November 11, 2024/United Capital Research
Global Markets: Markets Closed Lower Across Most Regions; But the US Closed Strong
Following the US election, markets experienced a “risk-on” rally, with major indices reaching new all-time highs. The anticipated volatility around the election did not materialize; instead, equities rallied, particularly after the S&P 500 broke above summer highs. The election outcome, a decisive win for President Trump, exceeded expectations, removing uncertainty and triggering a swift unwind of hedges, pushing the VIX from ~22 to ~15. Markets focused on the prospects of a more business-friendly environment, including lower taxes and reduced regulation, while largely ignoring potential inflationary impacts from tariffs. The rally, particularly in small and mid-cap stocks, has been driven by optimism around the Trump agenda, especially in financials and industrials. Thus, the Russell 2000 surged by 8.70% w/w, and the S&P 400 gained 6.20% w/w. Treasury yields also increased, but small-cap stocks, which are more focused on domestic markets, benefited from reduced concerns over tariffs. The S&P 500 closed up 4.70% w/w , touching 6,000 for the first time. It is also noteworthy to mention that the FOMC cut its rate by 25bps to a target range of 4.50% – 4.75%. However, this was already widely expected. Chair Jerome Powell’s commentary was consistent with his Sept-2024 comments, pointing to progress on inflation and downplaying labor market weakness.
Conversely, the European markets closed modestly lower driven by a mix of disappointing earnings, mixed economic data, the potential impact of Trump tariffs, and political uncertainty in Germany. On the sectoral level, luxury stocks came under pressure due to disappointing economic data from China and disappointing earnings from Richemont, parent company of Cartier. Hence, the Stoxx Europe 600 was down by 0.80% w/w, the Dax fell by 0.20% w/w, CAC 40 down by 1.00% w/w, and the FTSE 100 was down by 1.30% w/w. The Bank of England (BoE) cut its interest rate by 25bps to 4.75%, citing progress in reducing inflation.
Somewhere else, China’s local markets ended the week modestly higher, though uncertainty over US trade policies under President Trump weighed on sentiment. Speculation that the National People’s Congress would announce a substantial stimulus package proved unfounded. Instead, the government unveiled a $1.40tn debt swap with local governments, while refraining from introducing new measures to stimulate domestic demand. Nonetheless, Shanghai Composite rose by 5.50% w/w.
In Japan, the Nikkei 225 rose by 3.80% w/w, boosted by a weakening yen post-Trump victory, raising speculation the BOJ may be forced to tighten policy. While, positive earnings, particularly in the financial sector, were buoyed by expectations of higher interest rates. However, the auto sector exhibited mixed performance. Meanwhile, the outlook for the region remains influenced by global interest rate expectations and trade tensions with the US.
Oil prices were volatile last week, rising initially on OPEC+’s decision to delay production increases and geopolitical tensions, but later pulling back due to disappointing data from China. There is uncertainty around US oil drilling, with mixed expectations for increased capital spending by E&P companies. While President Trump may help ease geopolitical tensions, these factors are counterbalanced by expectations of improved global economic growth, which could support higher demand for oil. Brent crude rose by 1.10% w/w to $73.87/bbl.
Next week, U.S. equity markets will be open on Monday (Veteran’s Day), but bond markets will be closed. Focus will be on Washington as President-elect; Trump forms his Cabinet. Key economic releases include the Consumer Price Index (CPI) on Wednesday and Retail Sales on Friday, which will provide insights into inflation and consumer spending. In China, inflation data was released over the weekend , with potential market weakness on Monday as markets reopen after the National People’s Congress. Later in the week, China will report industrial production and retail sales, with signs of economic improvement from recent stimulus. The earnings season is winding down, with a few key reports next week.
Macroeconomic Highlights
According to the Central Bank of Nigeria (CBN), the total revenue of the Federation Account earnings (FAAC) rose to N6.28tn in the second quarter of 2024, driven by significant collections from Value Added Tax (VAT), customs, and excise duties. These sources dominated earnings within the federation account during the period, contributing 72.42% of the total revenue. Notably, non-oil revenue printed for N4.55tn, reflecting a 32.22% q/q increase compared to the preceding quarter.
Nigeria has attracted over $1.00bn in investment in the oil and gas sector across different value chains. Olu Verheijen, the special adviser to President Bola Tinubu on energy, also added that the country is also expecting multi-billion-dollar investment in deepwater exploration projects by the middle of 2025, which will be the first of its kind in Nigeria in over a decade.
The federal government of Nigeria’s fiscal deficit surged to N4.53tn in Q2-2024, up from N3.88tn in the previous quarter. While the deficit saw a notable rise, the federal government’s revenue remittance increased marginally to N2.30tn. This figure represents a 57.66% increase from Q1-2024’s figure but still falls 52.49% short of the target for the period, prompting a heavy reliance on debt financing.
Nigeria recorded a significant increase in its net foreign exchange (forex) inflows in Q2-2024 as the net forex inflow surged by 49.39% q/q to $17.18bn in Q2-2024, compared to $11.50bn in the preceding quarter. This rise is due to increased inflows and reduced outflows across autonomous sources and official channels.
Nigeria recorded a current account surplus of $5.14bn, or 11.46% of GDP, in Q2-2024, representing a significant improvement from the $3.38bn (7.35% of GDP) surplus reported in the previous quarter. This boost in the nation’s external balance reflects a reduction in import bills and steady remittance inflows, which have helped stabilise the naira against the dollar.
The federal government, alongside the Economic Community of West African States (ECOWAS), Morocco, and Mauritania, have reaffirmed their commitment to advancing the $26.00bn African Atlantic Gas Pipeline project, which combines two major projects: the $975.00mn West African Gas Pipeline Extension Project, which spans 678 km, and the 5,669 km Nigeria-Morocco Gas Pipeline, anticipated to cost around $25.00bn.
Lastly, Fitch has projected that the Non-Performing Loans (NPL) of Nigerian banks will increase in 2024 on the back of the high interest rates and inflation in the country. This was stated in its latest credit ratings report on Nigeria, which affirmed the country’s Long-Term Foreign-Currency Issuer Default Rating (IDR) at ‘B-‘ with a positive outlook.
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 Oct-2024. We anticipate that headline inflation will inch higher due to the recent increase in fuel pump prices nationwide.
Domestic Equities: The Bears Regained Dominance…NGX-ASI Down by 0.20% w/w
Last week, the domestic equities market closed on a negative note, even as bullish sentiments drove gains for three (3) out of five (5) trading days. A notable underperformer was large-cap stock OANDO, which saw a significant loss of (-21.97% w/w), playing a key role in weighing the main index lower. Bargain-hunting activities declined with the market’s breadth dropping to 0.7x implying that 32 stocks appreciated while 42 declined, down from 0.9x 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 20bps to close at 97,236.19 points, bringing the YTD return to a steady 30.04% and lowering market capitalization to N58.92tn. In terms of trading, market activity improved with the volume and value of stocks traded climbing by 138.89% and 38.61% to print at 1.29bn units and N15.15bn.
Meanwhile, 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 Oil and Gas sector (+5.43% w/w) led the gainers owing to gains in CONOIL (+37.35% w/w). Following was the Banking sector (+2.81% w/w) on the back of share price appreciation in ACCESSCO (+11.54%) and UBA (+6.90%). The Insurance sector (+0.11% w/w) followed on the back of buy interests in WAPIC (+7.61% w/w) and SOVRENIN (+21.05% w/w). Following was the Consumer sector (+0.02% w/w) following share price appreciation in PZ (+13.41% w/w). On the other side of the coin, the Industrial Goods sector (-0.02%) led the laggards on the back of share price depreciation in BETAGLAS (-4.96% w/w) and MEYER (-9.98% w/w).
On corporate action, United Bank for Africa Plc (UBA) has sought the approval of the Nigerian Exchange Limited (NGX) for its proposed rights issue. The proposed rights issue includes “Six Billion, Eight Hundred and Thirty-Nine Million, Eight Hundred and Eighty-Four Thousand, Two Hundred and Seventy-Four (6,839,884,274) ordinary shares of 50 Kobo each at N35.00 per share based on one new ordinary share for every five ordinary shares held as at the close of business on Tuesday, 5-Nov-2024
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 Review: Stop Rate on the 365-Day Bill Climbed Higher at the PMA
Last week, the financial system opened with a deficit balance of N375.53bn. Following successful Open Market operations (OMO) and overallotments at NT-bill auction, the financial system liquidity dried-up, returning to the deficit region. Notably there was increased activity at the CBN Standing Lending Facility (SLF) window. That said, the financial system wrapped up the week with a deficit balance of N525.488bn. Consequently, the average Open Repo Rate (OPR) and Overnight Rate (OVN) surged by 516bps and 534bps w/w to settle at 28.98% and 29.52% (previously, 23.82% and 24.18%), respectively.
The CBN conducted Open Market Operations (OMO) auction to mop-up system liquidity. The CBN offered OMO bills to the tune of N300.0bn across the 91-day, 183-day, and 362-day bills. The auction was met with enormous demand to the tune of N1.45trn (only skewed toward the 363-day bill), implying a bid-to-cover ratio of 4.83x. The CBN opted to meet the demand by selling an equivalent N1.47trn. That said, the stop rate on the 363-day bill tapered by 2bps to settle at 21.28%, (previously 24.30%). This auction took a heavy chunk out of the financial system, encouraging a surge in activities at CBN SLF window.
Additionally, the CBN conducted an NT-bill auction (just a day after the OMO auction) with an offer size of N513.43bn across the 91-day, 182-day, and 364-day bills. At the auction, investors’ demand was strong, as total subscriptions printed at N669.93bn, indicating an oversubscription rate of 1.30x. The bids were majorly skewed towards the longer-tenured instrument, “364-day bill”, which received total bids of N608.93bn. Notably, the Apex Bank oversold the auction by 1.22x, allotting N626.33bn. As a result, the stop rates across the offerings climbed outside expectations, by 100bps, 100bps and 235bps to settle at 18.00%, 18.50%, and 23.00%, respectively.
In the secondary NT-bills market, we observed bullish sentiments, with investors looking to take advantage of the elevated levels of yields at the short-end of the curve. Consequently, the average yield on NT-bills declined by 26bps w/w to close at 23.96% (previously, 24.22%). Conversely, the average yield on OMO bills climbed by 11bps to settle at 26.33% (previously, 26.22%).
This week, we expect short-term rates like FTD and money market rates to remain around current levels. Meanwhile, we expect bullish sentiments to continue at the secondary market for NT-bills, as investors continue to exploit the elevated discount rate of the bills at secondary market level. We expect the financial system to be mildly illiquid in the absence of any significant boost.
Bond Market: Bullish Sentiments Resurfaced
Last week, the secondary bonds market was relatively bullish, as investors capitalise on the elevated levels of yields in the market. Hence, the average bond yield tapered by 8bps to close at 19.41% (previously 19.49%). Conversely, yields on corporate bonds traded on a mildly bearish note, as the average yield on corporate bonds climbed by 8bps w/w to 22.93% (previously, 22.85%).
In the Nigerian secondary Eurobonds market, we observed buy-interests as investors remain attracted to premium yield offering dollar-denominated assets, offered in the Sub-Saharan Africa (SSA) region. Also, the ongoing monetary policy easing in the US (with the US Fed just recently cutting by another 25bps) continued to encourage buy-interests in Nigerian Eurobonds market. Hence, the average yields in the market tapered by 42bps w/w to settle at 9.31% (previously 9.73%).
Looking forward, we anticipate that the mixed sentiments in the secondary bonds market, with portfolio rebalancing activities spurring buy-interests. On a broader note, the elevated level of short-term rates will continue to encourage a lacklustre approach toward duration exposed instruments. Meanwhile, we anticipate investors will continue to cherry-pick Nigerian Eurobonds.
Currency Market: Naira Depreciated at the NAFEM Window
Last week, the Naira depreciated by 73bps w/w at the Nigerian Autonomous Foreign Exchange Market (NAFEM) to close at N1,678.87/$, from its previous close of N1,666.72/$. Meanwhile, the Naira appreciated by 29bps w/w at the parallel market to settle at N1740.00/$, from its previous close of N1745.0/$. Meanwhile, activities in the NAFEM window increased, as average FX turnover climbed by 143.93% w/w to settle at $455.50mn. Lastly, Nigeria’s external reserves rose by 67bps to settle at $39.23bn.
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.
