Nigerian economy and financial markets may be challenged in 2015

Proshare

January 30, 2015 10:00a.m / United Capital Plc

 

Global economic activity and trade picked up substantially within the advanced economies towards the second half of 2013 raising hopes of a much stronger 2014. These hopes were premised largely on waning skepticism over the two major threats to global economic recovery at the time: the possible breakup of the Euro-zone and the reverberating effects of the US falling off the “fiscal cliff”. Although these two headwinds were summarily overcome early in 2014, the revival in global economic conditions remained largely unconvincing for the rest of the year. In the major high income areas, growth in private spending was at best tepid, as these economies began to slowly adjust to the “hangovers” of massive balance sheet adjustments in the previous year.

Beyond the anticipated decline in oil prices, we believe the major challenge facing the global economy in 2015 will be the task of minimizing the volatility expected to ensue from broadly dissimilar fiscal and monetary regimes across the advanced economies. With the Bank of Japan possibly pursuing Quantitative Easing, the European Central Bank maintaining its aggressive balance sheet expansion, and the US tightening stance, we see larger scale volatility compared to 2014.

 

The market is moving in the direction of a possible US rate hike...

As the US economy continues its recovery, much stronger than before, the Fed is widely expected to begin raising interest rate in mid 2015. Our analysis of seven (7) previous US rate tightening cycles shows that rise in rate often creates volatility and slows the pace of gains in emerging markets. Some of the impacts of a tightening environment already occurred in 2013. While many emerging markets now appear to be better off, having raised rates and reduced current account deficits, some are still exposed to rate hike due to domestic economic conditions. The last time the US Fed hinted on Quantitative Easing tapering, global financial markets went into panic mode with emerging markets bearing the brunt of portfolio reversals, resulting in sharp depreciations in exchange rates. Although we expect many emerging markets to take measures to reduce their vulnerabilities to such externalities in 2015, having learnt their lessons the hard way, we still see a sizeable chunk of capital outflows from very volatile frontier economies particularly those with relatively lower risk adjusted real returns.

  

Are oil prices assuming a new normal?

Given the long backwardation history of oil price trading dynamics, current and anticipated supply-demand scenarios, there is no reason to expect oil prices to rebound sharply in the short to medium term. We see oil prices remaining volatile especially in the first half of 2015 as the market digests the actions and inactions of oil producers. Notably, the outlook for oil prices in the medium to long term remains bleak against the background of the significant traction that alternative energy sources as well unconventional oil production has gained in the last decade.

  

Nigerian economy and financial markets may be challenged in 2015

The Nigerian economy is set to face one of the most difficult times in history as global crude oil prices, a key anchor for fiscal strength and macroeconomic stability, continue on a downward trajectory in 2015. The financial markets are likely to be more challenging relative to 2014 as we expect 4 major factors to shape the markets in 2015: 1) Post-election scenarios 2) Aggressive tightening by the CBN, 3) Variability in foreign portfolio flows, and 4) the downward trajectory of crude oil prices. These factors are largely expected to dictate movements in both equity and fixed income markets albeit in different degrees during the year.

  

This report contains a detailed review of the market in 2014 with projections for 2015, including expectations across different sectors; inherent opportunities as well as strategies for navigating the market at a time like this.

Click here to download report

 

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