October 14, 2024/United Capital Research
Global Market: Mixed Performance Across the Globe
In the world’s largest economy, equity markets began the week modestly lower, while Treasuries and oil prices rose above key resistance levels of 4.00% and $80.00, respectively. The impending hurricane Milton raised concerns about potential damages exceeding $100.00bn, negatively impacting insurance stocks. However, on Tuesday, markets rebounded, driven by mega-cap tech stocks, although oil prices fell after China’s market re-opened without new stimulus from the National Development and Reform Commission (NDRC). Wednesday saw the S&P 500 reach new all-time highs as insurance stocks recovered on better-than-expected hurricane news. Disappointing economic data released Thursday included a rise in claims and unexpected CPI results, but skepticism limited market pullback.
The unofficial earnings season began positively with strong financial sector results. Key themes included resilient consumer behavior and solid investment banking activity. The S&P 500 closed up by 1.10%, marking its fifth consecutive week of gains, while small and mid-cap stocks outperformed. Notably, the NYSE FANG+ index rose over 2.20%, though Tesla underperformed after a lackluster “We, Robot” event which underwhelmed investors given the lack of details disclosed on its Cybercab.
Most regional markets in Europe posted modest gains, except for the UK, which closed slightly lower due to a pullback in mining stocks and Diageo’s decline following China’s tariffs on bourbon imports. The European Central Bank (ECB) is set to announce its rate decision on Thursday, with expectations shifting toward a 25 basis point cut—its third reduction this year—as inflation data moderate and economic growth appears to be under pressure. The STOXX Europe 600 was up by 0.70% w/w, the CAC 40 up by 0.50% w/w, the DAX 40 up by 1.30% w/w and the FTSE 100 down by 0.4% w/w.
In Asia, China was the focal point and will continue to be so this week. In the prior week, while mainland indices were closed, the Hang Seng index rose on stimulus optimism. However, a lack of new stimulus announcements from the National Development and Reform Commission (NDRC) last week led to a pullback, with the Shanghai Composite down about 3.60% w/w and the Hang Seng down by 6.50% w/w. Despite this, both indices are up approximately 18.00% m/m and 23.00% m/m since mid-September. Over the weekend, the Finance Ministry’s press conference fuelled speculation of additional stimulus, with expectations of CNY 1.50-2.00tn. We anticipate market volatility this week, alongside significant economic data releases, including trade data, inflation, GDP, industrial production, and retail sales.
Brent crude oil prices have continued to rise due to optimism about China and ongoing tensions in the Middle East. After a selloff following the NDRC meeting, in China, losses were recovered as the market awaits Israel’s response, contributing to ongoing volatility. September saw negative sentiment with record short positions, which are fueling the current rally. On technical analysis, Brent crude tested important support levels, established a higher low, and broke its short-term downtrend. Over the past two years, Brent crude has fluctuated within a $20.00 range of approximately $70.00 to $90.00.
This week, there are key developments impacting markets. China will set the tone on Monday with China’s Finance Minister’s Press Conference, while US equity markets will be opened, bond markets will be closed for the Indigenous Peoples’ Day holiday. Earnings season is ramping up, primarily focused on financial and healthcare sectors, with some cyclical companies included. Key US economic data to watch includes regional surveys, retail sales, industrial production, and building permits/housing starts. Additionally, the ECB will announce its rate decision on Thursday.
Macroeconomic Highlights
The Nigerian National Petroleum Company Limited (NNPCL) has terminated its exclusive purchase agreement with Dangote Refinery, allowing other marketers to buy petrol directly from the refinery. This implies that Marketers can now negotiate petrol prices directly with the Dangote Refinery under a “willing buyer, willing seller” arrangement, aligning with practices for other deregulated products, such as diesel and kerosene. Meanwhile, NNPCL is set to deliver up to 400,000 barrels of crude oil daily to the refinery under its naira-for-crude agreement, amounting to 24.00 million barrels of local supply between Oct and Nov-2024.
Nigeria’s capital importation reached $2.60bn in the second quarter of 2024, representing a robust increase of 152.81% y/y compared to the $1.03bn recorded in Q2-2023. Despite this substantial annual growth, the figure marks a decline of 22.85% q/q from the $3.38bn recorded in the first quarter of 2024. The decrease in quarterly figures highlights ongoing fluctuations in investor sentiment, reflecting global economic uncertainties and domestic challenges.
Conversely, Foreign Direct Investment (FDI) dropped to $29.83mn in Q2-2024, marking the lowest level ever recorded since 2013. This figure represents a 65.33% y/y decline compared to the $86.03mn recorded in the same period of 2023. It also represents a 74.97% q/q drop from the $119.18mn reported in Q1-2024. Meanwhile, Foreign Portfolio Investment (FPI) in Nigeria’s equities markets improved significantly to settle at $149.93mn, marking a 203.69% q/q climb from the $49.40mn recorded in Q1-2024. It also marks a whopping 1659.84% y/y growth from the $8.52mn recorded in Q2-2023.
According to the Central Bank of Nigeria (CBN), Nigeria’s debt servicing payments surged by 69.00% y/y in the first half of 2024, reaching N6.04tn, up from the N3.58tn recorded in the same period of 2023. Notably, debt service costs made up 50.00% of the total expenditure of N12.17tn and a staggering 162.00% of the N3.73tn total revenue generated in H1-2024.
Data extracts from the CBN’s quarterly Economic Statistics report disclosed that net foreign exchange inflows to the Nigerian economy rose by 67.80% y/y to $27.60bn in the first half of 2024, from $16.44bn in the corresponding period of 2023. This is a result of a 34.60% y/y increase in net inflows through autonomous sources and a 170.00% y/y increase in net inflows through the Central Bank of Nigeria.
Lastly, Nigeria’s electricity distribution companies generated a total revenue of N887.86bn in the first seven months of 2024 following the tariff increase for Band A customers and improved revenue collection. The companies billed a total of N1.11tn over the period under review but could collect N887.86bn, achieving a revenue collection efficiency of 79.70%.
This week, we expect the National Bureau of Statistics (NBS) to release Nigeria’s Consumer Price Index (CPI) and Inflation report for the month of Sept-2024. We anticipate that headline inflation will inch higher due to the recent increase in fuel pump prices across the nation. However, we expect the high-base effect from 2023 to play a background role.
Domestic Equities: Local Bourse Regains Bullish Momentum…NGX-ASI up by 0.09% w/w
Last week, the domestic equities market closed on a positive note at the end of the week, despite closing in the red in the three (3) out of five (5) trading days of the week. At the same time, investors began to book profit with the market’s breadth declining to settle at 0.6x implying that 29 stocks advanced while 52 declined, as opposed to (1.4x the week before). Overall, investor sentiment towards riskier assets weakened, influenced by recent trends in the money and fixed-income markets. As a result, the benchmark NGX-ASI improved by 9bps to close at 97,606.63 points, bringing the YTD return to a solid 30.54% while market capitalization closed at N56.09tn. In terms of trading activity, market activity declined with the average value of stocks traded declining by 81.02% and 17.38% to print at N6.30bn and 593.23mn 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 (+1.57% w/w) led the gainers owing to buy interests in SEPLAT (+5.09% w/w). Following was the Banking sector (+0.47% w/w) on the back of share price appreciation in FIDELITY (+13.08% w/w). The Insurance sector (+0.08% w/w) followed owing to gains in PRESTIGE (+3.92% w/w) and CONERST (+3.59% w/w). On the flip side, the Consumer Goods sector (-6.84%) led the laggards on the back of losses in INTBREW (-8.16% w/w) and HONYFLOU (-6.45% w/w). The Industrial Goods sector (-0.13% w/w) followed due to share price depreciation in TRIPPLEG (-59.56%) and BERGER (-9.95% w/w).
On corporate actions, Access Holding Plc has obtained an Approval-In-Principle from the Bank of Namibia to establish a banking subsidiary in Namibia.
Oando Plc has been shortlisted by the Trinidadian government as one of three final contenders to take over the country’s state-owned refinery, Petrotrin.
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 Remained Tight
Last week, the financial system opened with a deficit balance of N707.32bn, following mop-up activities via the Cash Reserve Requirement (CRR) debits on banks and successful OMO auction conducted by the Central Bank of Nigeria. Despite inflows from OMO and other primary market repayments to the tune of N534.25bn into the system, targeted OMO auctions continued to weigh on any hope of excess liquidity. As a result, the financial system wrapped up the week under review in the deficit terrain, with a negative balance of N702.80bn. That said, funding rates between banks remained elevated, with the weekly average of the Open Repo Rate (OPR) and Overnight Rate (OVN) climbing by 164bps and 151bps w/w to settle at 32.19% and 32.67%, respectively.
The Central Bank conducted an OMO auction with an offer size of N500.00bn across the 95-day, 179-day, and 361-day bills. At the auction, investors’ demand was strong, as total subscriptions printed at N908.23bn, indicating an oversubscription rate of 1.82x. All of the bids came in for the longer-tenured instrument “361-day bill”, as there were no bids for the 95-day and 179-day bills. At the end of the auction, the Apex Bank over-allotted the auction, selling a total of 905.23bn worth of bills. That said, the stop rates on the 361-day bill inched down by 2bps to settle at 24.30%.
Also, the CBN conducted NT-Bill auction, to rollover maturing bills to the tune of N81.9bn across the 91-day, 182-day, and 364-day bills. The auction was met with strong demand as total subscription printed at N273.28bn, implying a bid-to-cover ratio of 3.34x. The CBN allotted just the amount on offer. Given the supply and demand fundamentals at work, stop rate on the 364-day bill tapered by 14bps to 19.86% (previously 20.00%), as 92.10% of total demand came in for the 364-day bill. Lastly, the stop rates on the other bills remained unchanged at previous levels, 17.00% and 17.50%, respectively.
In the secondary NT-bills market, we observed bearish sentiments across the curve, particularly driven by a mix of the recent +50bps MPR hike and the illiquid financial system. Consequently, the average yield on NT- bills rose by 48bps w/w to close at 23.16% (previously, 22.68%). Similarly, the average yield on OMO bills climbed by 214bps to settle at 25.92% (previously, 23.78%).
This week, we expect the financial system to remain broadly illiquid, pending receipt from FAAC payments. That said. we project that FTDs and money market rates will remain at current levels with a possibility of inching higher.
Bond Market: Investors Favoured Standoffish Posture
The secondary bonds market was relatively bearish, with most investors preferring a standoffish posture toward duration exposure, with a keen focus at the short end of the yield curve. That said, the average bond yield inched up by 2bps to close at 19.10% (previously 19.08%). In tandem, corporate bonds traded on a bearish note, as the average yield on corporate bonds rose by 21bps w/w to 22.15% (previously, 21.94%).
In the Nigerian secondary Eurobonds market, we observed positive sentiments return to the market, as investors continue to cherry-pick SSA Eurobonds with premium returns. Thus, the average yields in the market declined by 19bps w/w to settle at 9.44% (previously 9.63%).
Looking forward, we expect the investors to continue to favor standoffish stances toward duration exposed government instruments, particularly given the elevated levels of short-term rates. Meanwhile, we expect investors to retain their appetite for Nigerian Eurobonds, keeping in view the ongoing global monetary ease cycle.
Currency Market: Naira Depreciated at the NAFEM Window
Last week, the Naira depreciated by 0.62% w/w at the Nigerian Autonomous Foreign Exchange Market (NAFEM) to close at N1,641.27/$, from its previous close of N1,631.21/$. At the parallel market, the Naira depreciated by 1.80% w/w to settle at N1700.00/$, from its previous close of N1670.0/$. Meanwhile, activities in the NAFEM window decreased, as average FX turnover fell by 4.38% w/w to settle at $308.90mn. Lastly, Nigeria’s external reserves rose by 16bps to settle at $38.67bn.
This week, we expect continued pressure on the Naira across all market segments in the short-medium-term, given that Dollar earnings remain weak amid rising demand.
