Navigating the Tide: 2022 Outlook


Wednesday, January 19, 2022, / 5:35 PM / by Investment-One  Research / Header Image Credit: Ecographics

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Recovery in the global economy is expected to be sustained albeit the pace of growth may be slower than 2021 given base effects; nonetheless, we see the return of economic activities and spending to levels seen prior to the pandemic sometime in H2 2022. The U.S. economy remains poised for sustained economic recovery in 2022. Similarly, the Eurozone economy continues to recover with signs of improvement seen in the labour market.

Elsewhere, the United Kingdom may continue to record a slowdown in the pace of recovery on the back of supply chain issues and labour shortages due to Brexit. The rapid economic recovery from successful vaccination rollout in Q2 2021 seems to be fading following rise in Covid cases, occasioned by the Omicron variant.

In Nigeria, the oil sector was ridden with continuous divestment in the upstream sector, pipeline vandalism and leakages, poor pipeline maintenance and oil theft. These factors may continue to impede the country's ability to improve its volume production in line with OPEC's output expansion in 2022. We opine that the resilience seen in the agricultural sector is not unconnected with the intervention efforts of the CBN. Hence, the sector could maintain its slow growth pattern in 2022 on the back of CBN's intervention effort.

However, insecurity challenges, especially as election year approaches, remains key downside risk in that space. Overall, we expect GDP growth to register at around 2.50% in 2022 as base effects wanes in line with normalisation in economic activities. Major downside risk includes fuel subsidy removal, higher electricity prices, insecurity, continuous uncontrolled spread of coronavirus and FX volatility.

 Given the tacit devaluation we saw on the last day of 2021 at the IEFX window to N435/$, we highlight that the Naira will remain relatively stable at that level in 2022. As such, we opine that we are unlikely to see a major devaluation in the Naira beyond that level. At the parallel market, we expect rates to remain pressured given limited FX supply however, one factor to watch closely in 2022 will be the CBN's stance on revoking the ban on Bureau De Change Operators. Furthermore, the commencement of Dangote refinery operations may provide some respite.

 As most global central banks pursue restrictive monetary policies in 2022 coupled with the political uncertainty associated with the electioneering year, we believe that the CBN may raise the policy rate to attract investors, capital flows and prevent capital flight out of the country. Consequently, we posit that the monetary policy rate might increase by 50-100bps in H2 2022. Furthermore, we posit that the direction of yields will be determined by demand and supply dynamics, and we expect yields to increase from 2021 levels.

 In the equities space, we expect earnings performance to attract investors especially in the first quarter, when full-year results will be released. With expectations of decent performances, we see investors buying into the market and taking positions in bellwether stocks specifically dividend-paying names.

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