May 10, 2020/InvestmentOne Report

Please click to view the April 2020 Macro & Markets Update

·         In the month of April, Brent oil price appeared to have settled at US$20 per barrel levels as market seemed to have priced in the effects of the weak demand in the near term. Nonetheless, Brent oil price rose by 11% to close the month at US$25.27 per barrel.

·         Domestically, the IMF expects the Nigerian economy to contract by 3.4% in 2020. However it noted that there would be a projected rebound of 2.4% growth in 2021. We have a similar view with the IMF as the current pandemic continues to disrupt economic activities in major states in Nigeria. 

·         Overall, we believe the global economy is on course for a recession as we expect economic activities to remain limited throughout 2020.  While the easing of the lock down in the domestic economy (similar to major economies) should support economic activities in the near term, we are still sceptical of a significant jump in cases of the virus which could overwhelm the health system and force another lockdown in the near term.   

·         The Inflation numbers released by the National Bureau of Statistics (NBS) for the month of March 2020 revealed that headline inflation continued its upward trajectory. According to the report, inflation accelerated to 12.26% y/y in March 2020 from 12.20% in February 2020. 

·         We expect Inflation to sustain its upward trajectory due to a number of factors such as the impact of the lockdown in major cities which may impair farming activities and cause a further hike in food prices; increase in demand for pharmaceutical products and FX challenge on imported products. 

·         In the outgone month, we received news of Nigeria getting the green light regarding its US$3.4billion emergency fund request from the IMF. Also, the Senate approved the FG’s request for its debt search to be 100% sourced from the domestic market. Lastly, the NNPC was very vocal concerning the difficulties arising from the excruciatingly low oil price and intents to completely scrap its petrol subsidy regime. 

·         More broadly, we believe the crisis affords the FG the opportunity to make critical reforms, previously hindered by weak political will. Some of the reforms which we opine the FG should be considering include: streamlining MDAs with a view to eliminating duplicity of functions and offices, commencing a privatization programme i.e. converting unprofitable national assets to a liquidity source, containing overhead and personnel cost, amongst others. 

·         Following illiquidity in the FX space, bolstered by the National lockdown, FPIs showed interest in CBNs OMO auction in April 2020. Consequently, there was an increase in CBN’s OMO auction to N390billion, from N111billion in the preceding month. 

·         We see yields in the fixed income space remaining at current levels with a possibility of downward tilt as we see more interests from the local Portfolio Managers given limited investment opportunities and elevated risk in the variable income assets. 

·         The local currency remained under pressure in the outgone month against the major currencies both in the parallel market and IEFX window. In the parallel market, the naira lost 8%, 7% and 12% against USD, GBP and EUR  to close at N450, N525 and N470 respectively. In the same vein, at the IEFX window, the local currency lost 7%, 10% and 7% to close at N387, N488 and N424 against USD, GBP and EUR respectively. 

·         Going forward, on the back of heightened demand for dollars, we expect the FX market to remain under pressure. We believe CBN’s resumption to the FX market could encourage more FX demand and add to the pressure in the market. Nonetheless, we believe the recent inflow from the IMF loan of US$3.4billion should provide the necessary ammunitions for CBN to defend the local currency in the near term.  As such, we expect Naira to  remain relatively stable in the month of May as CBN supplies to the FX market. 

·         The local bourse ended the month of April 2020 in the positive territory as NSEASI gained 8.08%, retracing some of the losses in March 2020 (-18.75%). This translated to a Year-to-Date loss of 14.24% as of April 30, 2020. The market cap improved to N11.99trillion in April 2020 from N11.10trillion in March 2020. 

·         While we believe the risk-off sentiment on the back of the impact of Coronavirus could continue to weigh in on equities market, we opine that this may be one of the best periods to start picking some of the quality names with a medium to long term investment horizon. Nonetheless, we expect equities market to remain volatile in the near term as short term players continue to speculate on the direction of the market.