June 5, 2020/InvestmentOne Report

Please click to view the May 2020 Macro & Markets Update

·         In the month of May, there was an improvement in oil prices as Brent oil price recovered part of the losses recorded so far this year.  As such, Brent oil price gained 62% to close the month at US$35.49 per barrel. 

·         Domestically, the National Bureau of Statistics (NBS) released GDP figures for Q1 2020 on the 25th of May 2020. According to the report, real GDP growth slowed to 1.87% y/y from 2.55% y/y in Q4 2019 and 2.10% y/y in Q1 2019. 

·         While the recent rate cut by the monetary policy committee of the CBN may provide little impetus for economic recovery by improving consumer spending and business investment, we think it may not be sufficient to save the country from a looming recession given the damage the pandemic has caused on economic activities. 

·         The National Bureau of Statistics released the inflation report for the month of April 2020 which revealed that headline inflation continued in its upward trajectory. According to the report, inflation rate accelerated to 12.34% y/y in April 2020 from 12.26% in March 2020.   

·         Going forward, 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 the agricultural supply chain and continue to cause a hike in food prices; increase in demand for pharmaceutical products, ongoing border closure and FX challenges on imported products. 

·         In the outgone month, we saw Brent crude price pick up momentum following the commencement of OPEC+ cuts, news of economies opening up and the general trend being policy leaders moving in favour of normalcy. Also during the month, we witnessed FAAC numbers drop significantly as the predicted revenue crunch began reflecting. Lastly, the FG made some additional tweaks to the 2020 budget to reflect the current macro realities even as it received a much needed funding boost from the IMF. 

·         In line with our expectations of significantly lower oil and non-oil receipts in the coming months, revenues from Petroleum Profit Tax, Companies Income Tax, import and export duties, oil sales and VAT all declined during the month. The committee also provided guidance for distribution for the year, stating that the projected share for FG, States and LGs, which were expected at N4.8trillion, N3.3trillion and N2.5trillion, may print lower at N2.4trillion, N2.1trillion and N1.5trillion respectively. 

·         At its third meeting in 2020, the Monetary Policy Committee (MPC) reduced MPR by 100bps to 12.50% while retaining CRR at 27.50%, liquidity ratio at 30% and asymmetric corridor at +200/-500bps around the MPR. This decision was hinged on the attendant effects of the COVID-19 pandemic and oil price shock on the Nigerian economy. 

·         Furthermore, the decline in MPR serves as a pointer to the direction of interest rates in the domestic market. Our view is further buttressed by the outcome of the last OMO auction held in the month of May 2020, where the stop rates on the 82-day, 180-day and 348-day bills declined by 450bps, 279bps and 274bps from previous auction to 7.00%, 8.75% and 9.90% respectively.  

·         In the outgone month, we saw Brent crude price shed off some of the pressures from weakened oil demand as it gained 62%, retracing part of the losses seen in the previous months. FX reserves also recorded some accretion on the back of receipt of the IMF Rapid Finance Instrument funding. In the month of May 2020, FX reserves grew by 8.86% to US$36.49billion. 

·         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. 

·         The local bourse ended the month of May 2020 in the green territory as NSEASI gained 9.76%, extending the gains in April 2020 (+8.08%). This translated to a Year-to-Date loss of 5.85% as of May 29, 2020. The market capitalization improved to N13.16trillion in May 2020, from N11.99trillion in April 2020; we highlight that this is the best traded month so far in 2020. 

·         We expect the low interest environment to spur local interest in the equities market as it is one of the few markets with potential for a positive real return at this time. We advise investors to position themselves in fundamental stocks as we retain our stance that this may be one of the best periods to pick up some quality names with a  medium to long term 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.