By Taofik Salako, Capital Market Editor
United Capital Plc has projected that Nigerian equities may deliver a modest average return of 5.3 per cent in 2020, although the overall market outlook remains susceptible to external shocks and the direction of domestic policies.
Equity investors lost about N1.71 trillion in 2019 as the market closed 2019 with negative average full-year return of -14.60 per cent. It had recorded negative average full-year return of -17.81 per cent in 2018.
In its 2020 economic outlook report titled, “A Different Playing Field”, United Capital said its base case scenario sees equities market returning +5.3 per cent in 2020, driven by local demand for high-quality dividend-paying stocks and increased system liquidity.
The report considered events in the international economic environment, including the effects of the United States-China trade disputes on the global economy, as well as piecing together the stance of the world’s biggest central banks from their decisions over the course of 2019.
The report takes these parameters into consideration, combined with local developments on the political and economic policy field to project the nature and movement of the economy and the financial market this year.
According to the report, the continued auction of high yield Open Market Operation (OMO) bills to foreign portfolio investors (FPIs) may keep foreign interest in local equity market tepid amid fears of a naira devaluation and uncertainty in the economy.
The report noted that FPIs are likely to continue their flight to safety by swapping or selling equities for low-risk OMO bills pointing out that the outlook for stocks in 2020 was anchored on developments in the domestic and global economy with monetary policy as the biggest factor to watch.
“From all indications, the only justification for an uptick in the equities market is the lower yield environment, supported by increased local currency liquidity.
However, this will not be enough to trigger a major rally in the absence of the demand from FPIs,” United Capital stated.
Speaking on the report, Group Chief Executive Officer, United Capital Plc, Mr. Peter Ashade, stated that the underlying theme of the outlook report for 2020 was change.
According to him, changes in key indicators such as oil prices, the status of the US-China trade war, domestic fiscal and monetary policy environment will vary the investment landscape in Nigeria in 2020.
“Notably, unconventional policy measures by the apex bank, as well as a review of fiscal policy framework in Nigeria, also informed the theme of our outlook report this year: a different playing field,” Ashade said.
According to the report, 2020 is a different playing field for capital market players. The fixed income market will be a corporate and private issuer market due to the buoyant level liquidity and the low yield environment.
Yields on FGN T-bills are projected to stay in the mid-to-high single-digit levels and bonds yields at low double-digit levels, especially in first half of 2020.
With these, interest in riskier assets, mostly corporate papers, will increase. The rate on OMO bills, solely for FPIs and banks, are unlikely to witness significant changes, as the CBN continues to deploy its set of unconventional policy tools to attract FPIs and limit an impending dollar outflow in first quarter 2020 while preserving the stock of reserves above the $30.0 billion threshold.
“Overall, we expect the sovereign yield curve to remain normal in first half 2020. However, this may reverse to a hump-shaped curve from third quarter 2020,” United Capital stated.
Read Also: North America, Mexico suffer $44b loss to forex
The report noted that while the momentum in the Nigerian economy was soft in 2019 despite increased clarity in the political space after the 2019 general elections, the outlook for the Nigerian economy in 2020 hangs on a framework of a well-intended but slightly uncoordinated policy outline.
The report stated that the recent amendment of the Deep Offshore and Inland Basin Production Sharing Contract (DOIBPSC) 1993 Act and the on-going reviews of the Tax Acts through the finance bill, will support the implementation of the 2020 Budget and beyond in the face of sharp rising debt profile.
It added that the unprecedented early passage of the 2020 budget by the Senate to return the economy to a January to December budget cycle was a positive development while the lower yield environment, triggered by the Central Bank of Nigeria (CBN)’s recent mix of heterodox policy actions, will not only ease the cost of rolling over government borrowings but also stimulate domestic private sector investment.
According to the report, on the back of the above, GDP growth is expected to sustain a gradual uptick in 2020, anticipated to expand above 2.3 per cent, faster than 2019 but below 3.0 per cent.
Also, inflationary pressure will persist due to supply shortages and the shutdown of the border, given the direct impact on food prices. Again, increased money supply by the CBN may keep the core inflation sub-index elevated due to pressure on foreign exchange (FX).
“In all, we expect the headline inflation rate to average 11.9 per cent in 2020, higher than 11.4 per cent in 2019, in the absence of further structural changes that may trigger a fresh uptick in month on month inflation.
While the benchmark interest rate (Monetary Policy Rate) may be kept unchanged or reduced marginally, we imagine that the CBN will sustain its recent framework of heterodox policy mix until conditions necessitate policy normalization.
Hence, interest rates in the fixed income market may remain low, especially in first half 2020,” United Capital stated.
On the exchange rate and capital flows, United Capital expected the CBN to continue to support the naira at N360-N365 per dollar levels, by selling OMO bills to FPIs as a strategy to preserve the reserves at decent levels.
At the current run rate, this can be sustained for another seven to nine months, all things being equal.
The report nevertheless acknowledged the growing concern about an impending devaluation of the naira but insisted a currency devaluation is unlikely in the immediate-term, though there is a possibility for the harmonization of the official rate from N305.5 per dollar to something very close to the Investors & Exporters window rate of N360.0 per dollar, in the medium term.
“Overall, our outlook for the naira is stable in the near term with a potential harmonization in the medium – to – long term,” analysts at United Capital said.
On capital flows, the report expected no significant change in the current dynamics. More specifically, the CBN is likely to sustain its OMO sale to FPIs in support of the reserves. This may keep FPIs interest dominant in money market funds at the expense of equity flows.
The report expected an upsurge in loans and other claims to continue, given the low interest rate environment in the international debt market. However, Foreign Direct Investment (FDI) flow may remain broadly muted.
Leave a Reply