February 6, 2020/InvestmentOne Report
Please click to view the January 2020 Macro & Markets Update
· In the outgone month, Brent oil price lost 12% to US$58.16 per barrel as the impact of the coronavirus led to a weak oil demand. We highlight that the outbreak of the virus has led to about 20% fall in oil demand from China which consumes about 16% of the global oil supply. While OPEC members are considering meeting in the near term in order to take the right action to stabilize the market, we think a continuous spread in the coronavirus may pose
· Elsewhere, the CBN’s purchasing managers index continued to show expansion but at a slower pace as Manufacturing and Non– Manufacturing indices for the month fell to 59.2 and 59.6 points from 60.8 and 62.1 points respectively in December 2019. We believe the expectation of a higher demand on the back of new minimum wage as well as the continuous border closure could have supported producers’ sentiment in the outgone month.
· Going forward, we expect growth in oil output to remain limited as we try to comply with OPEC output cap. With the OPEC and its allies’ likely to even cut more on the back of the outbreak of Coronavirus, we expect Nigeria to strictly comply with the output cap of 1.68mbpd (excluding condensates), thus reducing our oil output.
· The month of January began with a myriad of bittersweets for the country’s fiscal matters. On one side, Brent crude opened the year strong following positive talks between US and China relating to the ongoing trade war between the nations, FAAC distribution printed at N716billion, the FG kicked off the January to December budget cycle for the first time in over a decade and minimum wage implementation kicked off, albeit mostly on a federal level.
· The year began on a positive note for the fiscal segment with Brent crude rising as high as US$69 per barrel on the back of trade optimism and supply concerns majorly in the Middle East. With President Trump and his Chinese counterpart, Xi, coming to a phase one agreement there was an ease on global output outlook and by extension oil demand.
· The effects of the 2019 OMO restriction on local non-bank investors spilled into 2020 as expected. Yields in the fixed income space continued its downward journey, as system liquidity remain heightened. The level of liquidity in the system created some concern for the monetary authorities as broad money supply (M3) grew by 6.22% YTD in December 2019; aggregate credit similarly grew on the back of increase in credit to government and credit to the private sector.
· Going forward, we see yields in the fixed income space remaining at this level with a possibility of downward momentum. Although the hike in CRR may squeeze system liquidity to an extent causing some uptick in yields, we think it may not be sufficient to adequately stem the pressures from incoming OMO maturities in H1 2020 (N4.5trillion). In terms of monetary policy, we expect the MPC to maintain status quo on monetary parameters, however, we do not rule out a further hawkish tilt to its current stance.
· Brent Crude prices began the month on a high note and then began to fall in the outgone month. On average, Brent crude traded an average price of US$63.67 per barrel in January 2020 which is a 2.30% decline when compared to December 2019 on the back of the outbreak of the Coronavirus. On the other hand FX reserves continue its downward trajectory as it depleted to US$38.01billion for the month according to CBN data. Although the Apex Bank intervened in the IEFX window by c.24% to US$627million in the previous month, it did not intervene in January 2020. According to data from FMDQ, for the first 3 weeks of January 2020, FPI participation surged by 80% to US$1.57billion.
· We expect foreign exchange market to remain relatively stable supported by the reserve level of US$38.01billion. The recent outbreak of the Coronavirus proposes a significant threat on oil price, as it continues to decline (currently below budget benchmark of US$57 per barrel). However, this is majorly dependent on how the virus is being curtailed and how soon economic activities start to pick up in China.
· The Equities market ended the month of January 2020 on a bullish note, gaining 7.46% compared to the loss of 0.59% recorded in the month of December 2019. The market cap improved to N14.86trillion in January 2020 from N12.96trillion in December 2019
· Going into February, we opine that the bourse could sustain a positive trend, as we expect there will be release of corporate earnings results and we would most likely see investors come into the market to take position for dividend payment especially as prices of some banking names depressed on the back of investors’ reaction to the hike in Cash Reserve Ratio.