• Sunday, May 19, 2024
businessday logo

BusinessDay

Elevated fixed income yields, others to dampen equities market in Q2

Elevated fixed income yields, others to dampen equities market in Q2

Nigeria’s stock market, which enjoyed a strong first quarter with returns exceeding 39 percent, is expected to face headwinds in the second quarter (Q2) 2024.

Analysts anticipate a slowdown driven by three factors, rising fixed income yields due to CBN rate hikes, a decline in dividend payouts compared to Q1, and the potential dilution of banking stocks due to the recently announced recapitalisation exercise.

Gbolahan Ologunro, portfolio manager FBNQuest said that the bullish momentum that dominated the local bourse in the first quarter is expected to slow down substantially in the second quarter.

“This will be driven by the trioka impact of elevated fixed-income yields, fading impact of corporate actions, and the attendant impact of the ongoing recapitalization exercise in the banking sector,” he said.

At the end of the first quarter of 2024, the Nigeria Stock Exchange gave returns of 39.47 percent despite a double rate hike by the CBN.

However at the end of the first trading week in the second quarter the equities market saw bearish sentiments which continued on Monday with the market decreasing by 0.38 percent or N222 billion at the close of trading, pushing lower the market’s return year-to-date (YtD) to 37.81 percent.

The Monetary Policy Committee (MPC) last month raised the Monetary Policy Rate (MPR) to 24.75 percent, representing a 200 basis points increase.

The treasury bill environment has witnessed elevated yields with average stop rates of 20 percent at the last five auctions, with the current effective yield on a 1-year instrument coasting around 26.8 percent. Issuances have also been concentrated at the short end (Treasury bills), which has housed 69.0 percent of total government domestic capital market borrowings in 2024.

Ologunro said that the elevated fixed-income yields will likely engender investors to switch funds from the equities market to take advantage of higher returns on government instruments given rising inflationary pressures amidst the absence of corporate actions to catalyze buying sentiments.

He said in the second quarter, companies will be declaring fewer dividends compared to the first quarter of over 85 percent.

According to Afrininvest Berger, Stanbic IBTC, Dangote Cement, Transcorp, CWG, Unilever, Okomu, NAHCO, Mc Nichols Plc and Trans Nationwide Express Plc will be declaring dividends this week.

“In addition, the impending dilutive impact of the recapitalization exercise in the banking sector will make investors exhibit cold feet towards banking stocks given that the large equity capital raise required by banks also has negative connotations for dividend declarations in the near to medium term,” he said.

Last month the Central Bank of Nigeria (CBN) announced a ten-fold jump in minimum capital requirements for banks, nearly two decades since the last exercise.

The minimum capital requirement was jacked up to N500 billion for those with international authorization, N200 billion for commercial banks with national authorization, and N50 billion for those with regional authorization.

Access Bank Plc, the biggest bank by assets which also has vast international operations, needs to raise N500 million within the next two years. Currently, it has N251.81 billion in share capital premium, leaving N248.19 million to be raised to meet CBN regulations.

Another source, a Lagos-based stock market analyst also expects the market to remain bearish, barring any corporate news. “I think the market will remain bearish given the attractive yields in the fixed income market, investors will flock there.”

On the contrary, he said that recapitalization will not affect the bank stocks, “because it will happen in two years and the tier one bank can easily raise it through right issue or mergers and and acquisitions, also tier one banks stocks are still very solid.”

He said that dividend payout is more likely to have an effect on the performance of the equities market. “A lot of investors positioned for dividend payouts in q1 and since there won’t be much of it Q2 the market might be bearish, That said, positive q1 financial results could spur rally around a few stocks and lead investors back to the equities market,”

Similarly Olaolu Boboye, lead economist CardinalStone shares the same sentiment on the equities market.

He mentioned that Q2 will be a bit challenging because banks are a very exciting place investors look at, however the regulatory directory on banks has been very strict recently and might affect investors’ sentiment towards it.“Market sentiment towards banks will be poor,” he said.

Boboye mentioned that most banks have begun to release their full year report and despite having good returns, low dividend payout might deter investors from them.

“Market play towards dividends and was expecting higher dividends than was declared by the banks, because the prices of bank stocks were higher but dividend yields were lower . So I’m skeptical that there will be mixed feelings towards them but maybe when their Q1 number comes out it may spur a bit of excitement,” he said.

He said the consumer goods sector has also struggled for a while from fx instability, high interest rate environment, “But we’ve seen them restructuring, like Cadbury.”

“We’ve seen a lot of them doing debt restructuring in the FMCG, so looking at these companies excluding their fx losses can give an insight of what the future for them might look like which might spur some excitement in that space,” Boboye said.

The naira has been on a winning streak for the fourth consecutive week settling at N1245 against the dollar. Boboye highlighted that with these trends combined with the recent sale of dollars to the BDC at N1100 shows that the naira is on its way to stability and will be good news for FMCG.

“The naira gaining, and even going towards N1100 like we saw with the dollar sales to BDCs of recent is good for FMCG, If naira stabilizes in Q2, I won’t be surprised if they start to front loading their borrowings in in Q2,”

He said that there’s usually a lot of pressure on the FX in Q3 especially for students trying to travel and pay their fees.

Boboye said that a combined effect of all these will affect equities market sentiment, “Market sentiments generally will be weaker.”

For the fixed income market, Boboye mentioned that the system liquidity is thinning in the rest of the year, which will fuel higher yields for NT-bills, and OMO yields but not as strong as NT-bills.

“We expect liquidity to thin out, with monthly maturities and bond coupon payments likely to average N428.9 billion from April till year-end (vs N1.1 trillion in Q1’24). This lower liquidity will likely sustain yield increases at the short end of the curve,” he said.

This view is premised on the government’s decision to frontload a substantial part of its 2024 borrowings in the first quarter. Specifically, the second quarter bond auction calendar suggests that the government aims to raise between N300 billion to N600 billion monthly compared to the 2.5 trillion borrowings in the first quarter.

He explained that NTbills is more influenced by liquidity and MPR decisions, “ Since inflation will likely remain elevated till the end of Q2 meaning there might still be an increase in interest rate and an increase in yields for NT-bills.”

“While bonds are moved by the quantity issued, and the government has done most of its borrowing in Q1 so we don’t expect to see elevated yields in Q2,” he said.