United Capital Research Investment Views This Week, 10th June to 14th June 2024

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June 10, 2024/United Capital Report

Global Markets – Mixed Sentiments Toward Risk Asset Classes Persisted

Last week, the major indexes in the US equities market recorded mixed performances, as investors appeared to evaluate contradictory data from the week’s busy economic calendar. The start of the week brought some downbeat economic readings, which appeared to lead to a return of worries about slowing growth alongside high inflation—or “stagflation”—among some investors. For context, the Institute for Supply Management (ISM) reported on Monday that its gauge of manufacturing activity had fallen further into contraction territory (48.7, with levels below 50.0 indicating contraction). On Tuesday, the Labor Department reported that job openings in April had fallen to their lowest level (8.059 million) since February 2022. Conversely, the number of Americans leaving their jobs voluntarily, the so-called quits rate—considered by many as a more reliable indicator of the strength of the labor market—surprised on the upside. The S&P 500 Index and technology-heavy Nasdaq Composite reached record intraday highs, but the smaller-cap indexes pulled back. Relatedly, growth stocks outpaced value shares by the widest amount since early in the year, as falling longer-term interest rates increased the notional value of future earnings. Ultimately, the major indices in the US equities market bagged profit from a week-on-week perspective. The bulls were stimulated more by the prospects of a gradually normalizing economy and labour market, which is expected to incentivize the Fed to slowly normalize interest rates in tandem. Overall, the NASDAQ Composite (+2.4% w/w), and S&P 500 (+1.3% w/w) Indices attracted more of the appetite of the Bulls, with the DJIA (+0.3% w/w) recording mild gains respectively.

Elsewhere in Europe, the pan-European STOXX Europe 600 Index ended 1.04% higher after the European Central Bank (ECB) on Thursday cut interest rates for the first time in five years. Major stock indexes recorded gains. Italy’s FTSE MIB rose by 0.49%, Germany’s DAX tacked on 0.32%, and France’s CAC 40 Index added 0.11%. The UK’s FTSE 100 Index slipped by 0.36%. The ECB reduced its deposit rate by a quarter point to 3.75%, as expected, but it stopped short of indicating that more cuts could follow. The ECB forecast that inflation would average 2.5% in 2024, an upward revision from the previous estimate of 2.3%. The central bank also revised its estimate of average inflation for 2025 to 2.2% from 2.0% but held its forecast for 2026 at 1.9%.

In Asia, equities recorded mixed performances. Considering the Japan stock markets, we observed mixed weekly returns, with the Nikkei 225 Index climbing by 0.5% w/w and the broader TOPIX Index falling by 0.6% w/w. A tentative rally in the Yen, which strengthened to around JPY 155 against the US Dollar, from the prior week’s JPY 157, posed a headwind for Japanese exporters. However, the latest purchasing managers’ index data showing that the country’s services sector continued to expand at a sharp pace in May lent support to sentiment. There were also some signs that private consumption could stop being a drag on growth, as household spending increased year on year in April, the first increase in 14 months. Elsewhere in China, stocks retreated despite data showing that the property sector may be gaining traction. The Shanghai Composite Index declined by 1.15% w/w, while the blue-chip CSI 300 Index lost 0.2% w/w. In Hong Kong, the benchmark Hang Seng Index rose by1.6% w/w. In further context, the value of new home sales by the country’s top 100 developers rose by 11.5% in May, up from April’s 3.4% increase, according to the China Real Estate Information Corp. The data raised hopes that China’s property market downturn, now in its fourth year, might begin to recover following Beijing’s announcement of a rescue package in May aimed at stabilizing the struggling sector.

In the oil market, Oil prices declined on Friday and posted a third straight weekly loss as investors evaluated OPEC+ reassurances against the latest US jobs data that lowered expectations that the Federal Reserve will cut interest rates soon. However, oil prices have been buttressed by support from OPEC+ members Saudi Arabia and Russia, indicating readiness to pause or reverse oil output increases. Additionally, data from China showed that although exports grew for a second month in May, crude oil imports fell, signalling further demand concerns, amid the lingering woes in China’s property sector. That’s said, the benchmark Brent crude closed lower week-on-week, falling by 2.4% w/w to $79.62/bbl from $81.62/bbl.

This week, we expect the Federal Open Market Committee (FOMC) to meet on 11 & 12 June 2024, to decide on the new benchmark interest rate of the US Fed. We expect the sticky inflation woes to continue to discourage dovish stances, with the recent economic woes standing as key consideration/basis for the Fed to tilt toward a more defensive approach. That said, we anticipate mixed sentiments in the US equities, as the market also looks out for May’s Inflation data. In Europe, we expect the recent rate cut by the ECB to underpin bullish activities toward European shares (particularly the relatively undervalued counters).

Macroeconomic Highlights

Nigeria’s foreign exchange reserves have fallen by $1.8bn in 10 weeks, according to data from the Central Bank of Nigeria (CBN). As of 29 May 2024, the country’s FX reserves stood at $32.69bn, down from $34.44bn as of 18 March. This decline signifies a drop from the $36.1bn recorded in May 2023. The reserves have been declining steadily over the past few months, with a total decrease of $3.4bn since February 2024. Debt repayment recorded by the Apex Bank as of January 2024 was $560.00mn, it reduced to $283.29mn in February and then $276.16mn in March 2024.

The International Air Transport Association (IATA) has confirmed that the CBN has cleared foreign airlines trapped funds worth $831.0mn from June last year to date. IATA stated that the development had brought international airlines’ trapped funds globally to about $1.8bn. According to IATA, from the peak of about $850.00mn foreign airlines’ funds in Nigeria last June, only $19.00mn is left outstanding.

The Federal Government has settled a swooping N7.3tn in Ways and Means advances to the CBN. Consequently, the Minister of Finance stated that Nigeria is no longer reliant on borrowed funds for its projects, nor is it falling behind in its repayments to international creditors.

Naira has missed out of IMF’s Representative Exchange Rates for Selected Currencies for June 2024 amid exchange rate fluctuations. The IMF’s Representative Exchange Rates list provides a benchmark for currencies, pegging them against the US Dollars to facilitate international trade and financial transactions.

The Nigeria Deposit Insurance Corporation (NDIC) has announced that it will pay out insured deposits to depositors of the defunct Heritage Bank who have N5.00mn or less in their accounts. NDIC will settle creditors after paying depositors, as their assessment shows total deposits of around N650.00bn, with loans exceeding N700.00bn.

The Federal Government may borrow an additional N7.24trn to fund an intervention plan aimed at reviving the economy. In the 2024 approved budget, budget deficit was N9.18trn, to be partly financed by N7.83trn in new borrowings. However, according to the Accelerated Stabilisation and Advancement Plan (ASAP), the government intends to borrow N9.18trn to fund its deficit in the year. The intervention financing will add N7.24tn to the debt, bringing the total for 2024 to N16.42tn. Debt financing is projected to cost N8.81tn.

Afrexim Bank has disbursed $925.00mn, another tranche of the $3.3bn crude oil-backed loan agreement it entered with the NNPC last year. The current disbursement brings the total payment for the facility to $3.175bn. The bank explained that the current payment was raised from crude oil off-takers like Oando Group and Sahara Energy as well as others.

The Federal Government plans to settle about N1.7tn in electricity debt by issuing bonds and promissory notes. Other key plans for the power sector include the quarterly provision of funds to gas suppliers, to integrate renewable energy sources into Nigeria’s energy mix and increasing the capacity of the Niger Delta Power Holding Company (NDPHC). The total cost of these immediate interventions is estimated at N1.916tn, $245.6mn, and €4.5mn.

This week, we expect the National Bureau of Statistics to release Rail Transportation Data (Q1-2024), Electricity Report (Q3-2024), Annual Postal Services Data 2023, Foreign Trade in Goods Statistics (Q3-2024), Road Transport Data (Q3-2024) and CPI and Inflation Report May 2024. We expect Inflationary pressure to remain unabated in May 2024.

Domestic Equities: NGX-ASI Closed Lower…Down by 1.4% w/w

Last week, the Nigerian Exchange commenced the week on a positive note as indicated by the market’s breadth which printed at 1.2x indicating that 22 stocks advanced while 17 declined (on Monday). However, at the closed of the market on Monday, the index closed negative at -0.13% owing to the marking down of Seplat for its Q1-2024 dividend of $0.03cents. On a week-on-week perspective, the bulls fought hard to retain position at intervals, however, the bears managed to prevail as the benchmark NGX-ASI retreated by 8bps to settle at 99,221.14 points. Hence, YTD return retraced to 32.7%, while market capitalisation closed at N56.1tn. Activity level slowed, as the average value and volume of stocks traded declined by 4.3% w/w and -22.0% w/w to print at N5.97bn and 339.3mn units, respectively. Ultimately, overall Investors sentiments toward equities investments strengthened as indicated by the market’s breadth, which printed at 1.1x from 0.5x in the prior week.

On a sectorial level, performance was mixed as two (2) sectors out of the five (5) under our coverage closed in the green territory. The Insurance (+0.8% w/w) sector led the gainers on the back of share price appreciation across NEM (+8.7% w/w), MANSARD (+2.7% w/w), CORNERST (+3.7% w/w), and VERITASK (+6.8% w/w). The Consumer goods (+0.3% w/w), trailed on the back of bullish activities across INTBREW (+9.6% w/w), NB (+3.2% w/w), and NESTLE (+0.5% w/w). On the flip side, the Banking (-0.6% w/w) and Oil & Gas (-0.2% w/w) sectors closed in the red terrain, following losses across UBA (-5.4% w/w), FIDELITY (-9.8% w/w), and SEPLAT (-1.3% w/w). Lastly, the Industrial goods sector closed relatively flat, despite gains in CAP (+7.8% w/w).

On corporate actions, the NGX announced a revision in Fidelity Bank plc’s offer price for its rights issue and offer for subscription, from N10.0/share a piece to N9.25/share and 9.75%/share respectively.

Looking ahead, we expect activities in the fixed income market to continue to stand as a strong demotivator toward equities investments. A strong hope for the market is the expected high base effect for inflation in June 2024. Given the indications that equities market is considerably oversold, induced by the +750bps MPR hike year-to-date, we expect bargain-hunting in the equities market to remain unabated, particularly around fundamentally sound stocks (currently trading around their oversold region).

Money Market Review: System Liquidity Remains Tight

Last week, the financial system opened with a deficit balance of N79.5bn. During the week, there was an absence of any significant inflows, however, the CBN rolled over a total of N221.1bn of maturing bills across the 91-day, 182-day and 364-day bills. As a result, the financial system closed the week with a deficit balance of N90.4bn.

The Central Bank conducted an NT-Bills auction with an offer size of N221.1bn across the 90-day, 174-day and 363-day bills. At the auction, investors’ demand was strong, as total subscription printed at N713.9bn, majorly skewed towards the longer-tenured instrument. The CBN opted to oversell, allotting N278.4bn. Thus, the stop rate of the 365-day bill fell by 45bps to 20.67%. However, the stop rates across the 91-day and 182-day bills rose by 26bps and 50bps to settle at 19.5% and 17.5%, respectively.

This week, we expect the financial system to be tight in the absence of any inflows from coupon payments or FAAC inflows. The N44.1bn worth of maturing NT-Bills is unlikely to move the needle. As a result, we project that FTDs and money market rates will remain at current levels.

Bond Market:

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. However, there would be some buy-interest given that market participants are of the view that rates in fixed-income markets have peaked. Meanwhile, in the Eurobonds market, we expect the mild bullish sentiments in the market to moderate in the absence of any coupon payments this month. However, the start of the monetary easing cycle by global Central Banks could induce buy-interest in Nigeria’s high-yield Eurobonds.

Currency Market: Naira Appreciated at the NAFEM Window

Last week, the Naira appreciated slightly by 0.1% w/w at the Nigerian Autonomous Foreign Exchange Market (NAFEM) to close at N1,483.99/$, from its previous close of N1,485.99/$. At the parallel market, the Naira remained unchanged w/w to close the week at N1490.0/$. Lastly, Nigeria’s external reserves rose by 33bps to settle at $32.8bn.

This week, we expect the Naira to hover around current levels due to continued pressure on the currency across all market segments. Additionally, FX pressures will persist as Dollar earnings remain weak, and demand outweighs supply.

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