Nigeria: 2021 Full Year Outlook - Awaiting Dawn

Monday, January 18, 2021  / 3:13 PM / By CardinalStone Research / Header Image Credit: CardinalStone  

Drawing inspiration from the Irish poem "Second Coming", written in the aftermath of the First World War in 1919 amid a rampaging flu pandemic, we argue that the fate of several countries hangs in the balance in the face of the second wave of the deadly COVID-19 virus. The re-opening of economies combined with slack preventive measures and the evolution of mutated strains of the virus opened the doors to the second wave of widespread infections. The globe's economic fate now rests on the success or otherwise of distributing a few vaccines, with broad expectation skewed in favour of a V-shaped recovery.

In Nigeria, the V-shaped recovery is likely to be led by the non-oil sector on the impact of 2020 low base effect, a ramp-up of government spending, increase in credit creation and sustained normalisation of economic activities. The current pace of yield increases is likely to moderate in Q1'21 on the impact of excessive liquidity but pick pace in Q2'21. Our expectation of an eventual pick-up in yields reflects lower OMO maturities, lesser dovish inclinations on macro recovery, and a wider budget deficit. Thus, investors are likely to stay short in the fixed income space. The government could also frontload greater than expected domestic borrowing ahead of a potential pick-up in yields, especially if there are signs that external funding conditions could deteriorate.

In the equities market, we expect investors to take advantage of bargain hunting opportunities in cheap, fundamentally strong names with a track record of shareholder wealth creation or veritable evidence of structural breaks from previous constraints. Investors are likely to follow volatilities in these names and try to take advantage of mispricing when they occur.

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