January 21, 2020/InvestmentOne Report
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Global growth in 2020 is expected to be relatively better than 2019’s, with the IMF and OECD projecting 3.4% and 3.0% in 2020 respectively; however, downside risks to the outlook are elevated. Persistent trade hindrances and prominent geopolitical tensions, including the infamous Brexit-related risks, could additionally disturb supply chains and hamper confidence, investment, and growth. Such strains, as well as other local policy uncertainties, could adversely affect the forecasted growth pick up in developing economies and the Euro Area. A realization of these dangers could lead to a sudden move in risk sentiment and uncover financial vulnerabilities developed over long periods of low interest rates.
In Nigeria, we may not see the economy growing at 2.93% as targeted by the Federal Government. We only expect the economy to grow by 2.30% due to recovery in oil output and growth in Agriculture and Services sectors but per capita income may remain weak as growth remains below population growth rate. We highlight that our latest projection is lower than International Monetary Fund‘s (IMF) estimate of 2.5% but higher than the World Bank’s projection of 2.10% in 2020.
We maintain our view of a relatively stable Naira against US$ in 2020 on our base case scenario; we think factors like OMO restriction and foreign borrowing should keep the nation’s reserves above the devaluation trigger point of US$30billion (according to the CBN) in 2020. Similarly, we do not expect oil to trade at US$45per barrel (another devaluation trigger point) as we see oil trade at a base range of US$57-US$60 per barrel in 2020 on the back of OPEC output cap and improved trade relation between US and China. Nonetheless, we are concerned about the huge value of foreign investment in the CBN’s short dated instrument (US$17billion in OMO as at August 2019), this highlights the susceptibility of the nation’s FX stance to external shocks.
Elsewhere in the fiscal front, we expect FAAC disbursements to remain to strong with tax revenues set to increase and oil price remaining strong on the back of trade deal optimism between the China and the USA coupled with geopolitical risk. However we remain wary of various states’ inability to grow into fiscal independence. We proffer that states formulate a set of comprehensive fiscal packages to stimulate their economies. Our recommendations include generating more sources of local revenues by harnessing existing resources and boosting partnership, cutting excessive costs of governance, amongst others.
In the local space, we see sustained pressure on fixed income instruments as it appears unlikely for the CBN to make on turnaround on OMO restrictions. With N5.09trillion and N1.82trillion expected to mature in Q1 and Q2 2020, there will be increased demand for treasury bills and bonds in the secondary market, which would put downward pressure on yields. As the exclusion of local investors from participation in OMO has a positive impact on the apex bank’s balance sheet, the resulting effect – lower yield environment – also serves as a positive for the federal government as it sought to raise cheap debt and reduce debt service cost. This premise is further supported by the limited number of asset classes available to fixed income investors for investment consideration as well as the risk averse attitude of PFA’s. In our opinion, they may be willing to pay a premium — and ultimately take a loss — because they need the reliability and liquidity that government instruments provide. It is worthy to highlight that, safety of asset under management is a major objective of PFA’s.
To a large extent, the equities market would continue to be influenced by the nature or strength of the economy, and decisive policies stipulated to prompt growth. Nonetheless, we expect the recent fall in yields on government instruments on the back of OMO restriction to support investors sentiments towards equities market. We think cheap price levels which have returned attractive dividend yields should encourage buy interests in the equities market which has a low PE ratio (c. 7x) compared to peers in Emerging (c. 15x) and Frontier markets (c. 10x). As such, we see equities market recover about 10%-15% out of the 32% loss recorded in the last two years.
