August 5, 2019/InvestmentOne Report
In the month of July, we saw a stronger improvement in the Purchasing Manager’s Index (PMI) as both Manufacturing and Non-manufacturing PMI rose to 57.6 and 58.7 points from 57.4 and 58.6 points respectively in the previous month.
· On the other hand, Brent oil price remained above US$60 per barrel benchmark of the 2019 budget though it lost 2.07% month on month to close at US$65.17per barrel in July 2019.
· Going into the new month, we expect relative peace in the Niger Delta region to remain. Nonetheless, oil output growth may be limited by OPEC output cap on Nigeria and other members of the cartel. However, we expect more efforts to be made towards boosting condensates production which is not part of OPEC output cap.
· In the outgone month, Federation Account Allocation Committee (FAAC) allocations to the three tiers of government rose to N762.5billion; the sum was generated in June 2019 and shared in July 2019.
· Going forward, we could see disbursement figures print strongly on the back of strong crude price and local production levels as well as an increase in tax revenues with companies traditionally paying CIT in mid-year. On a fiscal downside, however, we spotlight the worrisome dependence on revenues from volatile commodities, low revenue mobilisation (2018 tax to GDP of 7.6%) and the ubiquity of poverty within the country inhibiting revenue generation.
· Furthermore, with the senate approving the nominees put forward by the presidency for ministerial roles in the recently elected administration, we believe there should be some expedition in the implementation of the 2019 budget. However, given the recent expenditure trends by the FG, we do not anticipate capital expenditure being the priority of government spending as the bulk of the budget goes into recurrent expenditure, particularly wage payments and debt servicing.
· The National Bureau of Statistics (NBS) released the Inflation report for the month of June 2019, which showed a decrease in inflation rates against our expectations. The report showed an deceleration in headline inflation, following two consecutive months of acceleration, to 11.22% year-on-year (y/y) from 11.40% y/y in May 2019.
· Also, Naira remained stable against major currencies in the outgone month; more specifically, although it depreciated slightly by 0.22% against the USD to close at N361.68, it appreciated by 1.97% and 3.74% against the EUR and GBP closing at N401.24 and N440.34 at the IEFX window. Similarly, at the parallel market, the local currency gained 0.28%, 1.96% and 1.72% against the USD, EUR and GBP to close at N360, N400 and N455 respectively.
· Going into the new month, we expect the foreign exchange market to remain stable on the back of strong reserves level (US$44.92billion, as at month end) and continuous FPI inflow into the IEFX window. In the same vein, we believe current oil price levels should support investors’ sentiment in the domestic FX market in the near term.
· Elsewhere, the MPC decided to keep MPR (13.50%) and other monetary policy parameters unchanged as the “mandate of price stability remains sacrosanct”. While concerns about slow economic growth have been voiced in recent times, and may be even warranting a cut in the MPR, we believe the agenda to drive credit to the real sector may serve as an impetus to accelerate growth within the economy.
· The local bourse continued its bearish trend from the previous month, losing 7.50% in July from a negative 3.55% in the month of June 2019. Consequently, the market’s Year-to-date performance deteriorated to -11.81%.
· Going into August 2019, we would continue to witness the wave of financial scorecards released by some quality names, especially in the banking sector. Following the trend already seen in some of the results already released and largely on the back of our forecasts, we do not expect much in terms of bottom line performance from these companies and as such, we do not expect any renewed interests in the equities market.
