January 6, 2025/United Capital Research
Global Markets: Mixed Sentiments Prevailed
Major US stock indexes recorded mixed performances during the holiday-shortened week, although broad gains on Friday helped indexes finish off their worst levels. Notably, the underperformance of major US equities at the beginning of the week was partially attributable to some profit-taking heading into the end of the year as Tuesday was the fourth consecutive day of declines for the S&P 500 Index. However, despite the year-end slump for US equities (approximately 70.00% of trading sessions in December saw more stocks decline than advance), 2024 marked the second straight annual gain of over 20.00% for the S&P 500 Index (+23.03% YTD gains in 2024) and capped off the best two-year positive stretch in 25 years. The Nasdaq Composite (+28.64 YTD gains in 2024) also finished 2024 on a strong note, for the sixth time in the past eight years. Meanwhile, the DJIA (+12.88% YTD gains in 2024) raked in fewer gains in 2024. Ultimately, from a week-on-week standpoint, the major US indices closed the week under review on a negative note, with the NASDAQ (-0.5% w/w), S&P 500 (-0.5% w/w), and DIJA (-0.6% w/w) recording losses.
Similarly, sentiment across European markets was mixed. despite the abbreviated holiday trading week. Major stock indexes including Germany’s DAX (-0.39% w/w) and France’s CAC 40 Index (-0.99% w/w) ended lower. Meanwhile, the pan-European STOXX Europe 600 Index (+0.20% w/w) and UK FTSE (+0.91% w/w) recorded gains. A weaker British pound versus the US dollar helped support the UK FTSE index, which includes many multinational companies that generate revenue overseas. The year began with a light macroeconomic data calendar. Spain released its first estimate of consumer price inflation for December, which came in stronger than forecast. Non-seasonally adjusted annual inflation accelerated to 2.80% from 2.40% in November on higher fuel prices. The uptick in Spain’s inflation rate appeared to play into arguments from more hawkish policymakers in the European Central Bank (ECB) for a cautious, gradual reduction in borrowing costs. Governing Council member Robert Holzmann told Austrian newspaper Kurier that rate setters could take more time before cutting interest rates again, citing rising energy prices and a possible devaluation of the euro if the US introduces trade tariffs. However, ECB President Christine Lagarde reiterated that inflation was on track to hit the 2.00% target in 2025, suggesting that rates remained on a downward path.
Investor sentiments in the Asian market was bearish. In China, equities retreated as weaker-than-expected manufacturing data hurt investor sentiment. The Shanghai Composite Index declined by -5.55% w/w, while the blue-chip CSI 300 fell by -5.17% w/w. Similarly, Japan’s stock markets ended lower in a holiday-shortened week amid signs of profit-taking. The Nikkei 225 Index lost almost 1.00% on Monday, the last trading day of 2024, to end at 39,894.54, its highest year-end closing level ever. The benchmark posted an annual gain of +19.22% in 2023, supported by share buybacks, corporate governance reforms, and a weaker yen that boosted exporters.
In the oil market, crude oil prices recorded its second consecutive weekly gain as optimism around China’s economic growth lifted market sentiment. For context, China’s factory activity grew in December, with data suggesting that policy stimulus is trickling into some sectors. Additionally, Beijing China’s central bank has indicated that it plans to lower interest rates from the current 1.50% “at an appropriate time” in 2025, all in a bid to alleviate the sluggish economic recovery. That said, oil prices closed higher week-on-week, with Brent Crude climbing by 3.15% w/w to print at $76.51/bbl (previously, $74.17/bbl). Similarly, WTI gained by 4.76% w/w to close the week at $73.96/bbl. (previously, $70.60/bbl.)
This week, sentiments around global equities is expected to remain positive, albeit mixed with bearish sentiments emanating from the cautious/restrictive monetary policy easing strategy embraced by major central banks of key advanced economies. The progress of global inflationary pressure will play a key role in determining investors’ sentiment toward risk-asset classes.
Macroeconomic Highlights
According to the Food and Agriculture Organisation of the United Nations, Global food commodity prices declined by 2.10% in 2024 compared to the previous year (2023). However, prices remain significantly higher than pre-Covid-19 levels. For context, the FAO’s overall Food Price Index averaged 122.0 points in 2024, representing a decline of 2.6 points, or 2.10%, from the average value (124.60 points) in 2023.
According to the CBN’s latest Economic report, receipts into the federation account grew by 7.48% to N6.86trn in the third quarter of 2024, largely driven by higher receipts from corporate tax and value-added tax. For context, total receipts received from corporate tax and value-added tax amounted to N5.56trn, 85.05% of total gross federation account earnings in Q3-2024. Oil receipts made up the N1.30trn balance.
The apex bank also revealed that in Q3-2024, oil revenue fell by 24.72% to N1.30trn, relative to the level in Q2- 2024 on account of lower receipts from petroleum profit, taxes, and royalties. The CBN also blamed the lesser oil receipts on shut-ins arising from ageing oil pipelines and installations. Meanwhile, from the federally collected revenue of N6.87trn in Q3-2024, about N3.92trn (57.06%) was distributed to the three tiers of government.
Nigerian telecommunications companies have proposed a 100.00% increase in their tariffs, pending approval from the government. The proposal, which has been submitted to the Nigerian Communications Commission (NCC), aims to address rising operational costs, including inflation and increased service delivery expenses.
Meanwhile, the NATCOMS President Adeolu Ogunbanjo revealed plans by the group to file a class-action lawsuit if the telecom operators proceed with a 100.00% hike (in the case where the NCC approves) without first exploring alternative revenue-generating methods. For further context, the proposed tariff hike is expected to raise the cost of a voice call from N11.00 to N22.00 per minute, an SMS from N4.00 to N8.00 per message, and a 1GB data bundle from N1,000 to N2,000. The NCC is currently reviewing the proposal and has not yet made a final decision.
The Dangote refinery in a statement on Thursday, disclosed that Heyden Petroleum and Ardova Plc, propelled by the economic relief provided by President Bola Tinubu’s crude-for-naira swap initiative, have entered into a bulk purchase agreement with the refinery. Further excerpts disclosed that the strategic move was designed to ensure a steady supply of petroleum products at affordable prices, further stabilising the nation’s fuel market and enhancing energy security for consumers.
This week, we expect the macroeconomic environment to be relatively quiet in the absence of any major economic data releases.
Domestic Equities: The Bulls Maintained Momentum…NGX-ASI Up by 1.42% w/w
Last week, the domestic equities market opened for a total of four trading days as the Federal Government of Nigeria declared Wednesday 1-Jan-2025, as Public Holiday to commemorate the New Year Day Celebration., that said, the market closed on a positive note, as bullish sentiments drove gains for three (3) out of four (4) trading days. A notable performer was BUAFOODS, which saw a significant gain of (+5.09% w/w), playing a key role in lifting the main index higher. Also worthy of mention is gains in large cap stock MTNN (+3.09% w/w) and WAPCO (+3.62% w/w). Bargain-hunting activities improved with the market’s breadth climbing to 4.6x implying that 82 stocks appreciated while 18 declined, up from 3.2x the week before. That said, the benchmark NGX-ASI improved by 142bps to close at 103,586.33 points, bringing the YTD return to 0.64% and raising market capitalization to N63.17trn. In terms of trading, market activity improved with the total value and volume of stocks traded climbing by 0.58% and 41.59% to print at N17.44bn and 654.48mn 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 Insurance sector (+26.15% w/w) led the gainers owing to gains in WAPIC (+44.92% w/w) and CORNERST (+33.03% w/w). Following was the Consumer Goods sector (+2.16% w/w) on the back of share price appreciation in BUAFOODS (+5.09%) and UNILEVER (+20.0%). The Banking sector (+0.58% w/w) followed on the back of bullish activities in STERLING (+11.50% w/w) and ACCESSCO (+2.08% w/w). The Industrial Goods sector (+0.50% w/w) followed on the back of share price appreciation in WAPCO (+3.62% w/w) and BETAGLAS (+10.00% w/w). On the other side of the coin, the Oil and Gas sector (-0.45% w/w) was the sole laggard on the back of sell offs in TOTAL (-6.51% w/w) and ETERNA (-6.32%).
Importantly, the Nigerian Exchange has just launched the Equity-Based Commodity Index, a market commodity index designed to track the performance of companies primarily operating in the energy, agriculture, mining, metals, and natural resources sectors. The starting constituents of the index include Geregu Power Plc, Multiverse Mining and Exploration Plc, Okomu Oil Palm Plc, Presco Plc, Seplat Energy Plc, Transcorp Power Plc, and Aradel Holdings Plc. The initial value of the NGX Equity-Based Commodity Index is set at 1,000.
In addition to launching the new index, the Nigeria Exchange Limited also provided updates on the changes in its incoming and existing indices. In the NGX 30 Index, which tracks the largest and most liquid companies, Conoil Plc, International Breweries Plc, Oando Plc, and Transcorp Power Plc are the incoming constituents. However, Guinness Nigeria Plc, Sterling Holding Company Plc, Total Nigeria Plc, and Flour Mills Nigeria Plc will be exiting the index.
The NGX Consumer Goods Index will see Golden Guinea Breweries Plc added to its list of constituents, while Flour Mills Nigeria Plc will exit. For the NGX Banking Index, Wema Bank Plc has been included, while Sterling Holding Company Plc will be removed. Changes also occurred in the NGX Insurance Index, with Guinea Insurance Plc and International Energy Insurance Plc joining the index. Conversely, LASACO Assurance Plc and Mutual Benefits Assurance Plc will be exiting. The NGX Industrial Index will not see any changes, as there are no incoming or exiting companies. In the NGX Oil & Gas Index, Aradel Holdings Plc, MRS Plc, and Oando Plc are the new additions, while Japaul Oil and Services will be exiting.
On corporate actions, Nigerian Breweries Plc has announced that the allotted 20,706,894,542 ordinary shares of 50 Kobo each (arising from the Company’s Rights Issue of 22,607,491,232 ordinary shares of 50 Kobo each at N26.50 per share) have been formally listed on the Daily Official List of the Nigerian Exchange Limited (the “NGX”) on Monday, 30-Dec-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 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: Increased Activity at the SDF Window
Last week, the financial system opened with a surplus balance of N846.78bn. During the week, increased activities at the CBN’s Standing Deposit Facility (SDF) window caused the system to remain inflated. Hence, the CBN resorted to Open Market Operation (OMO), in a bid to mop-up liquidity. Despite the CBN’s intervention, the financial system wrapped the week under review with a surplus balance of N871.20bn, notably powered by activities at the SDF window. Funding rates between banks were mixed, despite the extent of liquidity in the financial system. The weekly average of the Open Repo Rate (OPR) inched up by 6bps w/w to 26.81% (previously, 26.75%). Meanwhile, the weekly average of the Overnight Rate (OVN) tapered by 11bps w/w to record at 27.36% (previously, 27.47%).
At the primary market, the CBN conducted Open Market Operation (OMO) auction with total offer size of N250.00bn on a 358-day bill. The auction was surprisingly undersubscribed, with total bids recording at N228.0bn, implying a bid-to-cover ratio of 0.91x. The apex bank eventually undersold the auction, allotting total bills to the tune of N100.00bn. Hence the stop rate on the 358-day OMO bill printed at 23.93%. We note that the final OMO auction was met with underwhelming demand because of the attractive rates offered at the CBN’s SDF window which currently stands at 32.50% (MPR plus 500bps *27.50% + 500bps*). Thus, factoring in CBN’s restrictive approach with rates, and the short-mid outlook for monetary policy, banks participated more at the CBN’s SDF window, compared to OMO auctions. This sentiment surfaced in the final two (2) weeks of Dec-2024.
Meanwhile, the secondary market for NT bills closed was relatively more bullish than bearish. As a result, the average yields on NT bills fell by 3bps w/w to close the week at 25.46% (previously, 25.49%). Conversely, we saw mild sell-offs at the secondary OMO segment with the average yield on OMO bills climbing by 7bps w/w to settle at 27.18% (previously, 27.11%).
This week, we expect the CBN to attempt to mop-up system liquidity using Open Market Operations (OMO). However, the banks will most likely remain skewed toward placing their funds with the CBN through the SDF window @ 32.50%. This will continue as long as the apex bank remains cautious in increasing rates on OMO bills. On another side, the CBN will be offering N515.00bn worth of NT bills at a Primary Market Auction (PMA), this represents a N440.60bn difference compared to the N74.40bn worth of bills maturing. At the auction, we expect stop rates to fall, driven by the liquid financial system. Meanwhile, buy-interests is expected to continue at the secondary market for NT bills. The ultimate direction of FTD and money market rates will be determined in the aftermath of the NT bill auction.
Bond Market: Cautious Sentiments
The secondary bonds market was relatively quiet as investors maintained a cautious approach towards duration exposure. Thus, the average bond yield inched up by 3bps to close at 19.78% (previously 19.75%). Conversely, activities were mildly bullish in the corporate bonds market, as the average yield on corporate bonds tapered by 2bps to settle at 23.27% (previously, 23.29%).
Meanwhile, in the Nigerian secondary Eurobonds market, we observed bullish sentiments resurface, given the attractive premium on Nigerian Eurobonds. That said, the average yields in the market tapered by 18bps w/w to settle at 9.49% (previously 9.67%).
Looking forward, we expect the cautious trend in the bonds market to persist as investors remain attracted to the elevated rates at the shorter end of the yield curve. This situation is expected to persist given the inverted yield curve. Meanwhile, we expect continued mixed sentiments in the Nigerian Eurobonds market as investors look to create a balance between high quality assets and high-premium yielding assets.
Currency Market: Naira Mildly Appreciated at the Official Market
Last week, the Naira mildly appreciated by 28bps w/w at the official market to close at N1,534.05/$, from its previous close of N1,538.39/$. Meanwhile, the Naira depreciated by 91bps w/w at the parallel market to settle at N1,665.0/$, from its previous close of N1,650.0/$. Lastly, Nigeria’s external reserves rose by 4bps to settle at $40.883bn (previously, $40.868bn).
This week, we expect the recent stability of the Naira to be sustained in the short term, following improved FX supply and weaker FX demand. The successful $2.20bn Eurobond issuance signals a positive improvement in investors’ confidence in the Nigerian economy, particularly helped by recent economic reforms. Also, the ongoing normalization of monetary policy in key advanced economies which signals that borrowing costs in the International Capital Markets (ICM) will continue to taper into 2025, provides additional support for FX supply via increased external borrowings in 2025. Additionally, the recent upward trend in the nation’s reserves increases the likelihood for interventions at intervals, aimed at sustaining the Naira’s value around a support level above the N1,500/$ mark (2025 budget projection). Overall, in the long-run, the stability and consistent growth of the country’s crude oil output will play a key role in the Naira’s sustained appreciation below the N1,500/$ mark.
