September 23, 2024/United Capital Research
Global Markets: Fed Outsized Rate Cut Sours Positive Sentiments in Markets for Risk Assets
The Fed’s rate cut announcement seemed to be the most significant factor influencing investor sentiment last week. The Federal Open Market Committee chose to lower its key overnight borrowing rate by a half percentage point(50 basis points), amid signs that inflation was moderating, and the labour market was weakening. This represents the first interest rate cut since the early days of the COVID pandemic. The large-cap indexes soared to record highs as investors embraced the start of what many expect to be a prolonged rate-cutting cycle by the Federal Reserve. Smaller-cap indices outperformed throughout the rally, but they still lagged behind prior highs. The Russell 2000 Index, for example, concluded the week around 9.0% behind its all-time high set in November 2021. The gain was broad based. That said, key US indices registered gains with the NASDAQ (+1.5% w/w), S&P 500 (+1.4% w/w), and DJIA (+1.6% w/w) all closing in the green territory.
In Europe, investors’ sentiment was mixed. The pan-European STOXX Europe 600 Index ended the week 0.33% lower, as the rally triggered by the U.S. Federal Reserve’s interest rate cut faded and investors grew cautious about the outlook for monetary policy in Europe. Furthermore, major stock indexes advanced, with Italy’s FTSE MIB increasing by 0.6% w/w, France’s CAC 40 Index adding 0.5%, and Germany’s DAX eking out a 0.1% w/w gain. However, the UK’s FTSE 100 Index, lost 0.5% w/w. For additional background, the Bank of England (BoE), as expected, held its key policy rate at 5.0%, with the Monetary Policy Committee voting 8 – 1 in favor of no change. Unusually, the bank provided forward guidance on the rate path, noting that “in the absence of material developments, a gradual approach to removing policy restraint remains appropriate.” Governor Andrew Bailey stressed, “It is vital that inflation stays low, so we need to be careful not to cut too fast or by too much.” Still, Bailey added that he was “optimistic” rates would fall further once there was evidence that underlying price pressures were cooling.
In Asia, sentiments were bullish. Japan’s stock markets rose over the week, with the Nikkei 225 Index gaining 3.1% w/w and the broader TOPIX Index up by 2.8% w/w. Midweek, Japanese equities benefited as the yen weakened on the U.S. Federal Reserve’s latest monetary policy decision, which saw the Fed deliver an outsized 50-basis-point reduction in interest rates. Chinese equities rose in a holiday-shortened week as the Fed’s decision to cut interest rates offset a batch of disappointing economic data. The Shanghai Composite Index gained 1.2% w/w, while the blue-chip CSI 300 added 1.3% w/w.
Meanwhile, oil prices settled lower on Friday but recorded a second straight week of gains, garnering support from a U.S. interest rate cut and a dip in U.S. crude inventories to a one-year low. Additionally, rising tensions in the Middle East, raising the risk of supply disruption, further boosted the oil market. Israel announced on Friday the killing of a top Hezbollah commander and other senior figures in the Lebanese movement in an airstrike on Beirut as fears of a wider war rise. However, demand concerns remain at large as China’s refinery output slowed for a fifth straight month in August and industrial output growth hit a five-month low.
This week, we expect the sentiments within the global markets to remain within the spell of the pivot in global monetary policy, with risk on sentiments actively favoring mod-long term investment postures, across fundamentally sound equities. The revolution of Artificial Intelligence (AI) is bound to sustain interest around technology stocks. In Europe, we expect upcoming economic data to play a huge role in rate cuts pace in the region.
Macroeconomic Highlights
The Federal Government is set to receive a fresh loan from the World Bank, with approval expected for loans worth $1.7bn. The loan is expected to be approved on 26 September 2024. The funds will be received via three major development projects aimed at enhancing Nigeria’s economic stability and resource mobilisation capabilities. The Nigeria Primary Healthcare Provision Strengthening Programme would receive $500.0mn, the Nigeria Human Capital Opportunities for Prosperity and Equity Governance would receive $500.0mn, while the Sustainable Power and Irrigation for Nigeria Project would receive the highest funding of $700.0mn.
The Federal Government, States, and Local Government Councils (LGCs) shared a total of N1.203tn for revenue generated in Aug-2024 and distributed in Sep-2024. This represents a decrease of 11.4% compared to the N1.358tn shared from July 2024 revenue, distributed in August. In the month of August 2024, total revenue of N2.278tn was available. However, deductions were made to account for collection costs and other obligations. A total of N81.975bn was deducted for the cost of collection, while N992.617bn was set aside for transfers, interventions, and refunds.
President Bola Tinubu has issued five new executive orders aimed at providing fiscal incentives for investment in Nigeria’s oil and gas sector. This comes as the Federal Government announced the kick-off of the $550mn Ubeta gas project, which will deliver 350 million standard cubic feet of gas per day when operational.
The Central Bank of Nigeria (CBN) has released a total sum of $2.97bn to oil sector players for the importation of petroleum products and other related items into the country. In 2022, the Apex Bank released $1.41bn for fuel imports, the figure dropped to $1.03bn in 2023 representing a decline of 26.9%. In Q1-2024, $522.9mn was allocated indicating 0.01% of $4bn spent on imports in the period under review, but 12.86% increase when compared to the $463.3mn recorded in the preceding period of 2023.
This week, we expect the macroeconomic environment to be relatively quiet in the absence of any data releases.
Domestic Equities: Local Bourse Maintained Bullish Momentum…NGX-ASI Up by 0.81% w/w
Last week, the domestic equities market closed the week green as bullish sentiments dominated the market in three (3) out of four (4) trading days of the week. Notably, renewed interest in GEREGU (+15.00% w/w) stood out as the primary index driver. Bargain-hunting activities continued, however, the market’s breadth weakened to 1.3x (from 1.6x last week). Sentiments toward risk asset classes remained positive, given the recent trend and developments in the money/fixed-income market. That said, the benchmark NGX-ASI climbed by 81bps to settle at 98,247.99 points. As a result, YTD return strengthened to 31.4%, while market capitalisation closed at N56.5tn. Furthermore, market activities declined, as the average value and volume of stocks traded fell by 5.9% and 10.0% to print at N9.6bn and 465.0mn units.
Similarly, on a sectorial level, performance was bullish as three (3) sectors under our coverage closed in the green territory. The Banking sector (+1.26% w/w) led the gainers on the back of interests in FIDELITY (+24.20% w/w) and UBA (+2.32% w/w). Following was the Insurance sector (+0.86% w/w) on the back of share price appreciation in AIICO (+6.25%) and MANSARD (+2.47%). The Oil and Gas sector (+0.02% w/w) gained. On the flip side, the Consumer Goods sector (-0.77%) led the laggards on the back of share price depreciation in FLOURMIL (-7.43%) and INTBREW (-5.78% w/w). The Industrial Goods sector (-0.13% w/w) followed owing to profit booking activities in WAPCO (-2.40% w/w) and CUTIX (-5.86% w/w).
On corporate actions, Access Holdings Plc has released its H1 financial results, announcing a profit before tax of 348.9bn, which indicates a N108.2% y/y increase from the N167.6bn recorded in the same period last year. The profit after tax was N281.3bn, which indicates an increase of 107.8% from the N135.4bn recorded in the same period last year.
Access Holdings Plc has announced an Interim Dividend of 45 kobo, with a qualification date of Thursday, 03 October 2024, and a payment date of Thursday, 17 October 2024.
Nigerian Breweries Plc has announced plans to reduce its foreign exchange losses through a N599.1bn Rights Issue. The company is offering 22.6bn ordinary shares at 50 kobo each, at N26.50 per share, allowing shareholders to purchase 11 new shares for every five they currently hold.
Looking forward, the equities market is expected to retain its buy interest as investors cherry-pick undervalued stocks. However, given the sentiment that rates might have peaked in the fixed income and money markets and investors locking in on current rates, we expect some bearish undertone to persist in the equities market. Nevertheless, 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 strong fundamentals and ongoing corporate actions. This strategy will maximise market opportunities, thereby optimising portfolio returns.
Money Market Review: System Liquidity Improves Ahead of Sept-24 Bond Auction
Last week, the financial system opened with a deficit balance of N411.4bn. We observed inflows from coupon payments to the tune of N398.7bn. Additionally, OMO maturities amounting to N45.2bn hit the financial system. Nevertheless, this was no significant in bolstering system liquidity given increased activities in the Standing Lending Facility (SLF). As a result, the financial system closed the week with a deficit balance of N272.5bn. Consequently, the average Open Repo Rate (OPR) and the Overnight Rate (OVN) fell by 30bps w/w and 41bps w/w to settle at 30.72% and 31.09%, respectively.
In the secondary NT-bill market, we observed bearish sentiment across the curve. As a result, the average yield on NT-bills rose by 51bps w/w to close at 20.79% (previously, 20.28%). On the other hand, the average yield on OMO bills fell by 21bps to settle at 23.42% (previously, 23.63%).
This week, the Monetary Policy Committee (MPC) meeting is scheduled to hold on the 23rd and 24th of September 2024. At the meeting, we expect the MPC to hold the Monetary Policy Rate (MPR) given the slowdown in headline inflation readings for two consecutive months (July and August). For liquidity, we expect the financial system to be bolstered, particularly due to FAAC inflows reflecting in the system. Additionally, we anticipate a total of N202.3bn worth of coupon payments to hit the system. However, we do not rule out the possibility of the Central Bank of Nigeria (CBN) mopping-up any excess liquidity in the financial system via OMO auctions. In the primary market, the CBN is set to roll-over a total of N227.5bn worth of NT-Bill maturities across the 91-day, 182-day and 364-day bills. At the auction, we expect stop rates to decline further in line with the general downward trend of rates in the fixed-income market.
Bond Market: Nigerian Bonds Rally on Dovish US Fed
The secondary bonds market was bullish particularly at the short end of the curve, as the average bond yield fell by 18bps to close at 18.66% (previously, 18.84%). Similarly, corporate bonds traded on a bullish note, as the average yield on corporate bonds fell by 15bps w/w to 21.49% (previously, 21.64%).
In the Nigerian secondary Eurobond market, we observed bullish sentiments as the US Fed spurred a rally. Thus, the average yield on Nigeria Eurobonds fell by 35bps w/w to settle at 9.60% (previously, 9.95%).
Looking forward, we expect monetary easing by central banks in developed economies to spur buy-interest in Nigerian Eurobonds. In the primary FGN Bond market, there will be a Bond Auction on Monday, 23-Sep. The 5yr, 7yr and 9yr Bonds will be on offer. N150.0bn will be on offer. We anticipate strong investor participation, owing to improved system liquidity and the market sentiment that interest rates have peaked. Marginal rates are expected to remain at current levels (20.3% – 21.5%) with the likelihood of tapering. In the secondary market, we anticipate bullish sentiment to drive buy-interest.
Currency Market: Naira Appreciated at the NAFEM Window
Last week, the Naira appreciated by 0.3% w/w at the Nigerian Autonomous Foreign Exchange Market (NAFEM) to close at N1,541.52/$, from its previous close of N1,546.41/$. At the parallel market, the Naira depreciated by 0.6% w/w to settle at N1675.0/$, from its previous close of N1665.0/$. Meanwhile, activities in the NAFEM window decreased, as average FX turnover fell by 34.5% w/w to settle at $169.3mn. Lastly, Nigeria’s external reserves rose by 122bps to settle at $37.4bn.
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.
