.
Domestic Equities: Bearish sentiment drive selloffs…ASI down 3.27% w/w
The Nigerian Exchange Limited continued to be driven by bearish sentiments across board in the wake of the MPC’s decision to aggressively hike the Monetary Policy Rate (MPR) by 400bps. Noteworthily, selloffs in MTNN (-18.91% w/w) and BUACEMEN (-10.0% w/w) were the primary index movers. The benchmark All Share Index (NGX-ASI) fell by 327bps w/w to print at 98,751.98 points. Hence, YTD return weakened to 32.07%, while market capitalisation fell to N54.04tn. Also, investors’ sentiment as measured by the market’s breadth strengthened to 0.5x from 0.2x, as 27 tickers appreciated while 54 depreciated.
Across sectors, overall w/w performance was bearish as all the five (5) sectors under our coverage closed lower. The Industrial Goods Sector (-3.87% w/w) and Insurance Sector (-3.4% w/w) led the losers due to selloffs in BUACEMEN (-10.0% w/w), MANSARD (-8.77% w/w), CORNERST (-8.68% w/w), and SUNUASSU (-18.18% w/w). These was followed by loses in the Consumer Goods Sector (-2.62% w/w), the Oil and Gas Sector (-1.55% w/w), and the Banking Sector (-0.1% w/w) following selloffs in NESTLE (-18.18% w/w), DANGSUGA (-9.23% w/w), CONOIL (-10.0% w/w), ETERNA (-10.83% w/w), UBA (-3.77% w/w) and FIDELITY (-4.31% w/w).
On corporate actions, MTN Nigeria Plc released its FY-2023 financial results. In the period, the company grew its Service Revenue by 22.4% y/y to N2.5tn. However, due to a 341.9% y/y rise in Net finance costs to -N951.5bn, primarily due to a -N740.4bn net foreign exchange loss, the company made a Loss Before Tax of -N177.9bn and a Loss After Tax of -N137.0bn.
This week, we expect mixed sentiment towards equities investments, with bearish sentiments possibly outweighing positive sentiments as a direct result of the high yields in the fixed income market. However, we expect increased appetite among investors towards corporates in the financial services sector, as investors look to continue to position themselves in dividend-paying stocks ahead of full-year dividend declarations.
Money Market Review: Short Term Rates Continue Northward Gaze
Following the MPC’s decision to hike interest rates, we observed a northward trajectory of yields across the curve. Investors participation, foreign and domestic alike, witnessed significant improvement. At the same time, the financial system was broadly illiquid, given the absence of maturity and the CBN’s stance with mop-up mechanisms (particularly OMO). Last week, the liquidity situation barely received boost as the financial system wrapped the week with a deficit of -N97.6bn. Activities at the CBN’s Standing Lending Facility (SLF) remained strong, recording a high of N739.6bn on Tuesday 27 Feb-2024. Lastly, funding rates remained elevated in tandem with the yield environment. The weekly average of Open Repo Rate (OPR) and Overnight Rate (OVN) rose by 1.2ppts w/w and 1.4ppts w/w to settle at 24.15% and 25.25% 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 57bps w/w to close at 17.24% (previously 16.67%). On the other hand, the average yield on OMO bills climbed by 19bps w/w to settle at 17.95%. (previously 17.76%).
This week, we expect money and fixed income market rates to remain largely influenced by the recent 400bps hike by the Cardoso-Led MPC. On the other hand, the depressed system liquidity will continue to support rates elevation at the different market segments. As a result, we anticipate funding rates between banks and secondary market NT-bills to remain elevated at current levels, with a likelihood of slightly trending higher. Lastly, given the potential improvement in liquidity in March-2024, investors may be seen with improved appetite for short-term instruments, with minimum demand for duration exposure.
Bond Market: Bearish Sentiments Continue to Dominate the Secondary Market
At the secondary market for bonds, we observed sustained bearish sentiments, following the MPC decision to HIKE interest rates in its last meeting, in a bid to reduce the negative real returns, thereby attracting foreign investments. The bearish mood was supported by the broad-based illiquid financial system. That said, the average bond yield rose by 45bps to close at 17.25% (previously 16.80%). At the corporate bonds segment, we observed similar bearish sentiments as indicated by the 59bps climb in average yield of corporate bonds at secondary levels to print at 19.18% (previously 18.59%)
In the Nigerian Eurobonds market, we observed marginal bullish sentiments, as debt sustainability issues continued to weigh. However, indications across key central banks in advanced economies continued to play a key role in investors’ interest toward SSA Eurobonds. The average yields in the market tapered by a 2bps w/w margin to settle at 9.85% (previously 9.87%).
This week, we expect the bearish mood toward duration exposure to persist at secondary market level. We do not expect any Debt Management Office (DMO) activity at primary market level. For Nigerian Eurobonds, we expect mixed sentiments to continue, with the debt sustainability and FX volatility issues standing as key bearish motivators. The neutral stance across key central banks in advanced economies will continue to boost the attractiveness of SSA Eurobonds.
Currency Market: Naira Depreciated at the I&E Window
Last week, the Naira appreciated by 7.0% w/w at the Nigerian Autonomous Foreign Exchange Market (NAFEM) to close at N1,548.25/$, from its previous close of N1,665.50/$. At the parallel market, the Naira appreciated by 11.1% w/w to close the week at N1600.0/$ (previously, N1800.0/$). Activities in the I&E window improved, as average FX turnover rose by 32.0% w/w to settle at $248mn. Lastly, Nigeria’s external reserves rose by 89bps to settle at $33.7bn.
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.
