October 7, 2024/United Capital Research
Global Markets: Markets Closed Higher even as Investors Derisk.
Last week Monday marked the end of Q3-2024, a quarter which in the US showcased strong asset performance driven by solid corporate earnings, AI momentum, and the start of the US Fed’s easing cycle. The week also saw the beginning of Q4-2024 as investors began to derisk amid geopolitical concerns and uncertainties about the US Fed interest rate cuts. Meanwhile, the BLS payroll report on Friday exceeded expectations, reducing the likelihood of Fed cuts, while extended positioning and algorithmic trading heightened market volatility, pushing the VIX and one-day volatility upward. With the US election just 31 days away, volatility is expected to rise further.
Dovish central bank remarks during the week provided limited support for risk appetite, and as October progresses, the market faces historically negative seasonality. The Russell 2000 and S&P 500 Equal Weight indices still show strong year-to-date gains despite a pullback last week. Meanwhile, mega-cap tech and semiconductor stocks continue to thrive. Nvidia’s CEO highlighted “insane” demand for the Blackwell chip, and Micron Technologies reported solid earnings and positive FY2025 demand guidance, instilling optimism in the semiconductor sector. The S&P 500 closed the week up 0.20% w/w and 20.60% YTD.
In Europe, major indices fell by 1.00% to 3.00% last week. The STOXX Europe 600 fell by 1.80% w/w, the German DAX down by 1.80% w/w, France CAC 40 declined by 3.20% w/w, and the UK FTSE 100 fell by 1.10% w/w. European equities were weighed down by the escalating crisis in the Middle East. European stocks have failed to recover from Aug-2024 selloffs, pressured by uncertainty surrounding the US presidential election and the looming corporate earnings season. The Stoxx 600 eased by 0.40% in Sept-2024. Investors are flocking to defensive stocks to hedge against volatility into the US election, before rotating into economy-linked cyclical stocks.
In Asia, China, Taiwan, South Korea were closed on holidays for most of last week. The Nikkei 225 fell 3.00% w/w. There were selloffs in Japan as investors fretted over a surprise outcome in the ruling party’s leadership race, offsetting the optimism in Chinese markets. The losses came after Shigeru Ishiba’s victory wrongfooted investors, forcing them to pare positions that had been built on speculation that Sanae Takaichi would become the nation’s new prime minister and encourage the Bank of Japan to keep interest rates low. However, in China, Hong Kong’s Hang Seng index rose by 10.20% w/w, its longest winning streak since 2018, as investors turned more optimistic that an economic rebound was more sustainable. Following the policy bonanza announced in the prior week, investors are looking for early signs of improving consumer confidence.
In the Oil market, trader’s short positions unwound as a result of the largest weekly gain in Oil futures in more than a year following a negative Q3-2024 close. Geopolitical tensions persist as markets watch how the situation in the Middle East develops. The demand curve is in backwardation. Concerns about Libya’s supplies and Saudi Arabia’s impending production increases have put pressure on oil fundamentals. Oil demand in China has been declining owing to an irresolute economy, the surge in LNG use, and the popularity of electric cars.
This week, the start of the Q3 earnings season and US inflation will be the major events. Outside of the United States, industrial production, retail sales, and confidence indices are anticipated. Central banks in Asia and the Americas will deliver rate decision. The FOMC minutes as well as those from other central bank meetings will be released. US Fed representatives will discuss the implications of the BLS statistics for monetary policy. Artificial intelligence product events for Tesla, AMD, and HP may cause price movements in their stocks. The bi-weekly equities short interest data will be made available by the Financial Industry Regulatory Agency (FINRA). Finally, and on a lighter note, the Nobel Peace Prize announcement takes place on Friday, a notable event amidst the changing dynamics in the globe these days.
Macroeconomic Highlights
Last week, the World Bank approved a total of $1.57bn to strengthen human capital in Nigeria through better health for women, children and adolescents. Sources further disclosed that part of the support will also help to mitigate the impact of climate change (floods and droughts) in Nigeria through improvement in dam safety and irrigation.
Also, the President Bola Tinubu (GCFR) revealed the imminent ministerial approval of the ExxonMobil-Seplat divestment, having been concluded by the regulator, the Nigerian Upstream Petroleum Regulatory Commission (NUPRC), in line with the Petroleum Industry Act (PIA). The proposed divestment of 100% interest in Mobil Producing Nigeria Unlimited to Seplat Energy Offshore Limited worth $1.28 billion deal was first announced in Feb-2022 but has been entangled in regulatory hurdles for over two years.
Last week, the Federal Government announced the provision of new tax reliefs for deep offshore oil and gas production to boost investments in the sector. Additionally, FG disclosed that the importation of key energy products and infrastructure, including diesel, feed gas, Liquefied Petroleum Gas, Compressed Natural Gas, electric vehicles, Liquefied Natural Gas infrastructure, and clean cooking equipment would no longer require value-added tax payment.
Similarly, FG unveiled new tax regulations aimed at reducing the tax burden on the manufacturing sector and small businesses. The Withholding Tax Regulations-2024 aim to streamline the deduction of taxes at source from payments to taxable persons, reduce complexities, and promote ease of compliance for businesses. Furthermore, the newly introduced regulations will cover payments made under the Capital Gains Tax Act, Companies Income Tax Act, Petroleum Profits Tax Act, and the Personal Income Tax Act.
The Central Bank of Nigeria announced the introduction of an Electronic Foreign Exchange Matching System (EFEMS) aimed at transforming the country’s foreign exchange market. The EFEMS is expected to reshape how foreign exchange transactions are conducted in the interbank market by enhancing transparency and promoting a market-driven exchange rate accessible to the public.
On petrol related matters, oil marketers disclosed that the Nigerian National Petroleum Company Limited (NNPCL) portal used to purchase petrol has been shut against dealers, making it impossible for them to apply for the commodity purchase. They further disclosed that they are still awaiting over 90.0mn litres of petrol from the state-owned company, valued at about N79.0bn.
This week, we expect the macroeconomic environment to be relatively quiet in the absence of any data releases.
Domestic Equities: Local Bourse Reverses Bullish Momentum…NGX-ASI Down by 0.95% w/w
Last week, the market opened for four trading days as the Federal Government of Nigeria declared Tuesday, 01-Oct-2024, as Public Holiday to commemorate the Independence Day Celebration. Meanwhile, the domestic equities market closed on a negative note at the end of the week, despite mixed sentiments in the four (4) trading days of the week. At the same time, bargain-hunting also continued with the market’s breadth remaining unchanged to settle at 1.4x implying that 45 stocks advanced while 33 declined, same as (1.4x the week before). Overall, investors remained optimistic about riskier assets, thanks in part to recent trends in the money and fixed-income markets. As a result, the benchmark NGX-ASI declined by 95bps to close at 97,520.54 points, bringing the YTD return to a solid 30.42% while market capitalization closed at N56.03tn. In terms of trading activity, market activity improved with the average value of stocks traded advancing by 260.87% and 8.18% to print at N33.20bn and 717.99mn units respectively.
On a sectorial level, performance was bullish as three (3) sectors under our coverage closed in the green territory. The Oil and Gas sector (+7.29% w/w) led the gainers owing to buy interests in SEPLAT (+21.00% w/w). Following was the Insurance sector (+3.81% w/w) on the back of share price appreciation in VERITASK (+20.00% w/w) and REGALINS (+18.84% w/w). The Consumer Goods sector (+0.34% w/w) followed owing to gains in INTBREW (+9.98% w/w) and GUINNESS (+7.09% w/w). On the flip side, the Industrial Goods sector (-6.84%) led the laggards on the back of losses in DANGCEM (-12.20% w/w) and BUACEMEN (-3.42% w/w). The Banking sector (-0.74% w/w) followed due to share price depreciation in FIDELITY (-13.33%) and ZENITHBA (-0.53% w/w).
On corporate actions, United Bank for Africa (UBA) released its H1-2024 financial results, declaring a Profit before tax (PBT) of N401.58bn and a profit after tax (PAT) of N316.36bn. The top-tier bank announced an interim dividend of N2.00, with a qualification date of Monday, 14-Oct-2024, and a payment date of Tuesday, 22-Oct-2024.
Also, Fidelity Bank Plc released its Q2-2024 financial statement, declaring a profit before tax (PBT) of N200.87bn and a profit after tax (PAT) of N159.83bn. The bank announced an interim dividend of 0.85 kobo, with a qualification date of Thursday, 17-Oct-2024, and a payment date of Friday, 25-Oct- 2024.
Lastly, Access Holding Plc announced the merger between Access Pensions Limited with ARM Pensions Managers (PFA) Limited to become Access Arm Pensions Limited (AAPL). AAPL is one of Nigeria’s largest Pension Funds Administrator by customer base and with nearly N3.00tn in Assets Under Management.
Looking ahead, we expect mixed sentiments to persist in the equities market. As a result of the stubborn nature of inflation (particularly fuelled by elevated exchange rate environment), the MPC hiked 50bps. We expect this hike to play a background role in the market, with investors and equity-biased fund managers adopting a more cautious approach to trading. This approach involves a strict restriction of trading activities to only equities with solid fundamentals who are set for sustained profitability (bottom-line performance) in FY-2024 financials (beginning from 9M-2024 financials). In the same vein, corporates with pending corporate actions will continue to outperform (in terms of positive market sentiments), presenting trading opportunities (in-and-out scenarios). Fund managers/traders may consider improving cash positions, to trade market volatilities (while retaining a holistic mid-long term investment posture). Ultimately, investors may retain an investment posture of ≥3 months. This will enable portfolios to take advantage of positive sentiments during 9M-2024 earning season, as well as remain positioned to profit from the anticipated (cyclical) portfolio rebalancing activities, which would commence toward the end of the year in Q4-2024.
Money Market Review: System Liquidity Tightens
Last week, the financial system opened with a surplus balance of N707.32bn. System liquidity shrunk significantly during the week in the absence of any inflow into the financial system. This was also primarily due to mop-up activities via the Cash Reserve Requirement (CRR) debits on banks and the OMO auction conducted by the Central Bank. As a result, the financial system closed the week with a deficit balance of N1.43tn. Consequently, the average Open Repo Rate (OPR) and Overnight Rate (OVN) climbed by 812bps and 810bps w/w to settle at 30.56% and 31.16%, respectively.
The Central Bank conducted an OMO auction with an offer size of N500.00bn across the 89-day, 187-day, and 362-day bills. Unlike the last two previous auctions, investors’ demand was strong, as total subscriptions printed at N737.14bn, indicating an oversubscription rate of 1.47x. All the bids came in for the longer-tenured instrument “362-day bill”. Notably, there were no bids for the 89-day and 187-day bills. At the end of the auction, the Apex Bank over-allotted the auction, selling a total of 731.14bn worth of bills. As a result, the stop rates on the 362-day bills inched up by 2bps to settle at 24.32%.
In the secondary market, we observed bearish sentiments across the curve. As a result, the average yield on NT-bills rose by 76bps w/w to close at 22.68% (previously, 21.92%). Similarly, the average yield on OMO bills climbed by 13bps to settle at 23.78% (previously, 23.65%).
This week, we expect the financial system to remain broadly illiquid. Despite expected inflows from OMO maturities to the tune of N7.25bn, it is insufficient to bolster liquidity in the financial system. Thus, we project that FTDs and money market rates will remain at current levels, with a likelihood of inching slightly upwards. Lastly, we expect the Central Bank to conduct an NT-bill auction, rolling over a total of N53.43bn worth of bills across the 91-day, 182-day, and 364-day bills. At the auction, we expect supply and demand fundamentals to determine the outcome of the auction.
Bond Market: Bearish Sentiments Dominated in the Secondary Market
Last week, the secondary bonds market was bearish, fueled by a blend of the recent Monetary Policy Rate hike (MPR) hike and the illiquid financial system. Thus, the average bond yield climbed by 33bps to close at 19.08% (previously 18.75%). In tandem, corporate bonds traded on a bearish note, as the average yield on corporate bonds rose by 33bps w/w to 21.94% (previously, 21.61%).
In the Nigerian secondary Eurobonds market, we observed mild selloffs as investors considered the possible impacts of the renewed crisis/excalation in the Middle East. Thus, the average yields in the market increased by 6bps w/w to settle at 9.63% (previously 9.57%).
Looking forward, we expect the bearish sentiment in the secondary bonds market to continue, driven by the illiquidity in the financial system. Investors will also remain on the sidelines, as all attention will be focused on the NT-bills’ primary market activity. Meanwhile, we anticipate investors will maintain a cautious approach to the Nigerian Eurobonds market.
Currency Market: Naira Depreciated at the NAFEM Window
Last week, the Naira depreciated by 5.90% w/w at the Nigerian Autonomous Foreign Exchange Market (NAFEM) to close at N1,631.21/$, from its previous close of N1,540.78/$. At the parallel market, the Naira appreciated by 0.90% w/w to settle at N1670.00/$, from its previous close of N1,680.00/$. Meanwhile, activities in the NAFEM window decreased, as average FX turnover rose by 12.40% w/w to settle at $248.3mn. Lastly, Nigeria’s external reserves rose by 1.37% w/w to settle at $38.58bn compared to $38.06bn as of 27-Sept-2024.
This week, we expect continued pressure on the Naira across all market segments, as FX pressures persist due to inadequate Dollar earnings and a burgeoning demand for Dollar in the economy.
