April 22, 2024/United Capital Research

Global Markets – Equity Markets Suffered Further Losses.

Last week was another tough week for global equities markets amidst continued geopolitical concerns and and rates in fixed-income markets remained near year-to-date highs. In the US, the earnings season began to ramp up. Despite the strong performance of equities in Q1-2024, the earnings releases have thus far fallen short of expectations. The S&P 500 concluded the week with a 3.0% decline. It has now fallen for three consecutive weeks since the start of Q2-2024. The weakness in equities last week was most pronounced within tech stocks as the NYSE FANG+ and ICE Semiconductor indices both fell 8.3% w/w and 9.0% w/w, respectively. Earnings played a part in the weakness. However, it was still early days for the earnings season. According to Factset, only approximately 15.0% of S&P 500 companies have reported their earnings.

In Europe, equity markets mirrored the performance of US markets. Broadly, they closed lower as tensions rose in the Middle East, and as European Central Bank (ECB) policy makers at the IMF and World Bank Spring Meetings reiterated that they were targeting Jun-2024 as the date for lowering interest rates, ceteris paribus. The STOXX Europe 600 was down 1.2% w/w, the German DAX down 1.1% w/w, and the UK FTSE down 1.3% w/w.

Markets in Asia were exposed to semi-conductor and tech underperformance. Advanced Semiconductor Materials Lithography (ASML), the world’s leading supplier of semiconductors, lowered its Q1-2024 and Q2-2024 sales guidance, indicating that demand is on the weaker side. Additionally, the strong US Dollar weighed on emerging markets. Therefore, the NIKKEI 225 led the losers, down 6.2% w/w. Conversely, the China Shanghai Composite ended the week higher, up 1.5% w/w.

In commodity markets, despite the geopolitical tensions, oil prices fell 3.5% w/w. The Israeli response to the Iranian attack left minimal damage and casualties, and Iranian sources have suggested there is no immediate plan for retaliation. The situation in the Middle East remains fluid.

This week, the focus is going to be squarely on corporate earnings as the scope and pace of companies reporting their results increase significantly, including several mega-cap tech stocks. By the end of the week, just under 50.0% of S&P 500 companies would have reported their earnings. Central Bank commentary will quiet down, even as the US Fed’s media blackout window begins ahead of its 01-May interest rate decision. The key economic data releases will include Global Flash PMIs on 23-Apr, US Q1-2024 GDP figures on 25-Apr, and US PCE on  26-Apr.

Macroeconomic Highlights

The National Bureau of Statistics has disclosed that Nigeria’s headline inflation rate increased to 33.20% in March 2024, up from 31.70% in February 2024. This represents a m/m increase of 1.50% points in the headline inflation rate, y/y data shows a significant 11.16% rise in the headline inflation rate from March 2023, which was at 22.04%. In addition, the m/m headline inflation rate for March 2024 was 3.02%, which is 0.10% lower than the rate recorded in February 2024. For the year ending in March 2024, the average Consumer Price Index (CPI) increased by 27.13% compared to the previous year, which was a rise of 6.76% from the 20.37% increase observed in March 2023.

The International Monetary Fund (IMF) has reviewed upwards Nigeria’s economic growth forecast for 2024 from 3.0% to 3.3%. this was announced in the IMF’s World Economic Outlook for April, which was released during the ongoing 2024 Spring Meetings of the World Bank and IMF in Washington, United States.

The CBN has clarified reasons for the significant decline in the nation’s foreign exchange reserves, asserting that it wasn’t primarily aimed at defending the Naira, as commonly believed, but rather to partially repay debts owed to creditors. Nigerians had raised concerns over the significant downturn of the country’s foreign exchange reserves, plunging by approximately $2.16bn in 29 days, amidst robust efforts to stabilise the Naira.

The Central Bank of Nigeria (CBN) has reviewed the loan-to-deposit ratio (LDR) policy to align with its current monetary tightening, reducing the LDR by 15.0% points to 50.0%.

The Federal Government has called for increased investments and trading partnerships from member countries of the Group of Twenty-Four. This appeal was made during the World Bank-IMF Spring Meetings in Washington DC by the Minister of Finance and Co-ordinating Minister of the Economy, Mr. Wale Edun, who was represented by the Director General of the Budget Office of the Federation, Mr. Ben Akabueze.

This week, we expect the National Bureau of Statistics to release Selected food prices March 2024, Transport Fare Watch (March 2024), and Federation Account Allocation Committee (FAAC) March 2024 Disbursement

Domestic Equities: NGX-ASI Closed Lower…down by 2.7% w/w

Last week, the local equities market was met with a significant bearish performance, following the outcome of primary market activities (which suggested that short-term rates have peaked). On that note, we observed portfolio rebalancing activities, with investors mostly risk-averse (particularly given the hawkish monetary policy environment). We observed quite significant sell-offs across the banks, with deeper analysis indicating that foreign NGX participants continue to reserve concerns with regards to the recapitalization exercise, and the potential of the banks to raise the required capital, within the stipulated time frame. Another factor is the appreciating Naira, which presented some exit opportunities for foreign investors who participated in activities of the NGX in Q1-2024. Overall, share price depreciation in GTCO (-19.1% w/w), ZENITHBA (-11.2% w/w), and UBA (-13.7% w/w) weighed the most on the performance of the NGX-ASI. That said, the benchmark NGX-ASI closed southward, retraced by 271bps to print at 99,539.8 points. Hence, YTD return weakened to 33.1%, while market capitalisation closed at N54.2tn. Activity level regressed significantly, as the average value and volume of stocks traded declined by 56.5% w/w and 44.7% w/w to settle at N6.3bn and 308.0mn units. Investors sentiments toward equities investments significantly weakened as indicated by the market’s breadth, which printed at 0.2x from 0.5x in the prior week.

On a sectorial level, performance was bearish as five (5) sectors under our coverage closed in the red territory. The Banking (-11.5% w/w) sector led the laggards on the back of share price depreciation across GTCO (-19.1% w/w), ZENITHBA (-11.3% w/w), UBA (-13.7% w/w), and ACCESSCO (-11.9% w/w). The Insurance (-2.8% w/w), Industrial goods (-2.7% w/w), and Consumer goods (-1.0% w/w) trailed on the back of bearish activities across AIICO (-10.7% w/w), MANSARD (-3.5% w/w), VERITASK (-13.2% w/w), WAPCO (-1.5% w/w), DANGSUGA (-9.6% w/w), FLOURMILL (-9.8% w/w), and UNILEVER (-11.7% w/w). Ultimately, the Oil & Gas sector closed flat.

This week, we expect activities in the fixed income market to continue to stand as a strong demotivator toward equities investments. We expect the status quo to remain same, with bearish sentiments outweighing. From an alternate viewpoint, we expect bargain hunting activities to lurk in the shadows, owing to the tremendous opportunities presented by the recent bearish trend (particularly around the banks). From a technical angle, we observed that the RSI of the NGX-ASI is currently @ 31.3pts, just slightly above the oversold region (30.0pts), indicating the possibility of a sharp reversal in trend in the very near term.

Money Market Review: System Liquidity Tightens Further

Last week, the financial system opened with a deficit balance of N537.3bn. During the week, there was an inflow of N146.0bn worth of coupon payments. However, this was not sufficient to bolster the financial system due to FGN bond primary market auction which partly depleted the level of liquidity in the market. As a result, the financial system decreased and closed the week lower with a deficit balance of N903.9bn. Consequently, the average Open Repo Rate (OPR) and Overnight Rate (OVN) climbed by 250bps and 314bps w/w to settle at 30.32% and 31.33%, respectively.

In the secondary NT-bills market, we observed bearish sentiments at the tail-end of the curve wiping out the mild bullish sentiments recorded at the shorter end (91 and 182-day bills) of the curve. As a result, the average yield on NT-bills rose by 632bps w/w to close at 25.18% (previously 18.86%). Similarly, the average yield on OMO bills increased by 25bps to settle at 18.44% (previously, 18.19%).

This week, we expect a total of N253.0bn worth of coupon payment to hit the financial system. However, we do not believe that it will be sufficient to bolster system liquidity given the depth of deficit in the financial system. As a result, we project that FTDs and money market rates will remain at current levels, with a likelihood of inching higher. Additionally, the Central Bank will conduct a NT-bill auction, rolling over N142.6bn worth of bills across the 91-day, 182-day and 364-day bills. At the auction, we expect investors’ demand to be strong, particularly skewed towards the longer-tenured instrument. Also, we expect stop rates on the bills to decline accordingly.

Bond Market: Bullish Sentiments Returned to the Secondary Market

The Debt Management Office (DMO) conducted the Apr-2024 FGN bond auction, with an offer size of N450.0bn across the newly open 2029s (5-YR paper), and the reopened 2031s (7-YR paper) and 2034s (10-YR paper). At the auction, investors’ demand was relatively strong, as total subscription printed at N920.1bn. Notably, the DMO oversold the auction, allotting a total of N626.8bn worth of papers. Thus, the marginal rates on the reopened 2031 and 2034 paper fell by 25bps and 45bps from 20.00% and 20.45% to settle at 19.75% and 20.00%, respectively. Meanwhile, the marginal rate on the newly opened 2029 paper printed at 19.30%.

The secondary bonds market was dominated by bullish investor sentiments as average bond yield fell by 23bps to close at 19.04% (previously 19.27%). Similarly, corporate bonds traded on a bullish note, as the average yield on corporate bonds decreased by 13bps w/w to 21.12% (previously 21.25%).

On the other hand, we observed sell offs in the Nigerian secondary Eurobonds market as possibility of the Fed remaining hawkish for longer than expected weighed investor’s appetite. Thus, the average yields in the market climbed by 20bps w/w to settle at 9.94% (previously 9.74%).

Looking forward, we anticipate the bullish trend in the secondary market to persist as investors look to fulfil their unmet bids from the Primary Market Auction (PMA). Also, most market participants believe that rates in the fixed income market might have peaked, hence, they are looking to take positions in the market given the high yield curve. Meanwhile, in the Eurobonds market, we expect the bearish sentiments in the market to persist in line with SSA Eurobonds.

Currency Market: Naira Depreciated at the NAFEM Window

Last week, the Naira depreciated by 2.4% w/w at the Nigerian Autonomous Foreign Exchange Market (NAFEM) to close at N1,169.99/$, from its previous close of N1,142.38/$. Meanwhile, activities in the NAFEM window decreased, as average FX turnover fell by 6.6% w/w to settle at $277mn. Lastly, Nigeria’s external reserves fell by 396bps to settle at $32.1bn. At the parallel market, the Naira appreciated by 5.3% w/w to close the week at N1200.0/$ (previously, N1140.0/$).

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.