March 19, 2020/United Capital Report
Executive Summary
2020 started off on a fresh note, as investors received a huge relief, from clarity regarding the prolonged BREXIT proceedings and a trade deal between the U.S. and China. As a result, major global financial markets soared, buoyed by a rather optimistic outlook for the year. Against the run of play, the outbreak of the coronavirus, COVID-19, is clearly a Black swan. So far, according to Worldometer, the virus has spread to over 176 countries, with countries in Asia and Europe being the most infected. The number of confirmed cases has surged to over 220,000 as at 19th March 2020, with close to 9,000 deaths. Notably, 85,700 recoveries have also been recorded.
Bearing the above the mind, this report focuses on an extensive view of the impact of the COVID-19 virus on Nigeria’s macroeconomy amid the fallout of the OPEC+ alliance which has resulted in the collapse of oil prices. From a peak of $68.9/b in Jan-2020, oil prices have crashed to $25.8/b, its lowest point since the drastic supply glut in 2016. Looking ahead, demand for oil is expected to weaken considerably as demand from China and Europe which account for 27.5% of global demand, weaken, due to the severity of the pandemic in both regions. On the supply side, an extended period of the oil price war, tied to the actions of Saudi Arabia and Russia is likely to aggravate supply glut. Overall, on a balance of factors, crude oil prices are likely to remain considerably low into Q3-2020.
Against this backdrop, we highlight the fact that Nigeria’s GDP growth in Q1 and Q2-2020 is likely to be weaker than expected, impairing our 2.3% growth earlier forecasted for the year. Also, pressure on the exchange rate is expected to increase, with a 50.0%- 60.0% probability that the CBN will be forced to initiate a currency adjustment if the health crisis triggered by the virus outbreak does not improve till the early part of Q3-2020 and 60%-70% if OPEC+ members fail to extend supply cut in April-2020. However, a return to the international debt market might erode the chance of a devaluation in 2020.
For the financial markets, given the fact that the current bearish trend is largely driven by the flight to safety, we believe the equity market may be poised for a swift rebound once the impact of the event dissipates. Thus, we advise equity investors that were caught in the web to hold on to their positions and wait out the storm. Yet, we insist that the current environment is an avenue for every class of investors (those caught in the web and new investors) to cautiously take advantage of the dip to average down cost, especially in fundamentally sound stocks. At the fixed income segment, given the uncertainty around how the long the outbreak will last, we advise investors to cut duration exposure and position on the short end of the yield curve in anticipation of further clarity on the direction of interest rates.
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