Positioning For Headwinds - Zedcrest 2019 Fixed Income Outlook


Friday, January 04, 2018/ 06:30PM / Zedcrest Capital


As expected, 2018 started out with strong positive sentiments for both the global and domestic economy, but it however ended on a significantly turbulent note given several downside risk factors which materialized over the course of the year.
Global Economy Review
In the Global economy, global growth expectations remained strong at the start of the year, whilst global financial markets maintained an upsurge from the tail end rally in the previous year.  But as global central banks adopted a more hawkish monetary stance and trade tensions reverberated across the horizon combined with a spate of geopolitical confrontations and elevated policy uncertainty from adoption of more nationalistic policies and withdrawal from multilateral trade and security agreements, global growth expectations dampened, whilst tighter financial conditions dampened risk sentiments and fuelled selloffs in risk assets especially in Emerging and developing economies.
Domestic Economy Review
The Sluggish growth in the Nigerian economy was further dampened by external sector developments which depreciated rapidly towards the tail end of the year in tune with the developments in the Global Economy which pressured capital flows to the economy. The Domestic Financial Markets which witnessed a strong start to the year with a continued upsurge in equity prices and significant decline in bond yields, however began to deteriorate significantly in the second half of the year due to capital flow reversals and dampened risk sentiments in view of the heightened geopolitical risks ahead of the general elections expected in early 2019.
Global Economy Expectations
As 2019 dawns, the Global economic outlook remains challenging as several downside risk factors which materialized over the course of the previous year remain on the front burner. Major Central banks are expected to maintain a contractionary stance, whilst Trade tensions and Geopolitical risks continue to pose threats to the outlook for global growth. We however expect pockets of value to be found in select Emerging and Developing economies with relatively stronger macro fundamentals which were significantly downbeat in the wake of the aggressive US FED rate hikes in the previous year.
Domestic Economy Expectations
Our outlook for the Nigerian Economy remains dampened by political uncertainties in view of the forthcoming General Elections. Financial markets are expected to remain downbeat in H1 19 as offshore and local investors are expected to maintain a relatively risk off stance on the country. We however expect the outlook to brighten slightly in H2 19 as political risks abate and investors get more clarity on the policies and plans of the new Government.

Fixed Income Outlook 
In the Domestic Fixed Income Space, we expect the yield curve to remain inverted over the course of the year, as the CBN is expected to maintain a tight stance on financial system liquidity, in a bid to rein in on expected inflationary pressures and maintain stability of the exchange rate, which would likely remain pressured in H1 19. We are consequently underweight duration in H1 2019. A gradual return of FPIs in H2 19 should moderate the yield curve as investors are expected to overweight duration in anticipation of a further expansion to the domestic economy in 2020, with the economy expected to gain traction from implementation of key structural reforms.


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