October 28, 2024/United Capital Research
Global Markets: Most Markets Closed Lower.
Last week, the focus in US markets shifted to the earnings season with over 20.00% of companies in the S&P 500 reporting their results. The early earnings season started positively with financials, but as more industries reported, results became mixed. According to FactSet, 37.00% of S&P 500 companies have reported, with 75.00% beating Earnings Per Share (EPS) estimates, slightly below historical averages. The percentage of companies beating on revenue estimates dropped to 59.00%, below 5 and 10-year averages of 69.00% and 64.00%, respectively. Despite a cautious macroeconomic outlook and some overseas weakness, companies are not sounding their alarms, with a few indicating a potential trough. This week’s reports led to modest selloffs, attributed to prior stock rallies and high valuations. Equities pulled back slightly, influenced by rising Treasury yields, particularly affecting small and mid-cap stocks. Mega-Cap Tech stocks showed some resilience, though with increased dispersion within that sector. Consequently, the S&P 500 was down by 1.00% w/w. This week will feature key reports from the “Magnificent Seven.”
Meanwhile, major indices in Europe closed the week with moderate losses. The Stoxx Europe 600 was down by 1.20% w/w, the German DAX fell by 1.00% w/w, the France CAC 40 fell by 1.50% w/w, and the UK FTSE 100 down by 1.30% w/w. Although the region’s PMIs were underwhelming, its inflation readings continue to decline. On Friday, the ECB cut its inflation expectations: 1yr to 2.40% (from 2.70%), and 3yr to 2.10% (from 2.30%). Finally, there was mixed commentary coming from ECB officials, causing speculation about the scale of its next interest rate cut.
In China, after a brief surge in late September to early October, market optimism surrounding stimulus has waned, leading to a stabilisation phase. The National People’s Congress (NPC) Standing Committee is set to meet from 04 – 08 Nov, with high expectations for new policy measures following the discussions. Meanwhile, Japan’s Nikkei index dropped by 2.70% w/w, with financial stocks particularly affected. Economic data indicates slowing growth and lower-than-expected inflation, ahead of the Bank of Japan’s (BOJ) upcoming rate decision, which is anticipated to maintain current rates amid dovish sentiment. Additionally, Prime Minister Shigeru’s call for a general election on Sunday could introduce volatility, particularly if his Liberal Democratic Party loses seats, jeopardizing its majority in the Diet.
Brent crude recovered half of the previous week’s losses, up by 2.20% on Friday and 4.10% w/w. The market was driven by renewed optimism over Chinese crude demand. The International Energy Agency (IEA) expects South-East Asia oil consumption to rise from 5.00 mbpd to 7.00 mbpd by 2050 despite the bearish outlook on global oil demand in general. Nonetheless, in the coming weeks, the direction of oil markets will be determined by macroeconomic data and geopolitics. The Middle East remains a focal point.
The coming weeks will be packed with major catalysts for financial markets. This week, a third of companies in the S&P500 will report their earnings, including most of the Magnificent 7 (META, AAPL, GOOGL, AMZN). The key US economic data will be the PCE, employment data (JOLTs Job Openings and monthly BLS employment report), and GDP Advance estimates. On Thursday, China’s National Bureau of Statistics will release the country’s Manufacturing and non-manufacturing PMIs, and the EU’s Eurostat will publish the region’s Inflation flash and unemployment rate. Also, the Bank of Japan will make its interest rate decision.
Macroeconomic Highlights
Nigeria has officially joined BRICS as a partner country, alongside 12 other nations, further strengthening its economic ties with the intergovernmental bloc. The BRICS expansion announcement was made during the BRICS summit held in Kazan, Russia, from October 22 to 24, 2024. Nigeria’s inclusion comes on the heels of a significant surge in foreign capital inflows from BRICS nations, which rose by 189.00% in Q1-2024, reaching $1.27bn, compared to $438.72mn during the same period in 2023.
According to Olayemi Cardoso, governor of the CBN, Nigeria’s external reserves have grown to $40.2 billion currently. At the same time, Wale Edun, Nigeria’s minister of Finance and Coordinating Minister of the Economy, on Wednesday, disclosed that the country’s gross reserves have been building organically due to the government’s decision not to defend the naira as was done in the past.
The CBN Governor also disclosed that Nigeria is considering a diaspora bond in the United States next year and is targeting remittance inflows of $1.00bn a month. He further revealed that Nigerians abroad are keen to invest and have already more than doubled the remittances they send home since the current government began sweeping reforms last year.
The Central Bank of Nigeria (CBN) emphasized that Nigerians should disregard claims that the old naira notes will cease to be legal tender on December 31, 2024.
The National Bureau of Statistics (NBS), on Thursday, said the decision to rebase the Gross Domestic Product (GDP) and Consumer Price Index (CPI) was to ensure that the economic data accurately reflect current realities and account for structural changes in the economy. The last rebasing was done about six years ago in 2018/2019, while the next rebasing is expected to be completed in November 2024.
The International Monetary Fund (IMF) has revised its economic forecast for Nigeria, projecting a slowdown in the country’s growth for 2024. Nigeria’s economy is now expected to grow at 2.90% in 2024, maintaining the same growth pace recorded in 2023. The latest projection is a 0.20% decrease from the previous projection in July and a 0.40% decrease from the previous projection in April.
Furthermore, the IMF disclosed that Nigeria allocates the majority of its revenue to debt servicing, leaving limited funds for critical development projects. Although Nigeria’s debt service-to-GDP ratio has declined from nearly 100.00% to 60.00%, Davide Furceri, Division Chief of the IMF’s Fiscal Affairs Department stressed that the country must further reduce the share of its revenue allocated to debt repayments by focusing on broadening its tax base.
Additionally, Abebe Selassie, the IMF Director of the African Department asserted that no loan request was made by Nigerian government. This follows speculations and reports in some parts of the media that the federal government is looking to request a loan from the IMF.
The Dangote Petroleum Refinery has received four cargoes of crude oil from the Nigerian National Petroleum Company Limited (NNPCL) under the Naira-for-crude sale agreement and still waiting to receive more crude oil cargoes from NNPCL.
Also, the Dangote Petroleum Refinery has started supplying Premium Motor Spirit (PMS) to some oil marketers directly without recourse to the Nigerian National Petroleum Company Limited (NNPCL). However, while more oil marketers were intensifying efforts to buy the product directly from the plant, others were importing the commodity, as hundreds of millions of litres of imported PMS should hit Nigeria’s shores in two weeks’ time.
This week, we expect the National Bureau of Statistics to release Nigeria Gross Domestic Product Report (Expenditure and Income Approach) Q1 & Q2 2024.
Domestic Equities: Local Bourse Sustains Bullish Momentum…NGX-ASI Up by 1.41% w/w
Last week, the domestic equities market closed on a positive note, with bullish sentiments driving gains for five (5) out of five (5) trading days. A standout performer was SEPLAT, which saw a significant rise of (+9.25% w/w), playing a key role in pushing the main index higher, also, worthy of mention is the gains in UBA (+18.50% w/w) and OANDO (+16.43% w/w). Bargain-hunting activities persisted with the market’s breadth improving to 3.2x implying that 58 stocks appreciated while 18 declined, up from (0.8x 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 141bps to close at 99,448.91 points, bringing the YTD return to a solid 33.00% and lifting market capitalization to N60.26tn. In terms of trading, market activity improved with the average value and volume of stocks traded climbing by 16.31% and 48.03% to print at N17.19bn and 428.31mn units, respectively.
Similarly, on a sectorial level, performance was bullish as four (4) out of the five (5) sectors under our coverage closed in the green territory. The Banking sector (+7.86% w/w) led the gainers on the back of interests in UBA (+18.50% w/w) and ZENITHBA (+6.54% w/w). Following was the Insurance sector (+4.04% w/w) on the back of share price appreciation in CORNERST (+7.97%) and WAPIC (+15.85%). The Oil and Gas sector (+3.95% w/w) gained on the back of share price appreciation in SEPLAT (+9.25% w/w) and ETERNA (+1.12% w/w). Following was the Industrial Goods sector (+0.10% w/w) following share price appreciation in WAPCO (+1.37% w/w). On the flip side, the Consumer Goods sector (-0.84%) was the sole laggard on the back of share price depreciation in DANGSUGA (-10.13% w/w) and INTBREW (-6.24% w/w).
On corporate actions, United Bank for Africa Plc (UBA) has released its Q3-2024 financial results, declaring a profit before tax of N603.48bn and a profit after tax of N525.31bn. Dangote Cement Plc has released its Q3-2024 financial results, declaring a profit before tax of N113.43bn and a profit after tax of N89.19bn. Guinness Nigeria Plc has released its Q1-2025 financial results, declaring a loss before tax of N16.03bn and a loss after tax of N12.117bn.
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: Stop Rate on the 365-Day Bill Inched Higher at the PMA
Last week, the financial system opened with a deficit balance of N633.07bn. System liquidity was tight for most of the week and was further worsened by mop-up activities via the Primary Market Auctions (PMA). Nevertheless, system liquidity regained some boosts following inflows from FAAC payments to the tune of c.N600.00bn. Ultimately, the financial system closed the week with a surplus balance of N183.98tn. Consequently, the average Open Repo Rate (OPR) and Overnight Rate (OVN) declined by 102bps and 106bps w/w to settle at 31.30% and 31.62%, respectively.
The Central Bank of Nigeria conducted an NT-bill auction with an offer size of N374.67bn across the 91-day, 182-day, and 364-day bills. At the auction, investors’ demand was strong, as total subscriptions printed at N489.84bn, indicating an oversubscription rate of 1.31x. The bids were majorly skewed towards the longer-tenured instrument, “364-day bill”, which received total bids of N460.40bn. Notably, the Apex Bank sold just the amount on offer. As a result, the stop rates on the 364-day bills climbed by 79bps to settle at 20.65%. Meanwhile, the stop rates on the 91-day and 182-day bills remained unchanged at 17.00% and 17.50%, respectively.
In the secondary NT-bills market, we observed muted sentiments across the curve as attention was fixed on the outcome of the PMA. As a result, the average yield on NT bills rose marginally by 2bps w/w to close at 24.18% (previously, 24.16%). Similarly, the average yield on OMO bills climbed by 18bps to settle at 26.11% (previously, 25.93%).
This week, we expect the financial system to improve in terms of liquidity, as residual from the FAAC inflows will play a background role. Additionally, we expect inflows from coupon payments and OMO maturities to the tune of N259.35bn and N379.20bn, respectively, to further bolster system liquidity. Thus, we project that FTDs and money market rates will remain at current levels, with a likelihood of tapering. Nevertheless, we do not rule out the possibility of the CBN mopping up the inflows as seen in recent times.
Bond Market: Marginal Rates Climb Higher at the FGN Bond Auction
Last week, the Debt Management Office (DMO) conducted the Oct-2024 bond auction with an offer size of N180.00bn across the reopened 2029 and 2031 bond papers. At the auction, investors’ demand was strong, as total subscriptions printed at N389.32bn, indicating an oversubscription rate of 2.16x. The bulk of the bids were skewed towards the longer instrument, “2031”, which received total bids of N328.58bn. Notably, the DMO over-allotted the auction, selling a total of N289.60bn worth of bond papers. As a result, the marginal rates on the 2029s and 2031s climbed by 175bps a piece to settle at 20.75% and 21.74% respectively.
The secondary bonds market was relatively quiet, as investors were focused on activities in the primary market. Thus, the average bond yield climbed marginally by 1bp to close at 19.31% (previously 19.30%). In tandem, corporate bonds traded on a bearish note, as the average yield on corporate bonds rose marginally by 4bps w/w to 22.42% (previously, 22.38%).
In the Nigerian secondary Eurobonds market, we observed mild sell-offs as investors remained worrisome about the nation’s fiscal health. Thus, the average yields in the market increased by 14bps w/w to settle at 9.58% (previously 9.44%).
Looking forward, we anticipate that the bearish trend in the secondary bonds market will continue as fixed income rates hovr around current levels. However, we expect some buy interest arising from expected inflows from coupon payments and maturities as well as residuals from FAAC payments. We expect more activities at the short-to-mid-end of the curve as investors avoid duration-exposed bonds.
Currency Market: Naira Mildly Appreciated at the I&E Window
Last week, the Naira mildly appreciated by 0.05% w/w at the Nigerian Autonomous Foreign Exchange Market (NAFEM) to close at N1,600.00/$, from its previous close of N1,600.78/$. At the parallel market, the Naira depreciated by 0.29% w/w to close the week at N1735.0/$ (previously, N1730.0/$). Activities in the I&E window declined, as average FX turnover fell by 13.06% w/w to settle at $298.3mn (previously, $343.11mn). Lastly, Nigeria’s external reserves rose by 108bps to settle at $39.30bn (previously $38.88bn).
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.
