April 8, 2024/United Capital Research
Global Markets: Mixed Sentiments Toward Risk Assets Remained Unabated
Equities Markets in the United States (US) got off to a shaky start to the week and the second quarter, as strong economic readings raised concerns around if and when the Fed will be able to start cutting rates. As a result, large-cap US indexes pulled back from record highs, with US Treasury yields increasing in response to signs that the manufacturing sector might finally be gaining traction. For context, US stocks saw their first real semblance of weakness last week, sparked by Monday’s release of the ISM Manufacturing report that revealed that manufacturing activity has rebounded, returning to expansionary territory for the first time since late 2022. This exemplified the “good-news-is-bad-news”, wherein investors interpreted the acceleration in economic activity as an indication that the Fed might be able to cut rates as promptly or as extensively as many had hoped for. However, the Friday jobs report from the Labor Department, typically among the most closely watched indicators of growth and inflation pressures, appeared to reassure investors of a thriving economy. Employers added 303,000 jobs in March, well above expectations, and the most in nearly a year. Positively, from a wage pressures standpoint, the solid gains came with only a modest increase in average hourly wages, from 0.2% in February to 0.3% in March. Part of the reason may have been a solid rise in the labor force participation rate, suggesting that employers might be enjoying an easier time filling empty slots. Given the adverse reaction to the manufacturing data, we opine that the lift in stock prices following Friday’s hot employment report is encouraging. Interest rates also rose in response, so markets appeared to acknowledge that the jobs data likely challenges the Fed’s ability to lower rates soon. Overall performance drove a pullback of major US indexes from record highs with the DJIA (-2.3% w/w), S&P 500(-1.0% w/w), and NASDAQ (-0.8% w/w) all recording weekly losses.
In Europe, shares took a downturn in tandem with trends in the US markets, with the pan-European STOXX Europe 600 Index falling by 1.2% w/w during the holiday-shortened week, snapping 10 straight weeks of gains. Hawkish comments from some US’ policymakers and higher crude oil prices cast doubt on the timing of interest rate cuts. Other major European indexes including France’s CAC 40 Index (-1.8% w/w), Germany’s DAX (-1.7% w/w), Italy’s FTSE MIB (-2.1% w/w) and the UK’s FTSE 100 Index (-0.5% w/w) recorded losses in tandem. On a positive note, economic data in the Eurozone disclosed that Headline annual inflation in the Eurozone decelerated more than forecast to 2.4% in March 2024 from 2.6% in February 2024. Core inflation, which excludes volatile food and energy prices, also slowed to 2.9% from 3.1%. Also, the minutes from the European Central Bank (ECB’s) March meeting showed that policymakers were increasingly confident that inflation was slowing to the target level in a timely manner. The majority felt that the case for rate reductions was strengthening but that it would be prudent to wait for key economic data that are scheduled to come out after the ECB’s April meeting.
In Asia, Chinese equities advanced in a holiday-shortened week, as data added to evidence that the economy could be gaining traction. The Shanghai Composite Index gained 0.9% w/w, while the blue-chip CSI 300 added 0.9% w/w. In Hong Kong, the benchmark Hang Seng Index rose by 1.1% w/w. Markets in mainland China were closed on Thursday and Friday in observance of the Qingming Festival, also known as Tomb Sweeping Day, when Chinese people honor their ancestors by cleaning and placing offerings on their tombs. Hong Kong markets were closed on Thursday but reopened on Friday. Meanwhile, Japan’s stock markets fell over the week, with the Nikkei 225 Index falling by 3.4% w/w and the broader TOPIX down by 2.4% w/w. Heightened geopolitical tensions and uncertainty about the US Federal Reserve’s monetary policy trajectory weighed on global equities in general, while in Japan, speculation remained rife about whether the authorities would step in to prop up the yen. The Finance Ministry reasserted its readiness to respond to excessive moves in the foreign exchange markets, as the Japanese currency hovered around the high-JPY 151 level against the US Dollar, its lowest level in about 34 years. Over the past three years, weakness in the yen has provided a significant boost to Japan’s exporters—companies that tend to derive a major share of their earnings from overseas. BoJ Governor, Kazuo Ueda signaled that the central bank could use monetary policy to address the historic weakness in the yen. Its primary concern is the impact of the Japanese currency’s weakness on price and wage growth, which have appeared to be on a reflationary trend. The BoJ targets a 2.0% level of inflation in a sustainable manner, accompanied by growth in wages, and asserts that monetary policy normalization hinges on these preconditions being met.
In commodity markets, oil prices settled higher on Friday, notching strong gains for the week. Geopolitical tensions bolstered expectations of potential supply disruptions, contributing to the increase. However, the gains were tempered by reduced expectations of imminent Fed rate cuts following a robust jobs report. Looking at it from another perspective, the exceptionally strong nonfarm payrolls report dampened expectations of the Federal Reserve initiating interest rate cutting as early as June. Such a rate-cutting cycle would likely increase economic activity and thus demand for crude oil in the world’s largest economy. However, crude benchmarks remained on track for their best week in two months on the prospect of worsening geopolitical conditions in the Middle East, especially amid increased saber rattling between Israel and Iran. A broader outbreak of war in the Middle East potentially heralds more supply disruptions for oil and could further tighten markets in the coming months. Expectations of tight markets were reinforced by the Organization of Petroleum Exporting Countries (OPEC)and its allies deciding to maintain their current production cuts. Additionally, positive economic readings from top importer China, boosted traders’ optimism over stronger oil imports in the country this year. That said, the benchmark Brent Crude Oil price climbed by 3.9% w/w to record at $90.92/bbl, (previously, $87.48/bbl).
For the US, we construe the positive stock-market reaction on Friday as a potential indication that the market is still assigning some probability to the economy continuing to hold up alongside a downtrend in inflation that is sufficient to allow the Fed to still cut rates this year. As a result, we expect strong emphasis on upcoming important economic releases including US CPI Inflation data and FOMC minutes from the March meeting. In Europe, sentiments are expected to be mildly in tandem with sentiments in the US, with improving economic data in Europe signaling further inclination of the ECB toward faster/more interest rate cut decisions in 2024, specifically to sustain a rebounding economy.
Macroeconomic Highlights
The Debt Management Office (DMO) stated that Nigeria’s total public debt stood at approximately N97.34tn ($108.23bn) as of December 2023. This figure was an increase of 146.0% from N39.56tn ($95.77 bn) at the end of 2022. The major reason for the significant increase is the addition of CBN’s N20.0trillion ($48.0billion) in Ways and Means lending to the government and about 60.0% devaluation of Naira. Nigeria owes countries like China, France, Germany, and Japan (bilateral debts) and multilateral institutions like the World Bank, International Monetary Fund (IMF), Islamic Development Bank (IsDB) and the African Development Bank (AfDB).
The Nigerian Electricity Regulatory Commission (NERC) has approved an electricity rate hike for Band A consumers, raising the rate from N66.0/kilowatt hour to N225.0/kilowatt hour, affecting roughly 15.0% of the nation’s 12 million electricity consumers. NERC stated that the tariff hike was a response to the failure to meet necessary electricity supply hours, with some Band A customers being moved to Band B due to inadequate service.
The president has approved over N1.1trn statutory budget for the 2024 fiscal year for the FCT. The budget will impact on infrastructure development, healthcare facilities, as well as rehabilitation of schools in the FCT, amongst others. This comes on the heels of the FCT appropriation bill passing the second reading at the Senate last month.
The Manufacturers Association of Nigeria has disclosed that its members have lost at least N1.5tn in the last six months to forex-related transactions. This was made known by the Director-General of MAN, Segun Ajayi-Kadir. The disclosure came amid dissent by manufacturers, contrary to claims made by the CBN that all valid forex requests had been cleared. Several manufacturers reported outstanding Dollar requests, some of which have been left unattended for an extended period.
The Nigeria Customs Service (NCS) has recorded a decline of 15,999 (about 5.0%) in the volume of Single Goods Declarations (SGDs) for imports in the first quarter of 2024. The total volume declined from 327,492 SDGs to 311,492 between Q1-2024 and Q1-2023. According to a document released by the agency on Wednesday, there was also a bigger decline of 91,741 (about 23.0%) when compared to Q1-2022. The NCS blamed the fluctuating import duty for the major reason for the decline in the volume of SGDs.
The National Shippers Association of Nigeria (NSAN) has projected that the prices of commodities will further skyrocket due to the upward review of haulage rates by the Nigerian Shippers Council. This was disclosed by The President General of NSAN, Dr Innocent Akuvue. The council said the rates approved were in consideration of cost moderation, and cargo transport issues and were acceptable by all parties, including freight forwarders and truck owners.
This week, we expect the macroeconomic environment to be quiet in the absence of any major economic releases.
Domestic Equities: Bearish Sentiments Sustained…ASI down 1.1%
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 depreciations in banking stocks, FBNH (-14.2% w/w) and GTCO (-8.6% w/w) dragged the local bourse southwards. As a result, the benchmark All Share Index (NGX-ASI) declined by 108bps w/w to print at 103,437.67 points. Hence, YTD return weakened to 38.3%, while market capitalisation fell by N465.5bn to print at N58.5tn. Activity level improved, as the average value and volume of stocks traded rose by 23.0% w/w and 121.9% w/w to settle at N14.5bn and 919.9mn units.
On a sectorial level, performance was mainly bearish as three (3) out of the five (5) sectors under our coverage closed in the red zone. The Banking sector (-6.7% w/w) led the laggards following sell offs in ACCESSCO (-7.8% w/w), ZENITHBA (-4.5% w/w), and UBA (-5.4% w/w). Trailing behind was the Insurance (-0.9%) sector due to share price depreciations in CORNERST (-4.4% w/w), PRESTIGE (-6.7% w/w) and NEM (-1.0% w/w). The Industrial goods sector (-0.3% w/w) declined on the back of losses in WAPCO (-1.7% w/w). On the flip side, the Consumer goods sector (+0.9% w/w) was the sole gainer on account of bargain-hunting activities in DANGSUGA (+13.5% w/w). Lastly, the Oil & Gas sector closed flat.
On corporate action, several companies announced their dividend declarations for the financial year ended 2023. In the consumer goods, BUA Foods Plc and Unilever Nigeria Plc declared a final dividend of N5.50/share and N0.75/share with payment dates of 26th-Sep-2024 and 10th-May-2024 respectively. Dangote Cement Plc declared a final dividend of N30.00/share with a qualification and payment dates of 15th-Apr-2024 and 31st-May-2024 respectively. In the banking sector, Stanbic IBTC Holdings Plc declared a final dividend of N2.20/share with qualification and payment dates of 19th-Apr-2024 and 17th-May-2024 respectively. Okomu Plc declared a final dividend of N14.00/share with qualification and payment dates of 25th-Apr-2024 and 23rd-May-2024 respectively. Lastly, Transcorp Hotel announced a final dividend of N0.20/share with qualification and payment dates of 15th-Apr-2024 and 30th-Apr-2024 respectively.
On other corporate disclosures, Transcorp Power Plc reported gross earnings of N142.1bn for FY-2023, marking a strong increase of 57.3% y/y, from N90.3bn reported in FY-2022. Profit Before Tax (PBT) showed a similar impressive growth, surging by 84.6% y/y from N28.6bn reported in the previous year to N52.8bn in FY-2023. Thus, the company declared a final dividend of N3.13/share, reflecting the company’s strong financial position and underscores its dedication to rewarding shareholders for their support and investment.
Nigerian Breweries Plc has announced its plan to raise up to N600.0bn capital through rights issue. Due to the negative impact of the devaluation of the Naira and the high cost of funds on the company’s capital structure (especially on the company’s debts), the proceeds from the Rights Issue will help to reduce the huge debt burden arising, thereby leading to a healthier balance sheet.
This week, we expect 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 selloffs as investors switch their asset classes to less risky assets. However, we expect pockets of bargain-hunting activities across dividend-paying stocks, as the dividend season commences in full.
Money Market Review: System Liquidity Improves
Last week, the financial system opened with a surplus balance of N104.8bn. Despite the absence of major inflows from coupon payments or from maturities, the financial system closed the week with a surplus balance of N347.1bn. Consequently, the Open Repo Rate (OPR) and Overnight Rate (OVN) declined by 5.2ppts w/w and 4.3ppts w/w to settle at 22.1% and 23.0%, respectively.
In the primary market, the Central Bank of Nigeria (CBN) conducted an OMO auction, with a total of N500.0bn on offer across the 91-day, 182-day and 365-day bills. At the auction, investors’ demand was strong, as total subscription printed at N1.6tn. The bulk of the bids were skewed towards the longer-tenured instrument which recorded a total subscription of N652.4bn. The CBN oversold the auction, allotting a total of N676.7bn, a 2.3x bid-to-cover ratio. Thus, the stop rates across the 91-day, 182-day and 365-day bills closed at 19.0%, 19.5% and 21.1%, 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 125bps w/w to close at 18.91% (previously 17.66%).
This week, we expect the financial system to remained depressed in the absence of any inflows from coupon payments or maturities. Thus, we project that FTDs, and money market rates will remain at current levels.
Bond Market: Bearish Sentiments Dominate in the Secondary Market
The secondary bonds market was dominated by bullish investor sentiments as average bond yield rose by 10bps to close at 19.31% (previously 19.41%). On the other hand, we observed sell-pressure in the Nigerian secondary Eurobonds in the absence of any coupon payments. Thus, the average yields in the market rose by 16bps w/w to settle at 9.58% (previously 9.42%).
Finally, the DMO released the Q2-2024 FGN Bond Issuance Calendar. The DMO will issue a new FGN Apr-2029 (5-yr) bond and reopen the 18.5% FGN Feb-2031 (7-yr) and the 19.0% FGN Feb-2034 (10-yr) bonds. The amount on offer ranges from N100 – N200bn for each bond. There will be 3 auctions on: 15-Apr,13-May, and 17-Jun.
Looking forward, we anticipate an overall bearish sentiment to dominate the market underpinned by concerns about the nation’s fiscal health and the efficacy of its monetary policy. Meanwhile, in the Eurobonds market, we expect the bullish sentiments in the market to resume in line with SSA Eurobonds.
Currency Market: Naira Appreciated at the NAFEM Window
Last week, the Naira appreciated by 4.5% w/w at the Nigerian Autonomous Foreign Exchange Market (NAFEM) to close at N1,251.05/$, from its previous close of N1,309.39/$. At the parallel market, the Naira appreciated by 5.0% w/w to close the week at N1245.0/$ (previously, N1310.0/$). Meanwhile, activities in the NAFEM window decreased, as average FX turnover fell by 57.4% w/w to settle at $299mn. Lastly, Nigeria’s external reserves fell by 130bps to settle at $33.5bn.
This week, we expect the Naira to trade at current levels with a possibility of modest improvement as the CBN’s policies crystalize and as the interventions in the FX market continue to yield positive result.
