November 4, 2024/United Capital Research
Global Markets: The Bears Remained Dominant.
Last week, major US indexes finished mostly lower in an exceptionally busy week economic releases. On Tuesday, the Labor Department (the Department) reported that the number of job openings in the US had fallen to 7.44 million in Sept-2024, marking the lowest level since Jan-2021. Notably, the number of Americans leaving jobs remained relatively unchanged. Meanwhile, on Friday, the Labor Department reported that, overall, nonfarm payrolls were “essentially unchanged” in September, with employers adding only 12,000 jobs—the smallest increase since Dec-2020. The Department noted that the decline was driven by a loss of 44,000 jobs in transport equipment manufacturing activity due to the Boeing strike, while minimal or stagnant job growth in other major industries did little to offset this weakness. Nonetheless, average hourly earnings grew by 0.4% in October, a tick more than expected. That said, we note that the DJIA (-0.1% w/w), S&P 500 (-1.4% w/w), and NASDAQ (-1.5% w/w) closed in the red week-on-week.
Similarly, European equities closed lower week-on-week, weighed down by concerns over potential escalation of conflict in the Middle East. In the same vein, disappointing corporate earnings, and tempered expectations for interest rate cuts by the European Central Bank’s (ECB’s) contributed to the poor performance of the week. The pan-European STOXX Europe 600 Index ended 1.52% w/w lower. France’s CAC 40 Index lost 1.18% w/w, Germany’s DAX dropped 1.07% w/w, and Italy’s FTSE MIB decreased by1.42% w/w. Finally, the UK’s FTSE 100 Index declined by 0.29% w/w.
Meanwhile, Asian equities saw mixed sentiments last week. In China, stocks retreated despite data showing a pickup in economic activity. The Shanghai Composite Index fell by 0.84% w/w, while the blue-chip CSI 300 declined by1.68% w/w. However, Japan’s stock markets rose over the week, with the Nikkei 225 Index gaining 0.40% w/w and the broader TOPIX Index up by1.00% w/w, as the Bank of Japan (BoJ) held rates steady amid political uncertainty. Japan’s ruling Liberal Democratic Party (LDP)-Komeito coalition failed to secure a majority in the country’s lower house election on Sunday, 27-Oct-2024, with the opposition capitalizing on public discontent in the LDP corruption scandal and the higher cost of living. The key parliamentary election left Prime Minister (PM) Shigeru Ishiba’s LDP facing the prospect of a minority government as it sought the support of smaller parties to maintain control of the lower house.
Elsewhere in the oil market, crude oil prices fell sharply after recent Israeli strikes on Iran avoided oil and nuclear facilities, reducing the likelihood of future disruptions to energy supplies. Another factor that weighed on oil prices was Israeli Prime Minister Benjamin Netanyahu reportedly seeking diplomatic solution to the war in Lebanon. On another hand, a combination of the recent data which showed US crude and gasoline inventories fell unexpectedly last week (increasing future oil supply worries), as well as reports that OPEC+ may delay a planned oil output increase, drove oil prices higher in last two trading sessions. However, gains in the last two trading sessions were insufficient to return the market to the green territory. Thus, oil prices registered heavy weekly losses, with the Brent crude oil price closing at $72.73/bbl, down by 3.8% w/w. The WTI Oil price closed at $69.49/bbl, down by 3.2% w/w.
This week, we expect a combination of the near outcome of the crisis in the Middle East and moderating rate cuts expectations from major central banks to continue to weigh on sentiments toward risk asset classes, particularly in Europe and the US. The positive impacts from the stimulus packages in China will continue to spur renewed hopes for global demand in 2025, helping Chinese equities close the year 2024 on a positive note.
Macroeconomic Highlights
Last week, the International Finance Corporation (IFC), a member of the World Bank Group, and the Central Bank of Nigeria (CBN) announced an agreement to scale up local currency financing, unlocking over $1.00bn in investments across key sectors of the Nigerian economy. The agreement will provide naira-based financing to sectors such as agriculture, infrastructure, housing, energy, small and medium enterprises, and Nigeria’s youth and creative industries.
Four Free Trade Zones (FTZ) have attracted a total investment of $8.00bn within their years of operations, contributing to local economic activity and fostering international trade relations The Lagos Free Trade Zone attracted $2.50bn in investment, while the Lekki Free Trade Zone saw $4.00bn in investment inflows. Additionally, $1.0bn has been invested in developing Alaro City, and $500.00m in the privately owned LADOL logistics and engineering facility.
The National Economic Council (NEC) comprising the 36 state Governors and chaired by the Vice President, Kashim Shettima has recommended the withdrawal of the Tax Reforms Bill currently before the National Assembly. The council’s recommendation was in response to a presentation by the Chairman of the Presidential Fiscal Policy and Tax Reforms Committee, Mr. Taiwo Oyedele. The Nigeria Tax Bill 2024 includes an increase in VAT from 7.50% to 10.00% by 2025 with further increases to 12.50% from 2026 to 2029, and 15.00% from 2030 onwards. It also includes VAT exclusions and a 27.50% CIT.
Finally, the CBN’s official data revealed that Nigeria’s money supply (M3) has grown by 62.80% y/y in Sept-2024, despite the Monetary Policy Committee’s (MPC) tightening stance aimed at curbing excess liquidity to control inflation. M3 increased to N108.95tn in Sept-2024, compared to N66.94tn in the same month last year. On a m/m basis, the money supply rose by 1.60% from N107.19tn in Aug-2024.
This week, we do not expect any market-moving economic data releases from the NBS. Nonetheless, we expect the inflation report for the month of Oct-2024 to be released next week. Given recent hike in PMS pump price and the continued decline of the Naira, we anticipate an increase in Oct-2024 headline inflation.
Domestic Equities: Local Bourse Reverses Bullish Momentum…NGX-ASI Down by 2.03% w/w
Last week, the domestic equities market closed on a negative note, with bearish sentiments driving losses for five (5) out of five (5) trading days. A notable underperformer was large-cap stock BUACEMEN, which saw a significant loss of (-11.09% w/w), playing a key role in weighing the main index lower. Bargain-hunting activities declined with the market’s breadth dropping to 0.9x implying that 39 stocks appreciated while 45 declined, down from (3.2x the week before). Overall, Investor optimism toward riskier assets remained resilient, though bargain-hunting activities have noticeably tapered. This narrowing of market breadth suggests that while enthusiasm for higher-risk assets persist, investor selectivity is rising, with a keener focus on quality and potential returns. As a result, the benchmark NGX-ASI declined by 203bps to close at 97,432.02 points, bringing the YTD return to a steady 30.30% and lowering market capitalization to N59.04tn. In terms of trading, market activity improved with the volume of stocks traded climbing by 26.87% to print at 543.41mn units. Conversely, average value of stocks traded declined by 36.42% to print at N10.93bn.
Meanwhile, on a sectorial level, performance was bearish as three (3) out of the five (5) sectors under our coverage closed in the red territory. The Industrial Goods sector (-3.70% w/w) led the laggards due to declines in BUACEMEN (-11.09% w/w) and BETAGLAS (-3.27% w/w). Following was the Insurance sector (-0.40% w/w) on the back of share price depreciation in REGALINS (-12.50%) and VERITASK (-11.25%). The Consumer Goods sector (-0.22% w/w) on the back of losses in CADBURY (-9.89% w/w) and HONYFLOU (-6.53% w/w). On the other side of the coin, the Oil and Gas sector (+1.15%) led the gainers on the back of share price appreciation in CONOIL (+9.14% w/w) and ETERNA (+1.85% w/w). Following was the Banking sector (+0.19% w/w) following share price appreciation in ZENITHBA (+3.38% w/w).
On corporate actions, Fidelity Bank Plc has released its Q3-2024 financial results, declaring a profit before tax of N281.41bn and a profit after tax of N224.60bn. Access Bank Plc has released its Q3-2024 financial results, declaring a profit before tax of N553.18bn and a profit after tax of N457.75bn.
Looking forward, the equities market is expected to retain its buy interest as investors cherry-pick undervalued stocks. However, given the high interest rates in the fixed income and money markets, we expect some bearish undertone to persist in the equities market as fixed income biased investors take advantage of the high yields in the fixed income space. 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: System Liquidity Improved
Last week, the financial system opened with a surplus balance of N108.47bn. System liquidity was further bolstered following inflows from OMO maturities to the tune of N379.20bn. As a result, the financial system closed the week with a surplus balance of N398.31bn. Consequently, the average Open Repo Rate (OPR) and Overnight Rate (OVN) declined by 748bps and 746bps w/w to settle at 23.82% and 24.16%, respectively.
In the secondary NT-bills market, we observed mixed sentiments across the curve as investors remain weary about interest rate direction. As a result, the average yield on NT-bills rose marginally by 4bps w/w to close at 24.22% (previously, 24.18%). Similarly, the average yield on OMO bills climbed by 11bps to settle at 26.22% (previously, 26.11%).
This week, we expect the Central Bank of Nigeria to conduct a NT-bill auction, rolling over a total of N513.43bn worth of bills across the 91-day, 182-day, and 365-day bills. At the auction, we expect investors demand to be strong, majorly skewed towards the “365-day bill”, just as seen in previous auctions. Meanwhile, we expect the system liquidity to hover around current levels, barring any inflows into the financial system. Thus, we project that FTDs and money market rates will remain at current levels, with a likelihood of ticking higher.
Bond Market: Bearish Sentiments Dominate the Market
The secondary bonds market was relatively bearish, as investors were focused on activities in the primary market. Thus, the average bond yield climbed by 18bps to close at 19.49% (previously 19.31%). In tandem, corporate bonds traded on a bearish note, as the average yield on corporate bonds rose by 43bps w/w to 22.85% (previously, 22.42%).
In the Nigerian secondary Eurobonds market, we observed mild selloffs as investors remained worrisome about the nation’s fiscal health. Thus, the average yields in the market increased by 15bps w/w to settle at 9.73% (previously 9.58%).
Looking forward, we anticipate that the current bearish trend in the secondary bonds market will continue as investors prepare for the upcoming NT-bills auction. Similarly, the market generally expects fixed income rates to remain elevated for a much longer time. Consequently, we expect more activities at the shorter end of the curve as investors avoid duration-exposed bonds. Meanwhile, we anticipate investors to maintain a cautious approach to the Nigerian Eurobonds market given the continued concerns regarding the nation’s fiscal health.
Currency Market: Naira Depreciated at the Official Window
Last week, the Naira depreciated by 4.17% w/w at the Nigerian Autonomous Foreign Exchange Market (NAFEM) to close at N1,666.72/$, from its previous close of N1,600.00/$. At the parallel market, the Naira depreciated by 0.29% w/w to close the week at N1,740.0/$ (previously, N1,735.0/$). Activities in the NAFEM window declined, as average FX turnover fell by 44.99% w/w to settle at $173.09mn (previously, $314.62mn). Lastly, Nigeria’s external reserves rose by 1.12% to settle at $39.74bn (previously $39.30bn).
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 for the Dollar outweighs supply.
