July 22, 2024/United Capital Research
Global Markets: Sell-Offs Amongst the Mega-Cap Stocks Weighed on Investors’ Sentiments
Last week, the global equities market closed on a negative note as traders continue to digest key economic data, monetary policy outlook and earnings releases. In the US, investors continued to take profits following recent record highs in major indices. The losses were concentrated among the mega-cap stocks and many of the growth stocks, namely the semiconductor stocks, that had been previously favored by the momentum crowd. The sell-offs in technology stocks came after news that the Biden administration is considering using the most severe trade restrictions (tightening exports) if companies continue giving China access to advanced semiconductor technology. Additionally, a global IT outage added to the unease in the technology sector after an already turbulent week, affecting services from airlines to banks. The outage was allegedly due to a security update from CrowdStrike which caused a problem with Microsoft’s Windows. As a result, the US indices closed on a negative note as the NASDAQ (-3.6% w/w) and S&P 500 (-2.0% w/w) closed the week lower. Meanwhile, the DIJA climbed by +0.7% w/w.
In tandem, the European markets recorded w/w losses amid sustained pressure from potential trade barriers by the US as traders assessed the impact of a global tech outage caused by issues from CrowdStrike that hampered Microsoft products. Traders are retreating from big tech stocks amid expectations of interest rate cuts and losses for chip producers as markets continued to gauge their revenue forecasts and risks attached to potential trade barriers. During the week, the European Central Bank (ECB) held its key interest rates unchanged at 4.25% in its Jul-2024 meeting, contrasting from last month’s landmark rate cut. This reflects the ECB policymakers’ uncertainty on whether inflation in the Eurozone is moderating at a fast enough pace for expansionary monetary policy to be warranted. Additionally, the ECB President Lagarde refrained from signaling a stance for upcoming meetings and noted that September’s decision is wide open. Yet, market participants continued to expect that the ECB would resume cutting interest rates in its upcoming meeting as the wavering threat of inflation may allow the central bank to address increasing growth concerns. On data releases, headline inflation rate in the Euro Area settled at 2.5% y/y in Jun-2024, 10bps lower than the 2.6% y/y print in May-2024. Consequently, the Germany’s DAX (-3.1% w/w), France’s CAC (-2.5% w/w), Europe’s STOXX (-2.7% w/w) and UK’s FTSE (-1.2% w/w) edged lower.
The Asian market closed mixed as investors reacted to the recent updates from the Third Plenum. President Xi Jinping highlighted the need to harness market’s potential by easing restrictions and implementing effective regulations to maintain order and address market challenges. Chinese officials are also striving to double the country’s economy by 2035 through innovation, sustainability, private sector support, and stability-focused economic strategies. That said, the Chinese’ SHANGHAI composite (+0.4% w/w) and the Indian SENSEX (+0.1% w/w) recorded positive gains. Meanwhile the Japanese NIKKEI lost 2.7% w/w as investors reacted to the latest inflation figures. Data showed that Japan’s headline inflation rate remained unchanged at 2.8% y/y in Jun-2024, while the core inflation rate rose to 2.6% y/y from 2.5% y/y. The latest reading reinforced market expectations that the Bank of Japan could raise interest rates from current near-zero levels when it meets in late Jul-2024.
In the oil market, crude oil prices settled lower as underwhelming growth data from China knocked back optimism on the outlook for oil demand. However, the decline was tempered by a growing consensus that the U.S. Federal Reserve might start cutting its key interest rate as soon as September. As a result, oil prices closed lower, with Brent Crude falling by 282bps w/w to print at $82.63/bbl. (previously, $85.03/bbl.).
This week, investors’ attention will be centered on the release of the US Q2-2024 Gross Domestic Product (GDP) growth rate and Personal Consumption Expenditure (PCE) data for the month of Jun-2024. This will be key consideration for the Federal Reserve in terms of interest rate policy direction for the coming months. Additionally, other notable releases will feature the S&P Global Manufacturing and Services Purchasing Manager’s Index (PMI). In Europe, the spotlight will be on the Global Manufacturing and Services Purchasing Manager’s Index (PMI) for the Euro Area, Germany, France, and the United Kingdom. Elsewhere in Asia, People’s Bank of China are set to announce its interest rate decision. Lastly, we anticipate the release of Q2-2024 financial reports among corporates as the earnings season comes to full swing. The outcome of these releases will shape the global market sentiments.
Macroeconomic Highlights
The June-2024 Consumer Price Index (CPI) report released by the National Bureau of Statistics (NBS) revealed that the Nigeria’s headline inflation surged from 33.95% in May-2024, up 24bps to 34.19% y/y in Jun-2024. Comparing to a year ago, headline inflation climbed by 11.4ppts from 22.79% y/y in Jun-2023. This represents eighteen consecutive months of quickening inflation, raising the prospect of another benchmark rate hike by the Monetary Policy Committee (MPC). On a monthly basis, inflation rose from 2.14% m/m in May-2024 to 2.31% m/m in Jun-2024, bucking the trend of 3 consecutive months of falling month-on-month inflation.
President Bola Tinubu has requested the approval of the National Assembly to increase the 2024 budget by N6.2tn, bringing the total budget to N34.9tn from an initial N28.7tn budget the president signed into law on 01 January. Of the additional increase, N3.2tn is expected to be allocated for infrastructure projects, while N3.0tn is proposed for recurrent expenditure.
Additionally, President Tinubu seeks to amend the Finance Act to impose a one-time windfall tax on banks’ forex gains to fund key sectors like infrastructure, education, and healthcare. The government plans to tax banks 50.0% of profit realised from Foreign Exchange revaluation in 2023. Noteworthily, Nigerian banks earned N3.3tn in profits in 2023 from forex gains, highlighting the potential revenue from the proposed windfall tax.
The International Monetary Fund (IMF) has downgraded the growth rate in sub-Saharan Africa to 3.7% in 2024 (from previous estimate of 3.8%) as indicated in the latest World Economic Outlook (WEO) update. The downward review of the growth outlook was on the back of the weaker-than-expected growth in Nigeria. Notably, the latest economic growth projection for Nigeria dropped from 3.3% to 3.1% in 2024. Meanwhile, the IMF maintained Nigeria’s economic growth forecast at 3.0% for 2025.
The CBN has projected that the external reserves could reduce slightly in 2024, this is on the assumption of continued payments of outstanding foreign exchange forward obligations, matured foreign exchange swaps, and debt service. However, the expected improvement in crude oil earnings, together with recent reforms in the foreign exchange market and energy sector would cushion the drop in external reserves.
President Tinubu has approved a N70,000.00 minimum wage for Nigerian workers with a promise to review the national minimum wage law every three years. The President also promised to find ways to assist the private sector and the sub-nationals to pay the minimum wage. Meanwhile, the Members of the House of Representatives have unanimously decided to reduce their salaries by half for a period of six months as a demonstration of solidarity and shared sacrifice with the Nigerian people who are currently experiencing economic challenges and food insecurity.
This week, we anticipate the fourth Monetary Policy Committee (MPC) meeting for the year 2024, holding 22 to 23 July 2024. Key considerations for the policy makers are the persistent rising inflationary pressures and the impact on the nation’s economic growth. We expect a marginal (25-50bps) HIKE in the benchmark interest rate, popularly known as the Monetary Policy Rate (MPR). Other than that, we expect macroeconomic environment to be relatively quiet.
Domestic Equities: Local Bourse Regains Momentum…NGX-ASI Up by 0.87% w/w
Last week, in anticipation of the soon to be released earnings result of equities listed on the Nigerian Exchange (NGX), sentiments reversed, as investors looked to take positions in stocks with expectation of corporate earnings outperformance and possibility of interim dividend payment. The Nigerian Exchange was overridden by the bulls at the start of the week, evidenced by the market’s breadth on Monday, which printed at 1.8x, implying that 29 stocks advanced while 16 declined. The bullish trend remained unabated on Tuesday. The market was bearish in the third trading session of the week, but the bulls returned in the last two (2) trading sessions of the week. Worthy of note is the fact that significant buy-interest in large-cap stocks like AIRTELAFRI (+4.76% w/w), UCAP (+42.78% w/w), OANDO (+11.28% w/w) and PRESCO (+3.79% w/w) led the positive performance. That said, the benchmark NGX-ASI improved by 87bps to settle at 100,539.4 points. As a result, YTD return strengthened to 34.50%, while market capitalisation closed at N56.93tn. Activity level was mixed last week, as average value of stocks traded fell by 50.2% w/w to print at N8.4bn units and average volume of stocks traded climbed by 2.2% w/w to print at N565.4mn units, respectively. Investor sentiment was enthusiastic, improving to 1.2x (from 1.1x last week), as 66 tickers appreciated while 54 depreciated.
Conversely on a sectorial level, performance was bearish as three (3) out of the five (5) sectors under our coverage closed in the red territory. The Insurance Sector (-4.86% w/w) led the laggards on the back of share price depreciation in VERITASK (-11.67% w/w) and LINKASSU (-13.21% w/w). The Consumer Goods sector (-0.20% w/w) followed due to sell offs in DANGSUGA (-2.76% w/w). Following was the Banking sector (-0.5% w/w) due to share price depreciation in WEMABANK (-5.26% w/w) and JAIZBANK (-3.56% w/w). On the other side of the coin the Industrial Goods sector (+0.08% w/w) led the gainers on the back of gains in WAPCO (+1.10% w/w) and CUTIX (+26.65% w/w). Lastly, the Oil & Gas sector alone closed flat, as portfolio managers inclined more toward a HOLD strategy on the sector.
On corporate actions, GTCO announced the commencement of their Rights issue, which commenced Monday, July 15, 2024, and will close on Monday, August 12, 2024. The offer size is 9,000,000,000 ordinary shares of N0.50k each at N44.50 per share.
Looking forward, the equities market is expected to show mixed performance as investors adopt opportunistic investment strategies. We foresee selective buying of fundamentally strong stocks continuing into the upcoming week. Market activity is anticipated to rise due to ongoing banks’ recapitalization efforts, Q2 filings, and anticipated corporate actions in the near term. Conversely, elevated interest rates in the fixed income market are likely to exert a negative influence on equities as investors capitalize on higher fixed income yields. Overall, fund managers and investors are advised to maintain an opportunistic approach to capitalize on prevailing market opportunities.
Money Market Review: System Liquidity Remained Tight
Last week, the financial system opened with a deficit balance of N830.3bn. During the week, although system liquidity improved, it remained deflated due to the absence of any significant inflows. As a result, the financial system closed the week with a deficit balance of N379.5bn. Consequently, the Open Repo Rate (OPR) and Overnight Rate (OVN) fell by 22bps and 43bps w/w to settle at 31.39% and 32.02%, respectively.
The Central Bank conducted an OMO auction, offering a total of N150.0bn worth of bills across the 97-day, 188-day and 363-day bills. At the auction, investor’s bids which totaled N39.0bn were solely for the 363-Day bill. Consequently, there was a no-sale at the auction.
In the secondary NT-bills market, we observed bearish sentiments across the curve. As a result, the average yield on NT-bills rose by 156bps w/w to close at 24.89% (previously, 23.33%). Similarly, the average yield on OMO bills rose by 7bps to settle at 24.31% (previously, 24.24%).
This week, we expect the financial system to be bolstered due to inflows from FAAC payments. Additionally, there will be an NT-Bill auction with a total of N278.0bn worth of NT-Bill maturities on offer. Nevertheless, we project that FTDs, and money market rates will remain at current levels, with a likelihood of slipping lower.
Bond Market: Bearish Sentiments Dominate the Secondary Bonds Market
The secondary bonds market was bearish as average bond yield climbed by 15bps to close at 19.41% (previously, 19.26%). Similarly, corporate bonds traded on a bearish note, as the average yield on corporate bonds rose significantly by 11bps w/w to 22.24% (previously, 22.13%).
In the Nigerian Eurobonds market, we observed sell-pressure as Nigeria’s debt sustainability concerns continued to linger. Thus, the average yields in the market declined by 33bps w/w to settle at 10.07% (previously, 9.76%).
Looking forward, we anticipate overall mixed sentiment to dominate the market underpinned by concerns about the nation’s fiscal sustainability health and the efficacy of its monetary policy. There will be N141.6bn in FGN Bond coupon payments. Meanwhile, in the Eurobonds market, there will be inflows of $78.42mn in coupon payments. We expect this to spur mild bullish sentiments.
Currency Market: Naira Depreciated at the NAFEM Window
Last week, the Naira depreciated by 2.1% w/w at the Nigerian Autonomous Foreign Exchange Market (NAFEM) to close at N1,596.92/$, from its previous close of N1,563.80/$. At the parallel market, the Naira depreciated by 2.2% w/w to close the week at N1600.0/$ (previously, N1,565.0/$). Meanwhile, activities in the NAFEM window decreased, as average FX turnover fell by 2.7% w/w to settle at $218.1mn. Lastly, Nigeria’s external reserves rose by 158bps to settle at $35.9bn.
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.
