January 6, 2020/InvestmentOne Update

Please click to view the December 2020 Macro & Markets Update

·        Brent crude sustained its recovery in December as the excitement around COVID-19 vaccine and OPEC+ agreement on output outweighed the effect of rising cases of COVID-19 in different parts of the world.   

·        Going forward, we expect Brent crude to be supported by the recent OPEC and its allies’ decision to embark on a gradual (to reduce cut to 7.2mbpd from 7.7mbpd from January ) rather than a rapid increase in oil supply as the cartel continues to monitor the supply and demand dynamics in the market. 

·        Overall, we expect to see the economy shrinking in Q1 2021 on the back of high base effect of Q1 2020 performance. 

·        The recently released the inflation report for the month of  November-2020 by the National Bureau of Statistics (NBS) showed that headline rate rose to 14.89% y/y from 14.23% y/y in the previous month; this represents the highest inflation level since January-2018. 

·        The food sub-index rose by 18.30% y/y, representing a 92bps increase from 17.38% y/y in October-2020. Food prices increased 2.04% m/m (vs. 1.96% in October). 

·        Looking ahead, we reiterate that the outlook for the headline inflation rate remains biased to the upside for the rest of the last month of the year and going into 2021, despite the suspension of the recent increase in electricity tariffs. 

·        Nonetheless, we spotlight that some respite may be gained should the FG deliver on its plans to reopen land borders.

·        In the outgone month, we witnessed the FG pass the 2021 budget, enabling the continuation of the January to December budgetary cycle. 

·        In addition, we are also happy about the exclusion from subsidy provisions in the budget, compared to previous budgets, as this indicates the removal of fuel and electricity subsidies as previously planned. 

·        Going into 2021, we see budget performance affected by the incidence and severity of a second wave of Covid-19 as well as lockdown/social distancing measures put in place locally and internationally. 

·        During the month of December 2020, FAAC disbursement came out N3billion weaker, printing at N601billion.

·        During the outgone month, liquidity in the money market remained at buoyant levels with average Open buy back and Overnight rate declining by 18bps and 26bps to 1.01% and 1.36% respectively. 

·        The CBN, in a move to intensify its effort to control liquidity in the system and money supply in the economy, announced the introduction of “Special Bills”, a zero coupon 90-day bill tradeable amongst banks, retail and institutional investors. 

·        We saw bearish sentiments for most parts of the month as domestic market players continued to sell off and take profit, closing their books for the year. 

·        In terms of FPI inflow, we expect inflows to remain depressed on the back of heightened uncertainties on a global scale and increased risk in emerging economies such as Nigeria underpinned by FX restrictions and unfavourable policy implementation. 

·        In the outgone month, Brent crude price recorded gains as it rose by 8.84% to close the month at US$51.80/barrel. 

·        In the local scene, the CBN introduced a policy directive that effectively allows beneficiary of FX remittance to receive such inflows in foreign currency (dollars) through designated bank of their choice. 

·        On a positive note, the World Bank approved Nigeria’s US$1.5billion loan package; this resulted in uptick in FX reserves for the first time since April 2020. 

·        We posit that the medium to long-term outlook for the naira remains weak on the back of unfavourable fundamentals underpinned by overdependence on volatile oil receipts. 

·        The Nigerian equities market followed through with a stellar performance in December 2020 , as the NSE-ASI advanced by 14.92% m/m to close at 40,270.72pts, a new 52 week high. 

·        The equities market continued its bullish run on a more intense note with local investors ramping up their risk-on appetite, albeit skewed towards bellwether names. 

·        More generally, investors stumped by high liquidity, limited investment outlets and interest rates touching zero levels, continued to choose equities as their asset class of choice notwithstanding the fast pace in which asset prices have improved. 

·        In the same vein, annualised returns (dividend yields) on some quality names look more attractive for investors who are willing to invest with a medium to long-term horizon and presents disincentive for profit taking in the short term.