April 29, 2024/United Capital Research
Global Markets: A Return of Positive Sentiments for Risk Asset Classes
Equities markets in the US managed to snap a string of three weekly losses as investors responded to the busiest week of the first-quarter earnings reporting. The positive earnings releases stimulated bargain hunting activities in the US equities markets. The technology-heavy Nasdaq Composite Index performed best, helped partly by impressive performance of Apple and a late rebound in chipmaker NVIDIA. Shares in Google parent, Alphabet, also surged late in the week following its announcement of better-than-expected first-quarter earnings along with the company’s first dividend payment. Conversely, Facebook parent, Meta Platforms, fell sharply (at one point erasing nearly USD 200 billion in market value) after CEO Mark Zuckerberg announced plans to continue heavy spending on artificial intelligence and other new technologies. Overall major US benchmark indices, the DJIA (+0.7% w/w), S&P 500(+2.7% w/w), and NASDAQ (+4.2% w/w) all recorded weekly gains.
In Europe, shares took an upturn in tandem with trends in the US markets, with the pan-European STOXX Europe 600 Index gaining by 1.7% w/w, reversing a three-week losing streak. An easing of Middle East tensions and some encouraging corporate earnings results helped to boost sentiment. Most major stock indexes also advanced. Germany’s DAX gained 2.39%, France’s CAC 40 Index added 0.82%, and Italy’s FTSE MIB climbed by 0.97%. The UK’s FTSE 100 Index climbed to fresh all-time highs, putting on 3.09%. Regarding monetary policy, several officials from the European Central Bank (ECB) said that, absent any economic surprises, they anticipate lowering interest rates in June 2024. Hawkish remarks, nevertheless, seemed to call into question further decreases in borrowing prices. According to German Bundesbank, President Joachim Nagel (considering the current state of uncertainty), a decision in June “would not necessarily be followed by a series of rate cuts”. Isabel Schnabel, an executive board member, emphasized that the primary worry was services inflation. “There is a consensus emerging that we may be facing a quite bumpy last mile,” she added.
Elsewhere in Asia, sentiments were also positive. Buoyed by historic yen weakness, Japan’s stock markets gained over the week, with both the Nikkei 225 Index and the broader TOPIX Index returning 2.3% a piece. A key positive driver of investors sentiment was the fact that the Bank of Japan (BoJ) refrained from making changes to its monetary policy at its April meeting, which was perceived as broadly dovish by investors. BoJ Governor Kazuo Ueda hinted that confidence to raise interest rates further is set to increase in the second half of this year. In China, stocks rose as investors grew more optimistic about the economy. The Shanghai Composite Index gained 0.8% w/w, while the blue-chip CSI 300 added 1.2% w/w. In Hong Kong, the benchmark Hang Seng Index soared by 8.8% w/w. China’s economy is expected to grow by 4.8% this year, up from a median forecast of 4.6% last month, according to 15 economists surveyed by Bloomberg. China’s gross domestic product grew above 5.3% consensus in the first quarter from a year earlier, accelerating slightly from the 5.2% year-over-year expansion in the fourth quarter of 2023. However, economists downgraded their inflation forecasts as declining producer prices and a persistent property market slump remain a drag on the economy.
In commodity markets, oil prices settled higher on Friday, reversing a two-week losing streak. This rebound occurred despite the resilience of the Dollar, which had been strengthened by in-line inflation data. Notably, this resilience was observed amidst ongoing geopolitical tensions. Concerns over disruptions to Middle East supplies also remained in play as Israel stepped up its strikes against Gaza. While a war with Iran did not materialize, the Israel-Hamas conflict showed few signs of stopping. The US was also set to mobilize more military aid for Israel after President Joe Biden approved a bill earlier this week. This kept some elements of risk premium in play for oil prices, helping them weather concerns of weaker demand and softening global growth. Also, weekly data from Baker Hughes (on Friday 26 Apr-2024) disclosed that the number of oil rigs in the US declined to 506 from 511, representing a 1.0% w/w decline, the biggest weekly decline since Nov-2023. Hence, oil prices soared on Friday as the data indicated some level of tightness of supply in the global oil markets. However, oil prices remained significantly lower than the 8-month highs reached in September 2023 ($97.69/bbl). This decline is attributed to the absence of immediate escalation in the Iran-Israel conflict, prompting trades to reduce the risk premium factored into crude oil prices.
In the US, the Federal Open Market Committee (FOMC) will be meeting on 30 April to 1 May 2024 to decide on the new benchmark interest rate for the US economy. We expect the FOMC to remain complacent with its hawkish posture in 2023, which has positively impacted inflationary pressure in the US. However, the perception of a sticky inflation phase in the US will stand as a consideration to leave interest rates “higher for longer”. Ultimately, we expect a HOLD in the benchmark interest rate at current level. Elsewhere in Europe, sentiments are expected to remain bullish, given the dovish indications by ECB officials for a rate cut in June 2024. In Asia, equities are expected to retain positive outlook, in sync with developments in the broader Asian economies (China and Japan).
Macroeconomic Highlights
The Central Bank of Nigeria (CBN) has resumed the sales of Dollars to Bureau De Change operators (BDCs). The Apex Bank said it is set to sell $10,000 to BDCs at N1,021 per Dollar and directed the operators to sell at a spread not more than 1.5% above the CBN rate. Earlier, the Apex Bank sold $10,000 to BDCs at a rate of N1101/$ and directed the BDCs to sell to eligible customers at a rate not exceeding 1.5% above the purchase price. The current rate is 7.27% less than the previous price.
According to provisional data published in the latest statistics bulletin for the fourth quarter of 2023 recently released by the CBN, the Federal Government of Nigeria received an additional N3.8tn in what appears to be fresh Ways and Means Borrowing in the last six months of 2023. The CBN’s provisional data show that the total figure rose from N4.4tn at the end of June 2023 meaning that the cumulative Ways and Means balances due by the government now stand at N8.2tn as of December 2023.
The Nigerian National Petroleum Company Limited (NNPCL) has signed an agreement with the African Refinery Port Harcourt Limited (ARPHL) for the subscription of 15.0% equity by ARPHL in the Port Harcourt Refining Company. Parties in the deal said the agreement would lead to an increase in the refining capacity of the Port Harcourt refinery from 210,000 barrels per day to 310,000bpd, the proposed 100,000bpd will be co-located with the two existing refineries in the PHRC complex. PHRC is one of the three national refineries under the management of NNPC. The others are the Warri and Kaduna refineries.
Dangote Petroleum Refinery on Tuesday announced a further reduction in the prices of both diesel and aviation fuel to N940, and N980 per litre respectively. This is coming in the wake of its widely celebrated price reduction to N1,000 barely two weeks ago. The price change of N940 applies to customers buying five million litres and above from the refinery, while the price of N970 is for customers buying one million litres and above.
Wale Edun, minister of finance and coordinating minister for the economy, announced that the World Bank will, in June 2024, consider and give final approval to Nigeria’s $2.25bn loan request. The loan comprises a $1.5bn loan in Development Policy Financing and another $750.0mn in Programme-for-Results Financing.
The Nigerian Upstream Petroleum Regulatory Commission (NUPRC) has announced new guidelines for the purchase of crude oil by modular refineries. According to the disclosure, modular refineries will now be required to pay 80.0% of the purchase amount in United States Dollars, with the remaining 20.0% to be settled in the local currency, Naira.
Data from the latest Quarterly Statistical Bulletin of the Central Bank of Nigeria (CBN) shows that, Nigeria incurred a debt service of $3.5bn for its external loans in the fiscal year ended 2023. According to the data from the Apex Bank, Nigeria incurred $801.36mn, $368.26mn, $1,390.72mn and $943.17mn in the first, second, third and fourth quarter respectively. This $3.5bn spent represents a 55.0% increase from the $2.6bn incurred in 2022 as debt service-related payments for the country’s external debts. Data from the Debt Management Office indicates Nigeria has a total external debt portfolio of $42.29bn up from $41.69bn in 2022.
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 1.4%
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 yields in the fixed income market. Notably, share price depreciations in large-cap stocks, MTNN (-9.8% w/w) and NESTLE (-11.6% w/w) dragged the local bourse southwards. Additionally, losses in banking stock, FBNH (-16.3% w/w), weighed on the domestic equities market. As a result, the benchmark All Share Index (NGX-ASI) declined by 139bps w/w to print at 98,152.91 points. Hence, YTD return weakened to 31.3%, while market capitalisation fell by N784.7bn to print at N55.5tn. Activity level was mixed, as the average value of stocks traded rose by 6.0% w/w to settle at N6.9bn, while the volume of stocks traded fell by 2.2% w/w to settle at 314.3mn 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 (-3.1% w/w) led the laggards following sell offs in ACCESSCO (-2.4% w/w), WEMABANK (-12.5% w/w), and STERLING (-9.3% w/w). Trailing behind was the Oil & Gas sector (-1.4% w/w) due to share price depreciations in OANDO (-19.6% w/w). The Consumer goods sector (-1.2% w/w) declined on the back of losses in NESTLE (-11.6% w/w) and NB (-4.3% w/w). On the flip side, the Industrial goods sector (+0.4% w/w) led the gainers on account of bargain-hunting activities in WAPCO (+9.1% w/w) and CAP (+20.2% w/w). Lastly, the Insurance sector climbed by 2bps on the back of gains in SUNUASSU (+25.0% w/w) and WAPIC (+7.8% w/w).
On corporate disclosures, the Q1-2024 earnings season has commenced with several corporates releasing their financial results for the period. Dangote Cement Plc recorded a 101.0% y/y growth in revenue from N406.7bn in Q1-2023 to N817.4bn in Q1-2024. The company’s Profit After Tax (PAT) grew by 2.9% y/y from N109.5bn to N112.7bn in the period under review. As a result, Earnings Per Share (EPS) rose by 3.7% y/y from N6.44 in Q1-2023 to N6.68 in Q1-2024.
In the consumer goods sector, Nigerian Breweries declared a loss after tax of N52.1bn in Q1-2024, up 386.1% y/y from the loss after tax of N10.7bn declared in the corresponding period of 2023. The poor performance of the company can be due to the 370.2% y/y increase in net finance expenses which settled at N90.8bn (previously, N19.3bn).
On corporate action, Fidelity Bank Plc declared a final dividend of N0.60/share with a qualification and payment dates of 26th-Apr-2024 and 16th-May-2024, respectively.
Lastly, Seplat Energy Plc has confirmed that the currency exchange rate applicable in determining both the final and special dividend for 2023 to shareholders that will receive the dividend payment in Naira. The exchange rate for the Naira amounts payable is the NAFEM closing rate for 25th-Apr-2024 (1 USD = N1,309.88).
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 sell-offs as investors switch their asset classes to less risky assets. However, we expect pockets of bargain-hunting activities across dividend-paying stocks, in anticipation of the corporates’ qualification and payment dates.
Money Market Review: Strong Demand in the Primary Market
At the start of the week, the financial system opened in a N1.0tn deficit. N253.0bn worth of coupon payments entered the financial system. Nonetheless, the system closed in a N606.8bn deficit. The interbank lending rates rose, as the OPR and OVN rose by 86bps and 100bps to 30.25% and 31.25%, respectively.
In the primary market on 24-Apr, the Central Bank of Nigeria (CBN) conducted an NT-Bill auction with a total offer size of N142.57bn across the 91-day, 182-day and 364-day bills. Investor interest was strong as anticipated, with bids totaling N757.84bn. Bids were skewed towards the tail-end of the curve with investors bidding N725.66bn for the bill. The CBN opted to sell N362.45bn worth of bills. The stop rates on all the 3 bills remained unchanged at 16.24%, 17.00% and 20.70%, respectively. We observed buy-interest in the secondary market, as the average NT-Bill yield fell by 289bps to 22.29%.
We expect FTD and money market rates to remain elevated at current levels. System liquidity is expected to remain depressed in the absence of any significant inflows. Additionally, the consensus view is that short-term rates have peaked, with the stop rate on the 364-day bill peaking at 21.49% in the primary market (from 12.24% at the close of Q4-2023). Therefore, we expect the high yields to incentivize buy-interest in the secondary market.
Bond Market: Investors Weigh Duration Risk
In the secondary FGN Bond market, we observed bullish sentiments across the curve, particularly towards the shorter-tenured bonds, as the average yield declined by 11bps to 18.93%. We observed mild selloffs of Nigerian Eurobonds. The average Eurobond yield rose by 4bps to 9.98%.
This week, we expect some concern over the volatility of the FX market to influence effective demand for Nigerian sovereign instruments. Therefore, we anticipate investor focus to be on the shorter-tenured FGN bonds, and increased sell-pressure of Nigerian Eurobonds.
Currency Market: Naira Depreciated at the NAFEM Window
Last week, the Naira depreciated by 14.5% w/w at the Nigerian Autonomous Foreign Exchange Market (NAFEM) to close at N1,339.23/$, from its previous close of N1,169.99/$. At the parallel market, the Naira depreciated by 16.6% w/w to close the week at N1400.0/$ (previously, N1200.0/$). Meanwhile, activities in the NAFEM window decreased, as average FX turnover fell by 10.2% w/w to settle at $256mn. Lastly, Nigeria’s external reserves fell by 2bps to settle at $32.1bn.
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.
