October 21, 2024/United Capital Research
Global Markets: Bullish Momentum Sustained
Last week, the global equities market closed on a positive note, following impressive Q3-2024 earnings outings, rate cut decision in Europe and liquidity support stimulus in China. In the US, investors’ sentiments towards equities market improved following strong tech performance, with Netflix leading the charge after an impressive earnings report. The company delivered better-than-expected Q3-2024 earnings, revenue, and subscriber growth. Additionally, the overall positive bias was boosted by several other earnings releases. The financial sector was a top performer as investors digested a slate of earnings news from the space. Morgan Stanley, Bank of America, Citigroup, and Goldman Sachs were some of the standouts in the sector. Meanwhile, we observed initial weaknesses in the semiconductor space in response to a Bloomberg report that stated that the Biden administration is looking at curbing sales of advanced AI chips to certain countries, with a focus on Persian Gulf countries. Selling pressures intensified in the space in response to ASML’s Q3-2024 results, which reported weaker-than-expected Earnings Per Share (EPS), revenue, and FY-2025 revenue guidance. Nevertheless, market participants also considered the upcoming Nov-2024 election and the possibility that the Fed might not be as aggressive as previously thought after more solid economic data. According to the US Census Bureau, retail sales increased 0.40% m/m in Sept-2024, well above the 0.10% recorded in Aug-2024, and market expectations of a 0.30% rise. This implies a continued robust consumer sector in the US despite worries about global recession. Additionally, jobless claims came in lower than forecast, reinforcing the view that consumer spending remains resilient. As a result, the US indices closed on a positive note, with the NASDAQ (+0.80% w/w), DIJA (+0.96% w/w), and S&P 500 (+0.85% w/w) closing the week higher.
In tandem, the European markets recorded w/w gains supported by bets that the European Central Bank (ECB) will continue to lower its main interest rates and favorable developments for equities with large exposure to China. The PBoC decided to formally start two new facilities to add liquidity aimed at buying stocks, lifting the European luxury and auto sectors. The ECB lowered its three main interest rates by 25bps for the third time this year on the back of easing inflationary pressures and worsening economic prospects for the Eurozone. The deposit facility, main refinancing operations, and marginal lending facility rates will now stand at 3.25%, 3.40%, and 3.65%, respectively. The ECB President Christine Lagarde’s remarks were interpreted as a downgrade of the economic outlook, prompting markets to price in another 25bps cut in its Dec-2024 meeting, with a 25.00% chance of a larger 50bps cut. On economic data releases, the headline inflation rate in the Euro Area was revised lower to 1.70% y/y in September 2024, compared to initial estimates of 1.80% y/y and the 2.20% y/y recorded in Aug-2024. Inflation is now at levels seen in Apr-2021 and below the ECB’s target of 2.0% y/y. Lastly, the current account surplus in the Euro Area widened by 31.345 y/y to €35.20bn in Aug-2024 from €26.80bn in Aug-2023. Consequently, Germany’s DAX (+1.46% w/w), France’s CAC (+0.46% w/w), Europe’s STOXX (+0.58% w/w) and UK’s FTSE (+1.27% w/w) edged higher.
Market attention in Asia was primarily focused on China during the past week, as the People’s Bank of China (PBoC) has started a specialised re-lending facility for listed firms and major shareholders to buy back shares as part of a broad stimulus package to bolster recovery and revive the capital market. The program provides CNY 300.00bn in funding to 21 eligible commercial banks that lend to qualified companies and shareholders. Lenders are to decide independently whether to issue the loans and bear the associated risks, while the central bank will provide funds equivalent to the principal of the loans to commercial lenders. In a separate statement, the PBoC indicated that about 20 institutions, including securities firms and funds, have been approved to use a swap facility from the central bank, allowing them to access liquidity by pledging bonds and certain stocks. Thus, the Chinese Shanghai Composite rose by 1.36% w/w. Elsewhere in Japan, data showed that Japan’s trade balance shifted to a deficit in Sept-2024 amid a weakening Yen, with exports unexpectedly declining while imports growth softened. That said, the Japanese NIKKEI (-1.57% w/w) and Indian SENSEX (-0.19% w/w) closed lower.
In the oil market, crude oil prices were pressured as the prospect of a less severe escalation in the Middle East and weak demand weighed on sentiments. As a result, oil prices closed lower, with Brent Crude falling by 757bps w/w to print at $73.06/bbl (previously $79.04/bbl).
This week, the Q3-2024 earnings season will continue, with major companies such as Tesla, Coca-Cola, 3M, General Motors, and Verizon unveiling their earnings reports. In the US, we anticipate the release of the Purchasing Managers’ Index (PMI), durable goods orders, and reports on existing & new home sales. Elsewhere in Europe, investors will closely watch the consumer confidence figures for the Euro Area, UK, France, and Italy. Also, manufacturing and services PMI data will be in focus for Japan, India, France, Germany, and the UK. Lastly, the PBoC is set to cut its loan prime rates to aid in the transmission of its recent monetary stimulus measures.
Macroeconomic Highlights
In its Monthly Oil Market Report for Oct-2024, Organisation of the Petroleum Exporting Countries (OPEC) disclosed that Nigeria’s crude production fell from 1.352mbpd in August to 1.324mbpd in September. This figure indicates that the country has lost an average of 27,000bpd. This is coming at a time when the Federal Government said it was making efforts to hit 2.00mbpd.
According to the official Capital Importation data, Nigeria has attracted a total of $55.50bn in foreign capital inflows between Q1-2019 and Q2-2024. Since 2019, Nigeria has attracted a total of $3.60bn in Foreign Direct Investment (FDI), while the remaining $51.90bn came in the form of Foreign Portfolio Investment (FPI). Notably, Nigeria received its largest single-year capital inflow of $23.9bn in 2019, while 2023 recorded the lowest amount, with just $3.90bn.
The World Bank has projected that Nigeria’s revenue-to-GDP ratio could rise to over 10.5% by the end of 2024, following the recent increase in government revenue. The Federal Government recently reported a 100.00% rise in revenue to N9.10tn in the first half of 2024, compared to the same period last year. Ndiamé Diop, World Bank country director for Nigeria urged the Federal Government to sustain key reforms such as the unification of foreign exchange rates and the removal of fuel subsidies.
Also, extracts from Sept-2024 Consumer Price Index (CPI) report released by the National Bureau of Statistics (NBS) revealed that Nigeria’s headline inflation printed at 32.70% on a year-on-year (y/y) basis, indicating a 54bps climb from 32.15% y/y recorded in Aug-2024. On a month-on-month viewpoint, a similar uptick was observed. For context, headline inflation rate climbed by 2.52% m/m in Sept-2024, 30bps higher than the 2.22% m/m recorded in Aug-2024.
Finally, Nigeria’s foreign capital inflows from BRICS nations have surged by 189.00% in the first half of 2024, amid the country’s ongoing efforts to secure a spot within the expanded BRICS coalition. Data from the National Bureau of Statistics (NBS) revealed that capital importation from BRICS countries rose from $438.72mn in the first six months of 2023 to $1.27bn in the same period of 2024. The BRICS group, initially comprising Brazil, Russia, India, China, and South Africa, expanded on 1-Jan-2024, by officially welcoming five new members: Saudi Arabia, Iran, Egypt, Ethiopia, and the United Arab Emirates (UAE).
According to media reports, Oil marketers have stated that the volume of Premium Motor Spirit (PMS/ Petrol) produced by the Dangote Petroleum Refinery is insufficient to meet domestic demand. They align with the Trade Union Congress (TUC) allegation that the Refinery produces approximately 10.00mbpd compared to the 25.00mbpd the Nigerian Midstream and Downstream Petroleum Regulatory Authority (NMDPRA) said the Refinery would supply.
This week, we expect the NBS to release the Selected Food Price Watch Transport Fare Watch for Sept-2024. Mid-week, the NBS will publish its Electricity Report for Q3-2024. Finally, on Thursday, the details of the Federation Account Allocation Committee (FAAC) (September 2024 Disbursement) will be published.
Domestic Equities: Local Bourse Sustains Bullish Momentum…NGX-ASI Up by 0.48% w/w
Last week, the domestic equities market closed on a positive note, despite bearish sentiments driving losses for three (3) out of five (5) trading days. A standout performer was OANDO, which saw a significant rise of (+10.00% w/w), playing a key role in pushing the main index higher. Bargain-hunting activities persisted despite a lower figure of appreciated stocks from those that depreciated, with the market’s breadth improving to 0.8x implying that 33 stocks appreciated while 43 declined, up from (0.6x 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 climbed by 48bps to close at 98,070.28 points, bringing the YTD return to a solid 31.16% and lifting market capitalization to N59.43tn. In terms of trading activity, it was a mixed bag: while the average value of stocks traded jumped by 134.60% to N14.78bn, the total volume of stocks traded dipped by 51.22% to 289.34mn units.
Similarly, on a sectorial level, performance was bullish as three (3) sectors under our coverage closed in the green territory. The Consumer Goods sector (+1.42% w/w) led the gainers on the back of interests in DANGSUGA (+13.06% w/w) and INTBREW (+6.91% w/w). Following was the Oil and Gas sector (+1.08% w/w) on the back of share price appreciation in CONOIL (+5.33%) and ETERNA (+8.10%). The Industrial Goods sector (+0.04% w/w) gained on the back of share price appreciation in WAPCO (+0.69% w/w). On the flip side, the Insurance sector (-1.23%) led the laggards on the back of share price depreciation in MANSARD (-4.01%) and CORNERST (-3.46% w/w). The Banking sector (-0.51% w/w) followed owing to profit booking activities in STERLING (-4.02% w/w) and BERGER (-6.64% w/w).
On corporate actions, United Capital Plc has released its Q3-2024 financial results, declaring a profit before tax of N18.73bn and a profit after tax of N15.98bn. Transpower Plc has released its Q3-2024 financial results, declaring a profit before tax of N81.12bn and a profit after tax of N58.42bn.
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 Remained Tight
Last week, the financial system opened with a significant deficit balance of N2.37trn, following successful mop-up activities via the Cash Reserve Requirement (CRR) debits on banks and successful OMO auctions conducted by the Central Bank of Nigeria. Despite inflows from OMO and other primary market repayments to the tune of N160.36bn hitting the system, the financial system illiquidity remained at large. As a result, the financial system wrapped up the week under review in the deficit terrain, with a negative balance of N837.30bn. 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.
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 100bps w/w to close at 24.16% (previously, 23.16%). Similarly, the average yield on OMO bills inched up by 1bp to settle at 25.93% (previously, 25.92%).
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 trending higher.
Bond Market: The Illiquid Financial System Fuelled Bearish Sentiments
The secondary bonds market was relatively bearish. However, most investors preferred a standoffish posture toward duration exposure, with a keen focus at the short end of the yield curve. That said, the average bond yield climbed by 20bps to close at 19.30% (previously 19.10%). In tandem, corporate bonds traded on a bearish note, as the average yield on corporate bonds rose by 23bps w/w to 22.38% (previously, 22.15%).
In the Nigerian secondary Eurobonds market, we observed relatively quiet sentiments due to lack of inflows from maturity and coupon payments. Similarly, investors are concerned about Nigeria’s debt sustainability, hence weighing market sentiments last week. Meanwhile, investors sought higher returns amid the uptick in inflation. Thus, the average yields in the market closed flat w/w to settle at 9.44%.
Looking forward, we expect the investors to favor standoffish stances toward duration exposed government instruments, particularly given the elevated levels of short-term rates. However, the illiquid financial system will continue to fuel bearish sentiments. Meanwhile, we expect investors to retain their appetite for Nigerian Eurobonds, keeping in view the ongoing global monetary ease cycle.
Currency Market: Naira Appreciated at the NAFEM Window
Last week, the Naira appreciated by 2.53% w/w at the Nigerian Autonomous Foreign Exchange Market (NAFEM) to close at N1,600.78/$, from its previous close of N1,641.27/$. At the parallel market, Naira closed flat at N1700.00/$. Meanwhile, activities in the NAFEM window decreased, as average FX turnover fell by 11.78% w/w to settle at $323.06mn. Lastly, Nigeria’s external reserves rose by 53bps to settle at $38.88bn.
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.
