March 25, 2024/United Capital Research
Global Markets: Broad-based Bullish Sentiments
Last week, the global equities market closed higher as positive sentiments emanating from stronger-than-expected economic data releases and interest rate decisions dominated the market. In the US, the equities market recorded weekly gains largely in response to the Federal Open Market Committee (FOMC or the Committee) policy announcement. The Committee voted unanimously to leave the target range for the fed funds rate unchanged at 5.25-5.50% for a fifth consecutive time in it Mar2024 meeting. Additionally, buy-interest increased due to the closely watched dot plot included in the updated Summary of Economic Projections (SEP). The SEP shows that the Fed still anticipates three rate cuts this year despite recent inflation readings coming in hotter than expected. The Fed Chair, Jerome Powell’s press conference following the FOMC’s policy announcement did not deter the influx of bullish sentiments in the market. Powell largely reiterated prior comments, indicating that the Fed needs more evidence that inflation is moving toward the 2.0% target before cutting rates. Notably, rate cut expectations moved up this week, contributing to the positive bias in the stock market. According to the CME FedWatch Tool, the implied likelihood of a rate cut in Jun-2024 rose to 75.4% from 58.8%. Lastly, the price action in US Treasuries also contributed to the positive bias in the stock market. Hence, the yields on the 2-YR and 10-YR notes declined by 12bps and 8bps to settle at 4.60% and 4.22%. As a result, the US indices closed on a positive note as the NASDAQ (+2.9% w/w), DIJA (+2.0% w/w) and S&P 500 (+2.3% w/w) closed the week higher.
In tandem, the European markets recorded w/w gains as dovish comments from a typically hawkish European Central Bank policymaker boosted hopes that the bloc’s central bank might start cutting rates soon. Additionally, positive economic data supported the equities market, as the March’s Purchasing Managers’ Index (PMI) showed that private sector activity was nearing stabilisation after nine consecutive months of contraction. The HCOB Eurozone Composite PMI rose marginally to 49.9pts in Mar-2024, up from 49.2pts in the previous month. Elsewhere in the UK, the Bank of England (BoE) maintained borrowing costs at a 16-year high of 5.25%, with two officials adjusting their previous stance of advocating for higher rates. This decision followed recent data showing a decline in inflation to its lowest point in nearly two and a half years, albeit remaining above the bank’s target level of 2.0%. The UK’s inflation rate dropped to 3.4% y/y in Feb-2024, down from the 4.0% recorded in both Jan-2024and Dec-2023. This marks the lowest rate since Sep-2021, driven by a slowdown in price increases for food and non-alcoholic beverages. Consequently, the UK’s FTSE (+2.6% w/w), Germany’s DAX (+1.5% w/w) and Europe’s STOXX (+0.9% w/w) climbed this week. Conversely, the France’s CAC fell by 0.2% w/w.
Meanwhile, the Asian market closed mixed amid loss of investors’ confidence in China and improved sentiments in the Japanese market. Foreign Direct Investment (FDI) into China fell by 19.9% y/y to CNY 215.1bn or $30.0bn in the first two months of 2024. A deepening property crisis and signs of soft domestic demand also weighed on investors’ confidence. As a result, the Shanghai Composite declined by 0.2% w/w. In Japan, investors reacted to the latest inflation figures, which showed that the headline and core inflation rates both rose to a four-month high of 2.8% in Feb-from 2.2%, supporting the Bank of Japan’s (BOJ) decision to end negative interest rates. The rise is mainly due to base effects, as energy subsidies introduced by the government in February 2023 are losing their effect. Thus, the Japanese NIKKEI (+5.7% w/w) and Indian SENSEX (+0.3% w/w) recorded weekly gains.
In the oil market, crude oil prices rose during the week. This was driven by optimism about anticipated tighter markets following softer exports from Iraq and Saudi Arabia. Iraq, the second biggest producer in the Organization of Petroleum Exporting Countries (OPEC), stating that it will cut crude exports to compensate for higher production so far in 2024. The move is primarily to absorb the oversupply witnessed in January and Feb-2024 and to showcase the nation’s commitment to stick to its voluntary oil cuts as part of the OPEC+ agreement. As a result, oil prices closed higher, with Brent Crude climbing by 26bps w/w to print at $83.57/bbl. (previously, $85.34/bbl.).
This week, the focal point in the United States will revolve around the Personal Consumption Expenditure (PCE) index, alongside reports on personal income and spending. There will also be speeches by several Fed officials including Fed Chair, Jerome Powell. Other key data points include the final Q4-2023 Gross Domestic Product (GDP) growth reading and consumer confidence. Elsewhere, the spotlight will shine on the German economy, where market analysts will be keen on updates regarding consumer confidence, retail sales, and the unemployment rate. Lastly, we anticipate the release of Japan’s unemployment rate, industrial production, retail sales, and housing starts. The outcome of these data releases will shape the direction of the global equities market for the week.
Macroeconomic Highlights
The Central Bank of Nigeria (CBN) has announced the 294th meeting of the Monetary Policy Committee, a crucial gathering that shapes the nation’s economic policies. This was made known in a document uploaded on the apex bank’s website. The two-day event is scheduled to be held on Monday, 25 March and Tuesday, 26 March 2024, at the CBN’s headquarters in Abuja. Giving the current macro-economic environment and the notes from the last MPC meeting, the market expects more tightening measures.
The CBN has announced that it has successfully cleared all valid foreign exchange backlogs, effectively eliminating a legacy burden. This was made known by the CBN’s Acting Director of Corporate Communications, Mrs. Sidi Ali. This fulfils a commitment made by the CBN Governor, Mr. Olayemi Cardoso, who vowed to address an inherited backlog of $7.0bn in claims. Additionally, the CBN reported a significant increase in external reserves, rising by $993.mn to $34.11bn as of 07 March 2024 as against $33.12bn recorded in February, the highest level in eight months. The m/m increase was driven by a marked advance in remittance payments by Nigerians overseas, as well as higher purchases of local assets, including government debt securities, by foreign investors.
The Group Chief Executive Officer of the Nigerian National Petroleum Company Limited (NNPCL), Mele Kyari during a Leadership Dialogue Session at the CERAWeek Conference in Houston, United States, on Tuesday announced that the Final Investment Decision (FID) for the $25.0bn Nigeria-Morocco Gas Pipeline Project will be made in December 2024. He further added that, Nigeria was fighting the menace of crude oil theft frontally and through the joint efforts of government and private security agencies, there have been some reasonable improvements in the restoration of the nation’s crude oil production.
The latest Company Income Tax report for Q4-2023 by the National Bureau of Statistics (NBS), specifically noted that income tax paid by manufacturing companies in the sector fell to N145.06bn in Q4-2023 from N155.72bn in Q3-2023. On a year-on-year basis, income tax paid by manufacturing companies rose by 31.4% from N110.4bn in Q4-2022. Despite the constraints, analysis of the sectoral contribution shows that the manufacturing sector contributed the largest share at 12.84% to the aggregate Company Income Tax (CIT) valued at N1.13tn generated within the period.
The Federal Government is in talks with the World Bank to complete the processes of obtaining over $1.0bn loans to address the challenges facing Internally Displaced Persons (IDP)and their host communities, as well as bolster rural access and agricultural marketing in the country. While the IDP loan is put at $500.0mn, the rural access and agricultural marketing project loan is estimated at $550.0mn. The Solutions for the IDP and Host Communities Project, estimated for an appraisal date of 11 February 2025, and slated for approval on 08 April 2025, represents a targeted effort to improve the lives of millions of persons displayed due to internal conflict, violence, and climate challenges.
This week, we expect the National Bureau of Statistics to release Federation Account Allocation Committee (FAAC) February 2024 Disbursement, Q4-2023 Terms of Trade, Report National Agricultural Sample Census Report, Nigeria Domestic and Foreign Debt (Q4-2023) Report, and Nigeria Labour Force Survey Report Full Year 2023.
Domestic Equities: Bearish Sentiments Prevailed…ASI Down 42bps.
Last week, the local equities market closed on a negative note. Notably, share price depreciation in large-cap stock, MTNN (-12.25% w/w), drove the local bourse southwards. As a result, the benchmark All Share Index (NGX-ASI) fell by 42bps w/w to print at 104,647.37 points. Hence, YTD return weakened to 39.95%, while market capitalisation closed at N59.17tn. Activity level declined, as the average value and volume of stocks traded fell by 8.0% w/w and 2.1% w/w to settle at N9.75bn and 347.03mn units.
On a sectorial level, performance was bullish as four (4) out of the five (5) sectors under our coverage closed in the green. The Insurance Sector (+8.92% w/w) led the gainers following bargain-hunting activities in NEM (+45.11% w/w), MANSARD (+11.76% w/w) and AIICO (+7.07% w/w). The Industrial Goods Sector (+0.57% w/w) climbed due to share price appreciation in BUACEMEN (+1.56% w/w). Trailing behind were the Banking (+4.19%) and Oil and Gas (+0.30% w/w) Sectors due to buy-interests in UBA (+11.11% w/w), ETI (+11.59% w/w) and ETERNA (+9.24% w/w). On the flip side, the Consumer Goods Sector (-0.37% w/w) lost on account of losses in DANSUGA (-3.67% w/w).
On corporate action, Access Bank Plc announces acquisition plans for National Bank of Kenya from KCB Group Plc, solidifying its presence in the East African market. The agreement, signed recently, marks Access Bank’s second acquisition in Kenya following its purchase of Transnational Bank Ltd. in 2019. CEO Roosevelt Ogbonna sees this transaction as a pivotal step in the bank’s five-year strategic plan, anticipating enhanced scale and market presence in Kenya. Africa’s rapid population growth and significant unbanked population motivate Access Bank’s expansion efforts, recognizing Kenya’s mature lending market and faster economic growth compared to Nigeria. Access Bank aims to double its assets outside Nigeria by 2027, amidst domestic fintech competition and broader continental expansion plans, including recent acquisitions in Kenya and operations in other East African countries.
Looking ahead, we expect activities in the fixed income market to continue to stand as key demotivator for equities investments. Also, the indications of hawkish stance by the CBN in its next meeting to be held on Monday, 25 and Tuesday 26 March 2024, in line with its inflation targeting framework, will continue to also cast a bearish spell across risk asset classes. However, given the level of activity by the bulls in the market, pending the release of the financial statements of some corporates (particularly the top tier banks), the dividend season and strong corporate resilience, we expect further bargain hunting for the rest of the week. Given the recent bearish run, a lot of stocks drove further close to the oversold region, reflecting potential upsides. Ultimately, we expect strong corporate actions and dividend announcements to stand as a primary motivator toward the equities market, through to the first two weeks of April.
Money Market Review: System Liquidity Improved
Last week, the financial system started with a deficit balance of N351.5bn. During the week, liquidity in the financial system improved bolstered by CRR refunds (amount unspecified) by the CBN. As a result, despite the settlement of the primary market auction conducted on Monday, 18 March 2024, the financial system closed with a mild surplus of N52.8bn. As a result of the improved system liquidity, funding rates between banks dropped. Consequently, the weekly average of the Open Repo Rate (OPR) and Overnight Rate (OVN) declined by 364bps and 368bps w/w to settle at 27.31% and 28.08%, respectively.
In the secondary NT-bills market, we observed bullish sentiments across the curve, as investors weighed in the possibility that short-term rates may have peaked. That said, the average yield on NT-bills fell by 19bps w/w to close at 18.61% (previously 18.80%).
This week, we expect the N164.3bn worth of coupon payments to hit the financial system. This is expected to improve the available system liquidity. The CBN will conduct an NT-Bill auction in a bid to roll over maturing bills to the tune of N142.2bn. At the auction, we expect short-term rates to slide lower, owing to improved system liquidity. The outcome of the MPC meeting is expected to have a casual impact on short-term rates. Overall, we expect short-term rates like FTD and money market rates to remain elevated around current levels, albeit volatile, with a higher likelihood of inching lower on the back of improved system liquidity.
Bond Market: Marginal Rates Climbed at PMA
The Debt Management Office (DMO) conducted a primary market auction, with bond offering to the tune of N450.0bn across the 3-Yr “MAR 2027” (newly opened), 7-Yr “FEB 2031” (reopened) and 10-Yr “FEB 2034” (reopened) bond papers. At the auction, investors’ sentiment was strong, as indicated by the oversubscription rate of 1.4x. The total demand at the auction printed at N615.0bn. The CBN oversold (N475.7bn) at the auction by 1.1x. Given that pricing power was more skewed toward the investors, stop rates on the reopened papers nudged higher. For context, the 7-Yr and 10-Yr papers saw their marginal rates climb by 150bps and 145bps, to record at 20.00% and 20.45%. Marginal rate on the newly opened 3-Yr paper printed at 19.94%.
The secondary bonds market was dominated by bearish investor sentiments as investors continued to price in another interest rate hike. Also, the outcome of the PMA bolstered selloffs. That said, average bond yield rose by 86bps to close at 19.26% (previously 18.40%). Similarly, corporate bonds traded on a bearish note at the secondary market level, as the average yield on corporate bonds climbed by 129bps w/w to 21.27% (previously 19.98%). In the secondary market for Nigerian Eurobonds, we observed buy-interests, following statements and indications by the Fed for up to three (3) rate cuts this year. This sentiment is in tandem with sentiments across SSA Eurobonds, given the attractiveness of these Dollar denominated instruments. That said, the average yields in the market fell by 60bps w/w to settle at 9.48% (previously 10.08%).
This week, we expect the outcome of the MPC’s meeting (slated for Monday and Tuesday 25 & 26 March 2024) to strongly influence the direction of bond yields at both primary and secondary market levels. For the Eurobonds market, we anticipate the broad-based bullish sentiments toward SSA Eurobonds to persist, as investors continue to position themselves for a potential shift in global capital flow in H2-2024.
Currency Market: Naira Appreciated at the NAFEM Window
Last week, the Naira appreciated by 10.6% w/w at the Nigerian Autonomous Foreign Exchange Market (NAFEM) to close at N1,431.49/$, from its previous close of N1,602.75/$. Meanwhile, activities in the NAFEM window improved, as average FX turnover rose by 58.3% w/w to settle at $328mn. Lastly, Nigeria’s external reserves fell by 25bps to settle at $34.3bbn. At the parallel market, the Naira appreciated by 7.8% w/w to close the week at N1480.0/$ (previously, N1605.0/$).
This week, we expect the Naira to further improve (though modestly) as pressure on the Naira moderate and CBN’s initiatives to stabilize the Naira crystalise.
