• Wednesday, February 21, 2024
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United Capital research: investment views: Markets linger in the south…as liquidity strain weighs

South Korea Asian Markets

The equities market quashed last week’s gains on the back of speculative trading and the negative impact of weak macro outlook on the domestic markets. The local bourse lost 2.3% w/w to close at 30,705.62 point, pegging YTD return at -11.4%.

Similarly, market capitalization was down by N88.0bn to N10.5trn. Losses in a number of top banking, energy, and consumer counters drove the bearish run in the market last week. Market activity as measured by volume and value of transaction also declined by 43.0% and 34.3% to 271.3mn units and N2.4bn respectively. Market breadth tilted in support of the decliners, standing at 0.3x as 59 stocks declined against 17 advancers.

The T-Bills market kicked off the week on a bullish note as yields declined by 2bps on Monday to 14.5%. However, this was short-lived for the rest of the week as the bears returned to the market, pushing prices to multi-year lows. Average yields declined by 60bps W/W to 15.3%.

Speculative activities have been the key driver in the market in recent times with some level of activities from long term investors as value stocks remain attractive. We look to see continued short term tactical plays this week with modest bargain hunting, albeit more tilted towards profit taking. Thus, we expect the equities market to remain gloomy this week; hence we advise investors to trade cautiously with a medium to long term horizon.

Global and Domestic macro-economic updates

China devalue to surprise markets, with implications for global growth scenarios

Earlier in the past week, China’s devaluation of its currency sparked worries about the health of the global economy, while safety plays like gold gained. The surprise triggered fears about waning competitiveness of the region’s exporters and cast fresh doubt on the health of the world’s no. 2 economy, which has  anchored growth in the region.

This Impact rippled across other Asian markets, with the Malaysian ringgit and the Indonesian rupiah falling to 17-year lows, while the stock markets in those countries are down 5.2% and 3.9% for the week, respectively. China shares, meanwhile, weathered the week’s volatility and closed out with their best weekly performance in over two months

The U.S. equities market also opened the week lower, and then flipped between small gains and losses through Friday, as choppy trades capped a tumultuous week marked by thin summertime volumes, turmoil abroad, and hand-wringing over the timing of the Federal Reserve’s plans to raise interest rates. While a string of upbeat economic reports paint the U.S. economy in a strong albeit not spectacular light, market mood remains downcast on investors concerns about the strength of the global economy.

Markets across Europe were bearish in the past week, driven majorly by the knock-on impact of yuan devaluation in China, a move that raised concerns about the health of the world’s second-largest economy. Data also showed July consumer price inflation in Germany remained subdued rising 0.3% on the month, leaving the annual rate steady at 0.1%, a sign that the European Central Bank’s bond purchase program has yet to have its desired effect on Europe’s largest economy.

On the domestic scene, the Consumer Price Index (CPI) which measures inflation remained static at 9.2% in July, flat on the previous month, according to the National Bureau of Statistics (NBS). This was attributed to muted rises in the food and non-alcoholic beverages, housing, water, electricity, gas and other fuels, as well as household equipment maintenance divisions amongst others.

Liquidity tightening sustained; rates remain at double digits

On the back of TSA implementation, NNPC withdrawals, Bond auction and FX intervention, market liquidity remained tight in the previous week with rates remaining at double digits though lower than rates in the week preceding last week. Opening balance on Monday was N178.5bn but declined to N86.3bn on Tuesday and further down to N71.7bn and N28.1bn on Wednesday and Thursday respectively. Rates trended down on Monday to 28.3% and 31.2% for the OBB and O/N, got to a high of 50.0% and 54.3% during the week, but closed the week at 15.0% and 28.1% respectively. Rates are expected to trend north this week as liquidity is expected to remain tight compounded by T-Bills auction scheduled for the week.

Bearish run sustained in the fixed income space

The T-Bills market kicked off the week on a bullish note as yields declined by 2bps on Monday to 14.5%. However, this was short-lived for the rest of the week as the bears returned to the market. Average yields declined by 60bps W/W to 15.3%. The bond market was by and large bearish all through the week despite demand witnessed at the medium term space. The bearish run at the start of the week can be attributed to the bond auction as investors look to see were rates will trend at the PMA. Average yields at the close of the week was at 15.4%; a flat movement w/w. Bond auction for August was held last week as the DMO reopened the FEB-2020 and JUL-2034 instruments to raise N40bn and N30bn respectively. Marginal rates came in at 15.4% (FEB-2020) and 15.2% (JUL-2034), 10bps higher than July’s auction. Even so, the FEB 2020 and JUL 2034 instruments were oversubscribed to N88.3bn (120.8%) and N65.2bn (117.2%) respectively. We expect to the fixed income market to trade sideways this week. Liquidity strain will likely limit DMBs participation in the market this week, though we look to see increasing participation by domestic institutional investors (non-DMBs).

Naira firms against the Greenback w/w

In line with on-going patterns, activities in the FX market remained relatively calm in the past week, as stakeholders continue to respond to recent policy tweaks by the apex body.  Consequently, the Naira gained 60bps against the dollar on a w/w basis, to close the week at N197.73. We expect recent stability in the USD/NGN to be sustained this week to be driven by the impact of the central bank’s recent slew of policy maneuver around FX.