August 26, 2024/United Capital Research
Global Markets: Positively Skewed Performance
Last week, investors’ sentiments towards US financial markets were positive, driven by signals that inflation is trending lower. Also, the labour market was decent as signaled by the weekly jobless claims. The Bureau of Labour Statistics released its Payroll revision through Mar-24, coming in at 818,000 fewer jobs. Although the data is lagged, the resulting numbers are hovering at levels consistent with a 2.0% y/y inflation target. This means the Fed is directionally closer to begin easing interest rates. Similarly, markets rallied following Jerome Powell’s speech at the Jackson Hole Symposium on Friday. During the symposium, he acknowledged progress on bringing inflation down to 2.5% y/y vs 2.0% target. His position on the US labour market is that there are no imminent macro or micro drivers suggesting it is quickly worsening in the short term. Overall, he affirmed that monetary policy should be adjusted soon given the dynamics on the dual mandate. Consequently, the S&P 500 was up by 1.4% w/w, bringing YTD gains to 18.1%.
In Europe, rising investor confidence saw Germany’s DAX and France’s CAC 40 outperform their peers. The DAX and the CAC 40 rose by 1.7% w/w, while the STOXX Europe 600 rose by 1.3% w/w. According to the S&P Global Purchasing Managers’ Index (PMI), Eurozone business activity improved in Aug-24, reading at 51.2 from 50.2 in Jul-24. This is largely attributed to the Paris Olympics. Also, markets appreciated due to optimism that the US Fed and the ECB would cut their benchmark interest rates in Sept-24.
In Asia, Japanese equities (the Nikkei 225) rose by 0.8% w/w amid speculation that the market volatility in recent weeks could discourage the Bank of Japan (BOJ or the Bank) from further rate hikes. Noteworthily, the BOJ Governor has stated that the Bank’s goal is to normalize monetary policy towards achieving its 2.0% y/y inflation target (currently at 2.8% y/y). In contrast, the Shanghai Composite was under pressure, down by 0.9% w/w, further dragging YTD performance to negative territory. Investors remained on the sidelines due to the US Fed Cahir’s speech on Friday.
In energy markets, oil prices began bouncing back on Thursday as the prospect of a dovish US Fed weighed on the US Dollar, and as global demand may float. The sluggish oil demand may result in OPEC+ delaying its planned output cuts in Q4-2024, therefore, supply may remain around current levels. Also, in the US, 4 tropical waves are under watch as the hurricane season peaks going into early September. This could be a tailwind for WTI futures. Brent futures were down by 0.6% w/w but are still up at 5.0% YTD.
This week, the main event in the equities market will be NVDA’s After-Market earnings release on Wednesday. There are several other late cycle releases this week including DELL and CRWD. On economic releases, US PCE, jobless claims, and the 2nd US GDP estimate will be released during the week. In fixed-income markets, auctions will include 5-yr and 7-yr tenors following a decent 20-yr sale last week. In other global markets, EU and Japan unemployment, inflation and industrial production are set to be released. The MSCI Index Quarterly Rebalance will be published on Friday.
Macroeconomic Highlights
The Central Bank of Nigeria (CBN) announced a significant increase in remittance inflows, reaching $553mn in July 2024. This is a 130.0% increase from the corresponding period in 2023. This figure represents the highest monthly total inflows on record and reflects ongoing efforts by CBN to enhance liquidity in Nigeria’s foreign exchange market.
Meanwhile, the chairman of the Federal Inland Revenue Service (FIRS), Zacch Adedeji, revealed that the federal government is on track to achieve its N19.4tn revenue target for 2024. Adedeji noted that increased crude oil production this year, along with a stronger focus on tax compliance, is helping to reverse the previous downward trend.
On the flip side, the Federal Government owes the Nigerian National Petroleum Company Limited (NNPCL) almost half of what it plans to collect in revenues this year for the petrol subsidy it reintroduced in August last year. NNPCL is owed N7.8tn ($4.9bn) by the government in subsidy debts for the seven months to July, whereas the government aims to collect N19.4tn in revenue this year.
The Federal Government is targeting a $500.0mn loan from the World Bank to tackle inadequate human resource issues in the country’s education and healthcare systems. The proposed loan, part of the Nigeria Human Capital Opportunities for Prosperity and Equity Governance Programme, is intended to tackle long-standing staffing gaps and enhance the performance management of basic education teachers and primary healthcare workers.
The Nigerian Electricity Regulatory Commission (NERC) has issued permits to Golden Penny Power Limited, MTN Communications Nigeria Limited, Havenhill Synergy, and others for mini-grid electricity generation. In the first quarter of 2024 NERC issued 9 new off-grid generation licenses with a gross capacity of 109.69 megawatts.
Similarly, the management of the Nigerian Midstream and Downstream Petroleum Regulatory Authority (NMDPRA) has issued an operational license to Edo Refinery and Petrochemical Company Limited, Ologbo, in the Ikpoba-Okha Local Government Area of Edo State. This implies that the plant can now fully operate as a refinery.
Nigeria’s state oil company, NNPC Limited, released its 2023 full year audited financial results, showing a net income of N3.29 trn. This indicates a significant 31.6% y/y growth from the N2.5trn profit reported in 2022, and notably the largest corporate profit reported by any Nigerian company so far. Further extracts revealed the company’s total assets printed at N246.8trn ($272.0bn using N907.0/$1 or $154.0bn using N1,600.0/$1 as of August 2024), surpassing the country’s nominal GDP, which printed at N229.9trn in the year ended December 2023.
The significant size of the oil company’s total assets was driven by its trade and other receivables, which stood at N162.9trn, and fixed assets (property, plants, and equipment) valued at N67.8trn, bringing the total to N230.7trn (93.5% of total assets). Whereas, the increase in the value of trade and other receivables, as well as fixed assets, can be attributed to the impact of foreign currency translation, as most of the company’s assets are denominated in dollars.
Lastly on macro-related news, Dangote Petroleum Refinery announced the Refinery is undergoing test runs for petrol production, with full operation expected to commence by mid-September.
This week, we expect the release of the Nigeria Gross Domestic Product by Output Report (Q2-2024). This report will provide insight into the total output of the country in Q2-2024.
Domestic Equities: Sell Pressures Weigh on Local Bourse …NGX-ASI Down by 1.16% w/w
Last week, the domestic equities market reflected mixed sentiments, despite losing some value in market capitalization. The sell-off in DANGCEM (-10.0% w/w) weighed on the index value the most, given it is a large cap stock. Notably, bargain hunting persisted in the equities market, evidenced by the improvement in investors’ sentiment, which strengthened to 1.4x (from 1.1x last week). Sentiments toward risk asset classes remained positive given the upbeat high base effect on inflation (also helped by fiscal and monetary interventions), which has birthed expectations for a neutral monetary stance by the CBN in its September (23 & 24) meeting. Nonetheless, a blend of share price depreciation in a large cap stock, and last week’s primary market auctions forced the benchmark NGX-ASI to fall by 116bps to settle at 95,971.05 points. As a result, YTD return weakened to 28.4%, while market capitalisation closing at N55.1tn. Furthermore on the mixed level of market activities, the average value of stocks traded fell by 21.4% to print at N6.6bn while the total volume of stocks traded rose by 168.3% to print at 1.1bn units.
On a sectorial level, performance was bullish as three (3) out of the five (5) sectors under our coverage closed in the green territory. The Oil and Gas Sector (+3.54% w/w) led the gainers on the back of share price appreciation in TOTAL (+9.98% w/w) and SEPLAT (+1.28% w/w). The Insurance Sector (+1.90% w/w) followed due to buy interests in SOVRENIN (+12.00% w/w) and CORNERST (+10.48% w/w). Following was the Banking Sector (+0.37% w/w) on the back of share price appreciation in WEMA (+6.67% w/w) and FIDELITY (+6.44% w/w). On the flip side, the Industrial Goods Sector (-4.94% w/w) led the laggards on the back of selloffs in DANGCEM (-10.00% w/w) and BETAGLAS (-9.43%). The Consumer Goods Sector (-1.42% w/w) followed due to share price depreciation in INTBREW (-5.49% w/w) and DANGSUGA (-5.29% w/w).
Oando Plc has acquired a 100% stake in the Nigerian Agip Oil Company from Italian energy firm, Eni, in a deal valued at $783mn. The newly acquired assets include 40 oil and gas fields, with 24 currently producing, as well as 1,490 kilometres of pipelines; 12 production stations; 3 gas processing plants; the Brass River Oil Terminal; and the Kwale-Okpai power plants, with a combined capacity of 960MW.
Looking forward, the equities market is expected to continue with mixed performance as investors adopt opportunistic investment strategies. Given the current trend of rates in the money/fixed income market, we expect some bearish undertone to persist in the equities market. Whereas the Bulls will remain incentivized to persist in bargain hunting, given the tremendous mid-long term opportunities in the equities market. Fund managers and businesses may begin to entertain mid-long-term (≥6 months) investment objectives, cherry-picking only sound equities with undisputable (or undervalued) fundamentals and ongoing corporate actions (M&As…). This strategy will look to maximise market opportunities, thereby optimising portfolio returns.
Money Market Review: FGN Opens its Domestic Dollar Bond Offer for Subscription
Last week, the financial system opened with a surplus balance of N417.4bn. It was quite a busy week as the Federal Government opened its 5-YR (2029) domestic dollar bond offer for subscription on Monday, 19Th August 2024. The offer size is $500.0mn, with a coupon of 9.75% per annum, and the offer is expected to be closed on the 30th of August 2024. Additionally, there were two primary market activities (NT-bills and Bond auctions). Despite this, system liquidity was bolstered following inflows from coupon payments to the tune of N367.0bn. As a result, the financial system closed the week with a surplus balance of N1.2tn. Consequently, the average Open Repo Rate (OPR) and Overnight Rate (OVN) declined by 636bps and 648bps w/w to settle at 27.97% and 28.51%, respectively.
The Central Bank conducted an NT-bill auction with an offer size of N410.0bn across the 91-day, 182-day, and 364-day bills. At the auction, investors’ demand was strong, as total subscriptions printed at N1.0tn, indicating an oversubscription rate of 2.5x. The bids were majorly skewed towards the longer-tenured instrument “365-day bill”, which received total bids of N909.5bn. Notably, the Apex Bank under-allotted the auction, selling a total of N291.0bn worth of bills. As a result, the stop rates on the 91-day, 182-day and 364-day bills declined by 30bps, 30bps and 99bps to settle at 18.20%, 19.20% and 20.90%, respectively.
In the secondary NT-bills market, we observed bullish sentiments across the curve. As a result, the average yield on NT-bills fell by 262bps w/w to close at 22.32% (previously, 24.94%). Similarly, the average yield on OMO bills declined by 72bps to settle at 25.11% (previously, 25.83%).
This week, we expect the financial system to remain liquid, driven by increased activities in the Standing Deposit Facility (SDF) window. We also anticipate inflows of N16.0bn from OMO maturities. Overall, we expect the efficacy of the CBN’s favourite mop mechanism to determine the extent/magnitude of the system liquidity. That said, we project that FTDs, and money market rates will tapper due to excess liquidity in the financial system. In the secondary market, we anticipate bullish trends to persist as investors look to fulfil their unmet bids from the primary market.
Bond Market: Bullish Sentiments Dominated to the Secondary Market
Last week, the Debt Management Office (DMO) conducted the Aug-2024 bond auction with an offer size of N190.0bn across the reopened 2029, 2031 and 2033 bond papers. At the auction, investors’ demand was strong, as total subscriptions printed at N460.2bn, indicating an oversubscription rate of 2.4x. The bulk of the bids were skewed towards the longer instrument, “2031”, which received total bids of N314.2bn. Notably, the DMO over-allotted the auction, selling a total of N374.8bn worth of bond paper. As a result, the marginal rates on the 2031s and 2033s declined by 10bps and 38bps to settle at 20.90% and 21.50%, respectively. Meanwhile, the marginal rate on the 2029s climbed by 41bps to settle at 20.30%.
The secondary bonds market was bearish, as the average bond yield decreased by 8bps to close at 19.62% (previously 19.70%). In tandem, corporate bonds traded on a bullish note, as the average yield on corporate bonds fell by 23bps w/w to 22.57% (previously 22.80%).
In the Nigerian secondary Eurobonds market, we observed buy-interest amongst investors as cherry-picking activities continued, helped by $92.7mn in coupon payments which supported buy-interests. Thus, the average yields in the market declined by 20bps w/w to settle at 10.13% (previously, 10.33%).
Looking forward, we expect the bullish sentiment in the secondary bonds market to continue as investors continue to take advantage of the current high yields due to the market’s belief that rates may have peaked. In tandem, we expect sustained buy interests in the Nigerian Eurobonds market based on the anticipated interest rate cuts by global central banks.
Currency Market: Naira Appreciated at the NAFEM Window
Last week, the Naira appreciated by 0.6% w/w at the Nigerian Autonomous Foreign Exchange Market (NAFEM) to close at N1,570.1/$, from its previous close of N1,579.9/$. At the parallel market, the Naira depreciated by 1.3% w/w to close the week at N1,620.0/$ (previously N1,600.0/$). Meanwhile, activities in the NAFEM window decreased, as average FX turnover declined by 13.4% w/w to settle at $162.8mn (previously, $187.9mn. Lastly, Nigeria’s external reserves fell by 0.2% w/w to settle at $36.4bn.
This week, we expect continued pressure on the Naira across all market segments. This is due to scarcity of FX as Dollar earnings remain weak, and demand outweighs supply.
