March 11, 2024/United Capital Research
Global Markets: Mixed Investors’ Sentiment Prevailed
In the US, growing hopes that the Federal Reserve might begin cutting interest rates sooner rather than later appeared to help bring the large-cap S&P 500 Index and S&P Mid-Cap 400 Index to new record intraday highs, alongside the Nasdaq Composite before pulling back late Friday. Overall, investor’s focus was centered around economic data, central bank commentary and the continued surge in more speculative areas of the market such as cryptocurrencies. Fed Chair, Jerome Powell testified before Congress at midweek. While the testimony was largely seen as reiterating previous Fed talking points, it did offer some less hawkish takeaways on the timing of the path of rate cuts. In particular, Powell stated that policymakers were “not far” from having the confidence that inflation’s downtrend will be sustained, enabling them to begin cutting rates. As a result, futures markets ended the week pricing somewhat higher (71.0%, according to the CME FedWatch Tool) likelihood of a cut at the Fed’s policy meeting by June. Although the market was on course to extend its positive streak to 17 of 19, the US Job report (released on Friday) revealed further strengthening of the US labour market, as employers added 275,000 jobs in February 2024, more than consensus forecasts of around 200,000. This sparked concerns (and thus sell-offs) with regards to how soon the US Fed would begin to cut interest rates in the United States. That said, major US equity indices, DJIA (-0.9% w/w), S&P 500 (-0.3% w/w), and NASDAQ (-1.2% w/w) closed the week lower.
In Europe, investor sentiment was tepid for most of the week preceding the European Central Bank’s (ECB) benchmark interest rate decision. The ECB decided to leave rates unchanged i.e. the main refinancing rate at 4.5%, the marginal lending rate at 4.75% and the deposit facility at 4.0%. However, the ECB did lower its inflation and growth forecasts. The latest staff projections indicate that inflation is expected to average 2.3% in 2024, followed by 2.0% in 2025 and 1.9% in 2026. Additionally, projections for inflation, excluding energy and food, have been adjusted downward, averaging 2.6% for 2024, 2.1% for 2025, and 2.0% for 2026. Thus, most major indices ended with modest gains, hitting new all-time highs. The STOXX Europe 600 climbed by +1.1% w/w and the German Dax was up +0.4% w/w. However, the UK’s FTSE 100 Index declined by 0.3% w/w, as concerns with regards to the current recession situation in the UK continues to weigh.
The Asian stock markets witnessed mixed investors sentiments. The performance of Japan’s stock markets was mixed over the week, with the Nikkei 225 Index finishing 0.6% lower week-on-week and the broader TOPIX Index gaining 0.6% w/w. Exuberance around artificial intelligence and solid corporate earnings boosted sentiment. Investor speculation continued about the Bank of Japan’s (BoJ’s) likely monetary policy trajectory—with signs of increased conviction that the central bank could be closer to raising short-term interest rates out of negative territory than previously thought. Comments by a BoJ board member suggested that a virtuous cycle of prices rising in tandem with wages was in sight (a stated precondition for monetary policy tightening). Elsewhere, Chinese equities gained as the government’s recent market stabilization measures lifted investor confidence despite an uncertain economic outlook. The Shanghai Composite Index rose by 0.6% w/w, while the blue-chip CSI 300 added 0.2% w/w. Beijing set an economic growth target of around 5.0% this year at the National People Congress (NPC), China’s parliament, which started March 5 and ends March 11. The target was the same as last year when China’s economy officially rose by 5.2%. However, analysts said it would be hard to match last year’s growth pace, which benefited from a post-lockdown rebound in early 2023. The government set the budget deficit at around 3.0%—the same target as early last year until it was subsequently raised to 3.8% to accommodate more borrowing—and said it would issue RMB 1 trillion in special ultra-long central government bonds to support growth.
In the commodity markets, OPEC+ extended its production cuts, originally announced in Nov-2023, through Q2-2024 as expected, even as hopes for a ceasefire in Gaza continue to fade. However, concerns of slowing demand outweighed supply constraints. Thus, although ICE Brent tested recent highs of $84.0 multiple times this week, it ended down by 1.8% w/w at $81.90.
This week, the focus will shift to inflation data, beginning with the release of China’s CPI and PPI data over the weekend, US CPI data on Tuesday 12-Mar, and US PPI data on Thursday 14-Mar. The other impactful US economic data release will be Retail Sales on Thursday 14-Mar. The US Fed FOMC Media Blackout window (9-Mar to 21-Mar) will continue; therefore, we expect commentary from Fed officials to quiet down. On the fixed-income front, we expect US treasury auctions to get attention with $100.0bn on offer between the 3 and 30-year tenor. Finally, China’s National People’s Congress (5-Mar to 11-Mar) will end.
Macroeconomic Highlights
Members of the Organisation of the Petroleum Exporting Countries and its allies, (OPEC+), have announced a voluntary cut of 2.2m bpd for the second quarter of 2024. This is aimed at supporting the stability and balance of oil markets. The additional voluntary cuts were announced by the following OPEC+ countries, Saudi Arabia, 1,000bpd; Iraq, 220,000bpd; United Arab Emirates, 163,000bpd; Kuwait, 135,000bpd; Kazakhstan, 82,000bpd; Algeria, 51,000bpd; and Oman, 42,000bpd for the second quarter of 2024. Afterwards, these voluntary cuts will be returned gradually, subject to market conditions.
Nigerian banks have increased their lending rates following the record hike in the Monetary Policy Rate (MPR) by the Central Bank of Nigeria (CBN), in a development that will see businesses and individuals with existing loan facilities with the banks pay more to service those loans. Zenith Bank raised its interest rate by 500bps to 30% from 25%, GT Bank raised theirs by 500bps, and Stanbic IBTC raised theirs by 300bps.
According to the Acting Director of Corporate Communications of the CBN, Mrs. Sidi Ali, there was a surge in foreign exchange inflow into the economy during February 2024. This increase is attributed to substantial growth in remittance payments from Nigerians abroad and heightened interest from foreign portfolio investors in acquiring Naira assets. She further added that, overseas remittances reached $1.3bn in February 2024, surpassing the previous month’s inflow of $300.0m by more than fourfold, and she noted that foreign investors actively participated in the Nigerian market, purchasing over $1.0bn worth of local assets last month.
The International Monetary Fund (IMF or the Fund) highlighted that Nigeria may incur an expenditure of around N7.0tn, which is about 3.0% of GDP in 2024 should the existing fuel pump price cap and electricity subsidy be upheld in 2024. The Fund further added that, the current administration has capped retail fuel and electricity prices, ostensibly to ease the impact of rapidly rising inflation on living conditions, thus partially reversing the fuel subsidy removal.
Integrated energy company, Heirs Energies, has expanded its gas supply business to the newly opened 188-megawatt power plant operated by Geometric Power Limited in Aba, Abia State. The company disclosed that it has been providing gas to TransAfam Power Limited, which has a capacity of 966MW, and First Independent Power Limited, which has a capacity of 541MW, to supply the Nigerian National Grid. The Chief Executive Officer of Heirs Energies, Osa Igiehon, further added that Heirs Energies’ gas supplies to these critical power plants not only reinforce its major role in Nigeria’s energy sector but also underscore its strategic vision in developing operational synergies throughout the energy value chain.
President Bola Tinubu has established an 11-member committee tasked with executing the recommendations outlined in the Oronsaye report, which focuses on the reorganization and streamlining of government bodies, agencies, and commissions. The committee’s role would be to assess the existing mandates of the specified parastatals, agencies, and commissions to comprehend their current duties, responsibilities, and goals, as well as decrease the cost of governance and enhance efficiency throughout the governance value chain.
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 Inflation Report for February 2024. We expect inflation to continue northward in February 2024, underpinned by the lagged effect from currency depreciation and elevated cost of petroleum
Domestic Equities: NGX-ASI Closed Higher by 2.9% w/w
Last week, the Nigerian Exchange Limited recorded a positive run, bolstered by the monumental listing by introduction of TRANSPOWER (+46.4% w/w) on the main board of the exchange (with market capitalization of N1.8trn). Renewed buy-interest in MTNN (+10.3% w/w) and BUACEMEN (+4.4% w/w) helped the performance of the bourse. However, the elevated interest rate regime in the fixed income market (catalysed by the 400bps MPR HIKE) continued a background role, stimulating bearish sentiments, particularly visible across the sectors. Overall, the benchmark All Share Index (NGX-ASI) climbed higher by 261bps w/w to print at 101,330.9 points. Hence, YTD return strengthened to 35.5%, while market capitalisation improved to N57.3tn. Reflective of the broad-based bear market was the market’s breadth (which measures investors’ sentiment), weakening to 0.4x from 0.5x, as 22 tickers appreciated while 56 depreciated.
Across sectors, overall w/w performance was mostly bearish with three (3) sectors out of the five (5) sectors under our coverage closed lower. The Insurance Sector (-5.2% w/w) recorded the most losses, led by sell-offs across NEM (-16.7% w/w), AIICO (-9.3% w/w) and MBENEFIT (-9.2% w/w). Trailing was the Banking (-1.7% w/w) and Consumer Goods (-1.2% w/w) Sectors, following share price depreciation across ETI (-17.0% w/w), ZENITHBA (-4.2% w/w), UBA (-4.8% w/w), ACCESSCO (-4.3% w/w), DANGSUGA (-5.7% w/w), NB (-10.8% w/w), GUINNESS (-17.6% w/w) and NASCON (-10.4% w/w). Conversely, the Industrial Goods (+1.6% w/w) Sector closed in the positive terrain, accompanied by gains in BUACEMEN (+4.4% w/w). Lastly, the Oil & Gas Sector closed flat without week-on-week gains.
On corporate actions, Nigerian Exchange Group (NGXGROUP) declared a proposed dividend of N0.75kobo, with qualification date set for 26 Mar-2024. NASCON Allied Industries Plc declared a proposed bonus of 2 new ordinary shares of 50 kobo to every 100 existing ordinary shares. On the other hand, Africa Prudential declared a proposed dividend of N0.45kobo, with qualification and payment date set at 15 Mar-2024 and 28 Mar-2024, respectively.
This week, we expect mixed sentiments towards equities investments, with bearish sentiment persisting at the background, motivated by the elevated interest rate regime, and further indication of MPR tightening by the CBN, in line with its inflation-targeting framework. However, we expect solid corporate actions and fundamentals to continue to spur bargain hunting among investors.
Money Market Review: System Liquidity Tightens
Last week, the financial system opened with a deficit balance of N1.6tn. This was due to the settlement of the OMO auction (conducted the previous week) to the tune of N1.1tn. During the week, the financial system was void of any inflows from coupon payments or maturities. Due to NT-bills primary market activity, the financial system became further deflated as illiquidity persisted. Therefore, we observed increased activities (an unprecedented N2.4tn borrowings) in the Standing Lending Facility (SLF) as the banks borrowed money from the Central Bank given the suppressed financial system. As a result, the financial system closed the week with a deficit balance of N2.2tn. Consequently, the average Open Repo Rate (OPR) and Overnight Rate (OVN) climbed by 475bps and 467bps w/w to settle at 28.90% and 29.91%, respectively.
In the primary market, the Central Bank of Nigeria (CBN) conducted a NT-bills auction, rolling over a total of N337.8bn worth of maturing bills across the 91-day, 182-day and 365-day bills. At the auction, investors’ demand was strong, as total subscription printed at N1.7tn. The bulk of the bids were skewed towards the longer-tenured instrument which recorded a total subscription of N1.5tn. Notably, the CBN oversold the auction, allotting a total of N1.3tn bills. Thus, the stop rates across the 91-day, 182-day and 365-day bills rose by 24bps, 50bps and 249bps to settle at 17.24%, 18.00% and 21.49%, 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 156bps w/w to close at 18.80% (previously 17.24%). Similarly, the average yield on OMO bills climbed by 89bps to settle at 18.84% (previously, 17.95%).
This week, we expect the N51.1bn worth of coupon payment and a bond maturity to the tune of N720.0bn to hit the financial system. However, given the size of deficit that already exists in the financial system, the sum total of liquidity expected is not sufficient to relieve the illiquidity situation (N2.2trn) of the financial system. Meanwhile, there is a possibility that the CBN will conduct an OMO auction to absorb the expected liquidity, leaving the financial system in deeper deficit. That said, all scenarios point to a sustained elevation of short-term rates with FTD and money market rates possibly nudging above current level. At the primary market, the CBN will roll-over a total of N161.5bn worth of maturing NT-bills across the 91-day, 182-day and 364-day bills. We anticipate that investors’ demand will be strong at the auction and stop rates are likely to inch higher (supported by the overall illiquid financial system).
Bond Market: Bearish Sentiments Dominate in the Secondary Market
The secondary bonds market was dominated by bearish investor sentiments as average bond yield rose by 76bps to close at 18.01% (previously 17.25%). Similarly, corporate bonds traded on a bearish note, as the average yield on corporate bonds increased by 83bps w/w to 20.01% (previously 19.18%).
On the other hand, we observed mild buy-interests in the Nigerian secondary Eurobonds market underpinned by the posture across key central banks in advanced economies. Further indications of easing inflationary pressures in the US renewed investors sentiments of a possible rate cuts by June-2024. Thus, the average yields in the market fell by 14bps w/w to settle at 9.71% (previously 9.85%).
Looking forward, we anticipate an overall bearish sentiment to dominate the bonds market underpinned by concerns about the FGN bond auction calendar, the nation’s fiscal health and the efficacy of its monetary policy. However, we note the expected liquidity inflow to the financial system from a maturing bond instrument may spark bullish sentiments in the market as investors may reinvest their funds. Nevertheless, we project that the bearish sentiments will outweigh the buy interests in the market.
Currency Market: Naira Depreciated at the NAFEM Window
Last week, the Naira depreciated by 5.0% w/w at the Nigerian Autonomous Foreign Exchange Market (NAFEM) to close at N1,627.40/$, from its previous close of N1,548.25/$. Meanwhile, activities in the NAFEM window improved, as average FX turnover fell by 18.0% w/w to settle at $254mn. Lastly, Nigeria’s external reserves rose by 192bps to settle at $34bn. At the parallel market, the Naira depreciated by 9.0% w/w to close the week at N1615.0/$ (previously, N1600.0/$).
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.
