March 8, 2021/Cordros report

We have changed some of our views from our 2021 Outlook report in light of the rapid vaccine rollouts globally, rising oil prices, the prospect of significantly larger federal government borrowing, and rising fixed income yields.

A better-than-expected start to 2021 has seen some of our medium-term calls being achieved within the first two months of the year, e.g., FX depreciation and yield uptick. Following the release of the better-than-expected Q4-20 GDP numbers, we updated our views, in a report, on growth over the rest of the year. This report updates our views on oil prices, Nigeria’s balance of payments, the equities market, and the yield environment.

Crude Oil: Cautiously Optimistic

We revise our 2021 Brent crude average price estimate to USD55-60/bbl (up from USD45-50/bbl) underpinned by the better-than-expected global vaccination rate, output cuts and faster economic recovery. Our demand growth forecast remains around 6.0% for 2021, but we are encouraged by the fact that crudes stocks are easing, implying a tighter market. On supply, the OPEC+ agreement remains firmly intact, and the decisions made to ease supplies back into the market should keep prices in check. Higher oil prices are likely to encourage an increase in non-OPEC supply. However, there is still some way to go in terms of returning production. Finally, we are fully aware that, more than ever, oil prices are not just about physical supply and demand but also speculative interest. Investors are rushing back into the crude market, with combined net long contracts in WTI and Brent crude oil futures reaching 737,000 lots or 737 million barrels last week, the biggest bet on rising prices since October 2018.

Balance of Payments: Better but Not Yet Out of the Woods

We now expect an improved current account (CA) picture, with the deficit moderating from USD17.28 billion in 2020E, to USD15.48 billion in 2021E (previous forecast: USD22.63 billion) following (1) our higher oil price forecast, (2) lower goods imports and (3) improved remittances. The preceding translates to a CA deficit as a GDP percentage of 3.08% (previously: 4.57%). Meanwhile, we maintain that CBN’s capital control measures will remain in place for most of the year, contributing to the moderation in aggregate imports. Pertinently, we now expect exports to grow by 21.8% y/y to USD44.22 billion, and total imports to decline by 8.42% y/y to USD43.24 billion. Elsewhere, we expect the services account (net) and net income payments to increase by 48.9% y/y and 69.3% y/y, respectively. Lastly, we expect current transfers to settle at USD22.80 billion (2020E: 19.40 billion).

Fixed Income: Rollercoaster Year So Far

We adjust our expectations for Treasury bonds and bills average yields to c.10.0% and c.7.0%, respectively. The year has been quite volatile, following on from the tail end of 2020 when the DMO’s actions resulted in higher yields over a short period. The trend came despite the ‘lower-for-longer’ mantra postulated by the MPC, which seemed like a unified view upon which policy direction would be based. In the time since, yields have spiked, with the average yields on Treasury bonds and bills rising to 9.4% and 3.9%, respectively (+3.3% and +3.4% YTD). In our view, the primary reason for this sudden shift in policy view is tied to the impending securitization of the ‘Ways and Means’ balance of the Federal Government with the CBN; a pre-requisite for the dispensing of some multilateral loans earmarked for 2021. In our view, any new long-term issuances will have to be at rates higher than current levels, especially in a market with spiraling inflation and thus significantly negative real returns.

We had expected policy actions to be the driver of quicker than expected yields upticks, and the CBN has effected this change with its liquidity management instruments, which have been re-priced to attract FPIs into the Nigerian economy (OMO yields have increased by 5.4% 2021 YTD). We maintain our view that there will be concerted action to improve the makeup of reserves by engendering more foreign investments in Treasury bonds over OMO instruments, which would require commensurately higher yields on the longer-dated assets. Nonetheless, yields will remain tethered well below inflation, in our opinion, given the gloomy revenue picture and debt sustainability concerns therein.

Equities: All Signs Point North

Following the earlier than expected reversal in fixed income yields, our views on the timing of some of our key factors to watch have changed. Consequently, we revise our base case estimate for market return in 2021 downwards to 8.8% (previously: +12.8%). Over the rest of H1-21, we believe the interplay between corporate actions and yield elevation in the FI market will continue to shape market performance. As a result, we expect a choppy market, albeit with a bearish bias, as investors remain increasingly reluctant to leave gains in the market. Notwithstanding, we opine that investors should take advantage of the significant moderation in share prices to take positions in dividend-paying stocks with dividend yields that are substantially above the yield on the 1-year Treasury bill. We do not rule out the possibility of a broad market sell-off at the end of the earnings season, which typically ends in mid Q2. To this end, the continued uptick in yields would be a bad omen for the market.
 
Looking beyond H1-21, we see scope for positive market performance. The prospects of improved macroeconomic conditions and the possible return of FPIs underpin our view. We expect economic growth to maintain its positive growth trajectory. We believe this bodes well for improved corporate earnings, particularly cyclical stocks, over the medium term. On FPIs, we think the tacit devaluation (Naira has been devalued by 7% in the I&E window thus far in 2021) engineered by the CBN alongside rising crude oil prices raise the possibility that foreign investors may make a gradual return to the local bourse. Specifically, sustained higher crude oil prices will support accretion to the FX reserves.

Consequently, we should see a material improvement in liquidity conditions, bringing some comfort to foreign investors. A caveat – we do not think that FPIs will return in droves, as in 2017, due to concerns around the exchange rate framework and structural reforms to improve the domestic economy’s resilience. Interestingly, the second half of the year when we expect improved FPI participation also coincides with the period when domestic investors will be taking positions in stocks ahead of half-year dividend announcements. Thus, we think a more robust market recovery post-H1-21 is on the cards.

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