By United Capital Research,
Global and SSA Overview: Protectionism or free trade?
Developments in the global economy remained bumpy in H1-19 with trade, monetary policy, and geopolitics being the key drivers. Trade spat between the US and China continued throughout the period as tariff threats and renegotiations went beyond China, to include the EU, Mexico, and India. For context, the World Trade Organization (WTO) reported that global trade restrictions – tariffs, import bans, and new custom procedures – are near record levels. Alongside the Venezuelan crisis, the US sanctions on Iran drove oil prices above $70/b, before trending back to $65/b on the possibility of a fresh showdown in the Middle East, especially as it relates to the very important choke point – Strait of Hormuz. While the never-ending process of UK’s exit from the EU saw to the resignation of the Prime Minister, Theresa May in Jun-19, the global economy would have to come to terms with the crystallization of the new BREXIT deadline as the UK makes efforts to replace Theresa May. Against this backdrop, monetary policy authorities in the global space are increasingly taking an accommodative stance. Piecing these factors together, the outlook for global growth is muted, and risks that could upset markets abound.
As trade tensions, sanctions and BREXIT continue to gain ground, Africa is on the verge of piecing together a milestone trade agreement, the Africa Continental Free Trade Area (AfCFTA). The agreement, which took effect on May 30, 2019, following its ratification by the minimum 22-member states, is aimed at boosting intra-regional trade. While the AfCTA is identified as a factor to bolster economic activities within the region in the medium to long term, faltering growth momentum in the largest economies on the continent – Nigeria, South Africa, and Angola – is expected to continue to subdue growth in the near term. On the other hand, Ethiopia, Ghana, Ivory Coast, and Kenya will remain the key growth markets in the region.
Nigeria: There and back again
Following his victory at the polls in Feb-19, President Buhari surprisingly re-appointed the CBN governor for another 5-year term, the first time a CBN governor would be re-appointed since 1999. In their 2nd term, both the President and the CBN governor must battle structural and policy challenges which have kept output growth at a sub-optimal level. To drive high single or double-digit GDP growth and check double-digit inflation rate, economic policies must address poor revenue mobilization, rising debt profile, petrol price subsidy, low foreign direct investment, booming population, high unemployment rate, power sector crisis, port congestion, corruption, and insecurity. In H2-19, we are of the view that Nigeria’s short-term growth outlook will be dependent on policy uncertainties, the sustenance of the current macroeconomic framework and the implementation of structural reforms or otherwise. Overall, we expect economic activities to be slightly better than H1-19. Accordingly, we revise our expectation for FY-19 GDP growth of 2.2% y/y. We estimate headline inflation to be sticky between 11.0% and 11.5%, averaging 11.4% for the rest of the year. While the argument for a currency adjustment continues to gain momentum, we doubt the possibility of a devaluation before the end of the year. On interest rates, we see the potential for a further policy rate cut in H2-19.
Naira Assets: Will markets revert to fundamentals in H2-19?
While the stock market stayed bearish in H1-19, primary market activities, as well as corporate actions, supported returns for the period. Notably, MTN’s massive listing, ACCESS Merger with DIAMOND, the proposed acquisition of Dangote Flour and the divestments in FO and WAPCO were some of the major events that shaped performance. Broadly speaking, secondary market sentiment remained bearish as FPIs continue to snub equities for fixed income securities. Driven by outsized demand by local and foreign investors, average yields on bills and bonds fell 215bps in H1-19. However, a more accommodative stance by the Apex Bank also resulted in the repricing of sovereign instruments. The above notwithstanding, demand for short-term bills outstripped other segments of the market. We note that weaker appetite for equities in H1-19 increased the spread between the market PE ratio which settled at 7.4x compared to its 5-year average of 13.1x. Again, the Nigerian market trades at a huge discount to the peer average of 11.1x, indicating that the market presents a huge opportunity for discerning investors. However, overall outlook for naira assets is skewed in favour of short-term bills, as sentiment for equities remain muted in the absence of a badly needed catalyst or clarity in the policy framework of the economy.