November 25, 2024/United Capital Research
Global Markets – Mixed Sentiments Toward Risk Asset Classes
Last week, U.S. stock indexes posted strong gains, partially recovering losses from the prior week despite ongoing uncertainty surrounding the incoming Trump administration’s policies and rising geopolitical tensions from the Russia-Ukraine conflict. Notably, gains for the week were also relatively broad-based, with smaller-cap indexes outperforming large-caps and an equal-weighted version of the S&P 500 Index outpacing its more familiar capitalization-weighted counterpart. Similarly, the price of Bitcoin continued its postelection rally and notched its third consecutive week with a gain exceeding +10.00% w/w. Given the relatively light economic calendar for the week, much of the focus was on NVIDIA’s third-quarter earnings release on Wednesday. Shares of the chip giant ended the week little changed as investors appeared to be generally satisfied with the results, although the company’s guidance for the fourth quarter was lighter than some analysts expected. Relatedly, the utilities sector outperformed as commentary on NVIDIA’s earnings call seemed to drive optimism around rising artificial intelligence-driven demand for clean energy. Ultimately, major US benchmark indices, the DJIA (+2.0% w/w), NASDAQ (+1.7% w/w) and S&P 500(+1.7% w/w) closed the week recording strong gains.
In Europe, the pan-European STOXX Europe 600 Index ended 1.06% higher on hopes that the European Central Bank (ECB) could lower borrowing costs in December after purchasing managers’ surveys signaled a deterioration in the economic outlook. However, it was a mixed performance in the region given the weak economic outlook. Major European stock indexes closed lower including, Italy’s FTSE MIB (-2.04% w/w) and France’s CAC 40 Index (-0.20% w/w). Meanwhile the Germany’s DAX (+0.58% w/w) and UK’s FTSE 100 Index (+2.46% w/w) tacked on weekly gains. Providing further background to last week’s economic data release, business activity in the euro area contracted unexpectedly in Nov-2024, underlining the uncertain economic outlook, according to purchasing managers’ surveys conducted by S&P Global. The HCOB Flash Eurozone Composite PMI Output Index unexpectedly fell to 48.10pts, a 10-month low from 50.00pts in Oct-2024, as the manufacturing sector sank deeper into recession and the services sector started to struggle after two months of marginal growth. (PMI readings below 50 indicate a fall in output.) The PMIs for the bloc’s largest economies—France and Germany—also shrank. UK business activity also moved into contractionary territory, ending a 12-month period of sustained expansion.
Elsewhere in Asia, Chinese equities declined as a light economic calendar and concerns about the incoming Trump administration curbed risk appetites. The Shanghai Composite Index fell -1.91% w/w, while the blue-chip CSI 300 gave up -2.6% w/w. In tandem, Japan’s stock markets lost ground over the week, with the Nikkei 225 Index falling -0.93% w/w and the broader TOPIX Index down -0.56% w/w. The performance in Japan’s equities markets was mostly driven by heightened geopolitical tensions, which dented risk appetite and prompted demand for assets perceived as safer, including the Japanese yen.
In commodity markets, oil prices recorded weekly gains, climbing about 1.00% on Friday, to set a two-week high, as the intensifying war in Ukraine this week boosted the market’s geopolitical risk premium. For context, the benchmark brent crude oil climbed by +5.81% w/w, from $71.04/bbl to $75.17/bbl. In tandem, the US WTI oil price benchmark increased by +5.75% w/w from $66.92/bbl to $70.77/bbl.
Looking into the coming week, we expect the lingering geopolitical crisis to continue to douse positive sentiments toward risk asset classes, increasing the markets’ geopolitical risk premium. However, the ongoing monetary policy normalization will continue to encourage a bullish undertone. On another hand, the uncertainties surrounding the impact of the Trump administration will continue to fuel mixed sentiments in the global equities market, with equities in the US remaining the most bullish (supported by a resilient economy) in contrast to European shares (weighed by the weak economic growth fundamentals of the euro area).
Macroeconomic Highlights
The Senate has approved President Bola Tinubu’s loan request of $2.2bn to partially finance the N9.7tn budget deficit for the 2024 fiscal year. The proposed loan request, equivalent to N1.77tn, will be sourced through the issuance of Eurobonds and other sources. The requested loan is planned for execution of ongoing projects and programmed in the 2024 Appropriation Act, which are critical for growth and development. Additionally, it will contribute to implementing the Debt Management Strategy, which seeks to reduce the cost of borrowing, lengthen the maturity of the public debt stock, free up space in the domestic market for other borrowers, and help increase Nigeria’s external reserves.
Wale Edun, Nigeria’s Minister of Finance and Coordinating Minister of the Economy, revealed that the country has saved $20 billion through the removal of the petrol subsidy and the adoption of market-based foreign exchange pricing. Edun disclosed this during an event marking the first 100 days in office of Esther Walso-Jack, Head of the Civil Service of the Federation, in Abuja.
Additionally, he noted that the saved funds are now redirected into government coffers for developmental purposes. “The real change is that no one can wake up and target cheap funding or forex from the central bank to enrich themselves without adding value,” Edun said. “Similarly, profiteering from the inefficient petrol subsidy regime is no longer possible.”
The Dangote Petroleum Refinery has recommenced the purchase of crude oil from the United States in its ongoing efforts to ramp up oil production and enhance its refining capacity. The new purchase comes after a three-month hiatus in purchasing crude from foreign countries, focusing instead on domestic supply. This latest development may indicate that the naira-for-crude initiative by the Federal Government may have stalled or that the refinery is not getting enough crude supply from the Nigerian National Petroleum Company Limited (NNPCL).
Meanwhile, the refinery has begun exporting refined petroleum products to neighbouring West African countries. The refinery is set to begin fuel exports to South Africa, Angola and Namibia. While Niger Republic, Chad, Burkina Faso, and Central Africa Republic have started negotiations with the refinery.
Furthermore, Dangote Petroleum Refinery has announced a reduction in the ex-depot price of Premium Motor Spirit (PMS), commonly known as petrol, to N970 per litre from N990/litre. This price cut will take effect immediately for oil marketers.
In the words of Anthony Chiejina, the group chief branding and communications officer of the Dangote Group, “the price adjustment is described as part of the company’s end-of-year efforts to give back to the nation.”
The House of Representatives has directed electricity distribution companies (DisCos) to undergo a N500.00bn recapitalisation to improve their financial stability and enhance service delivery to Nigerians. The House also urged the Federal Ministry of Power to declare DisCos as non-state actors, take immediate action to address their reckless practices, and ensure their activities no longer jeopardise the nation’s economy.
The Federal Government noted that it has received a $500.00mn credit from the World Bank to boost the financial and technical capacities of electricity Distribution Companies (DisCo). According to the Transmission Company of Nigeria (TCN), the government intends to apply part of the proceeds for consulting services. The $500.00mn is meant to implement the performance improvement plan of each DisCo in different areas.
The Federal Government, states, and Local Government Areas shared N1.41tn in revenue for Oct-2024, an 8.70% increase compared to the N1.30tn distributed for Sep-2024. Of the total distributable revenue, the Federal Government received N433.021bn, state governments N490.70bn, and local councils N355.62bn. Also, oil-producing states received N132.40bn as 13.00% derivation from mineral revenue.
Nigeria has retained its position as the third-largest debtor to the World Bank’s International Development Association (IDA), with its exposure climbing to $17.10bn as of Sep-2024. Nigeria’s debt to the IDA rose by $600.00mn q/q in three months from $16.50bn recorded in Jun-2024. This also marks a 14.40% y/y increase between the figure for June 2024 and the $14.3bn recorded in June 2023.
This week, we expect the National Bureau of Statistics (NBS) to release Nigeria’s Gross Domestic Product (GDP) and Capital Importation Reports for Q3-2024.
Domestic Equities: The Bulls Prevailed…NGX-ASI Up by 0.11% w/w
Last week, the domestic equities market closed on a positive note, as bullish sentiments drove gains for three (3) out of five (5) trading days. A notable performer was WAPCO, which saw a significant gain of (+28.57% w/w), playing a key role in raising the main index higher. Bargain-hunting activities improved with the market’s breadth climbing to 1.7x implying that 73 stocks appreciated while 43 declined, up from 0.8x 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 improved by 11bps to close at 97,829.02 points, bringing the YTD return to a steady 30.83% and lowering market capitalization to N59.29tn. In terms of trading, market activity was mixed with the total volume of stocks traded improving by 31.73% to print at 390.42mn units while the total value of stocks traded declined by 7.60% to print at N7.17bn.
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 Insurance sector (+4.54% w/w) led the gainers owing to gains in MANSARD (+13.39% w/w) and SUNUASSU (+16.18% w/w). Following was the Consumer Goods sector (+1.93% w/w) on the back of share price appreciation in DANGSUGA (+16.67%) and UNILEVER (+20.82%). The Industrial Goods sector (+1.75% w/w) followed on the back of buy interests in WAPCO (+28.57% w/w) and BETAGLAS (+9.48% w/w). The Oil and Gas sector (+0.18% w/w) followed. On the other side of the coin, the Banking sector (-2.57% w/w) was the sole laggard on the back of share price depreciation in ACCESSCO (-7.47% w/w) and UBA (-3.29% w/w).
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 entertain mid-long-term (≥3 months) investment objectives, cherry-picking only sound equities with strong fundamentals and ongoing/pending corporate actions. This strategy will maximise market opportunities, thereby optimising portfolio returns.
Money Market: Strong Demand at PMAs
Last week, the financial system opened with a balance of N189.18bn. During the week, system liquidity was bolstered following inflows from coupon payments (N17.87bn), and OMO maturities (N6.38bn). There was increased activity in the Standing Lending Facility (SLF) in the week due to the system deficit. Given the fact that the 1st two trading sessions of the week (pre-Primary-Market-Auction) was mildly liquid, we saw the average funding rates between banks fall, but remaining elevated, as the financial system closed the week with a deficit balance of N321.54bn. For context, the average Open Repo Rate (OPR) and Overnight Rate (OVN) fell by 124bps and 126bps w/w to 29.29% and 29.88%, respectively.
The Central Bank of Nigeria (CBN) conducted an NT-bill auction, rolling over N610.80bn worth of treasury bills across the 91-day, 182-day and 364-day bills. At the auction, bids totaled N1.18trn, with bids for the 364-day making up 95.38% (N1.12trn) of demand. The CBN mildly oversold at the auction, allotting N693.05bn in total, implying a 1.13x allotment rate. Consequently, the stop rate on the 364-day bill rose 30bps to 23.30%, while the stop rates on the 91-day and 182-day bills remained unchanged at 18.00% and 18.50%, respectively.
In the secondary NT-bills market, we observed bullish sentiments across the curve as investors unmet demand at the PMA spilled over into the secondary market. As a result, the average yield on the 3-month, 6-month and 12-month NT-bills fell by 32bps w/w to close at 24.48% (previously, 24.80%).
This week, we expect the system liquidity to improve following inflows from FAAC payment (~N600.00bn). However, we do not rule out the possibility of the Central Bank conducting an OMO auction to mop up excess liquidity in the financial system. We expect FTD and money market rates to hover at current levels. The Monetary Policy Committee (MPC) is scheduled to meet in the 25th – 26th November. Given the upward momentum of inflation in recent months, a hawkish decision will further incentivize fixed-income investments.
Bonds Market: Improved Demand in Eurobond Market
The secondary bonds market saw bearish sentiment across the curve, as investors maintained a cautious approach towards the market. Thus, the average bond yield climbed by 10bps to close at 19.01% (previously 18.91%).
The Debt Management Office (DMO) conducted the Nov-2024 bond auction with an offer size of N120.0bn across the reopened 2029 and 2031 papers (N60.00bn each). As anticipated, investor demand was strong at the auction, totaling N369.59bn, i.e. N75.56bn/N294.03bn for the 2029/2031. The DMO oversold, selling N346.16bn worth of bonds, a bid-to-cover of 1.07x. Thus, the marginal rate on the 2029 and 2031 rose 0.25ppts and 0.26ppts to 21.00% and 22.00%, respectively.
In the Nigerian secondary Eurobonds market, we observed buy-interest particularly on the short-end of the curve as investors re-invested the $42.64mn of Eurobond coupon payments that hit the system in their bid to capitalize on high yields. Thus, the average yields in the market fell by 18bps w/w to settle at 9.02% (previously 9.20%).
Looking forward, we expect a total of $105.94mn worth of coupon payments in the Eurobonds market. This may propel some buy interests in the market as investors look to reinvest their funds. Nevertheless, we believe that investors will continue to maintain a cautious approach to the Nigerian Eurobonds market.
Currency Market: Naira Depreciated at the NAFEM Window
Last week, the Naira depreciated by 2bps w/w at the Nigerian Autonomous Foreign Exchange Market (NAFEM) to close at N1,652.62/$, from its previous close of N1,652.25/$. Meanwhile, the Naira depreciated by 57bps w/w at the parallel market to settle at N1755.00/$, from its previous close of N1745.0/$. Lastly, Nigeria’s external reserves rose by 67bps to settle at $39.47bn.
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.
