Year Ahead 2020 - Re-risking The Financial System

Proshare

Thursday, January 16, 2020 / 8:41 PM / Coronation Research / Header Image Credit: Coronation Research


Oil prices


In a global oil market threatened with over-supply, it appears that OPEC, and its ally Russia, are doing a good job of limiting production. Oil price volatility was reduced in 2019 and prices (Brent) held up above US$60.00/bbl most of the time. With further OPEC cuts announced last December, we think 2020 may well be a repeat performance. The current futures curve supports this view. We look for oil to average at least US$60.00/bbl this year.



Foreign exchange


We expect that the CBN will keep the exchange rate at close to N362.50/US$1 for most, if not all, of 2020. Although foreign exchange reserves fell steeply during the second half of 2019, we believe there will be sufficient sources of US dollars in 2020 for the CBN to support FX reserves. These include possible issues of eurobonds and international loans. Important data points, in this regard, will be the level of foreign portfolio investment (FPI) in the CBN's open market operation (OMO) bills during January and February 2020. If this resumes in earnest then the pressure on FX reserves will ease considerably, in our view.




Interest rates


We expect downward pressure on T-bill and government bond rates to continue as domestic funds rotate from high-yielding CBN OMO bills into government securities. However, there are two disruptive forces at work, we believe, which could change the interest rate outlook.



Possible change in interest rate regime


First, it is not certain that foreign portfolio investors will return to buy the CBN's OMO bills in early 2020. Second, Naira T-bill yields are close to yields on Nigeria's sovereign US dollar eurobonds, so demand for US dollars may increase. If FX reserves fall quickly (for example, as fast as they did during H2 2019), we could see a reversal of interest rate policy, opening the way for T-bill rates to rise.




Bank stocks, and earnings


This time last year we argued that bank valuations were low but that a catalyst was required. This year we cannot complain about the catalyst. T-bill yields have fallen far below, in some cases half the level of, the gross dividend yields of several listed banks. Hence our continued Buy recommendations. Bank earnings may suffer somewhat from the CBN's initiative to limit the scope of card charges: but this will likely be offset by balance sheet expansion and a degree of interest rate protection from high-yielding securities, in our view. 


Proshare Nigeria Pvt. Ltd.


Download Full PDF Report Here


Proshare Nigeria Pvt. Ltd.


Related News

  1. NSR H1 2020 (7) - Currency - How Long Can The CBN Keep Up?
  2. NSR H1 2020 (6) - Balance of Payment - Edge of the Cliff
  3. NSR H1 2020 (5) - EM Portfolio Flows - Happy Days Ahead for EM Foreign Portfolio Flows
  4. Fitch Revises IHS's Outlook to Negative; Affirms at 'B plus'
  5. Fitch Revises Outlook on UBA Subsidiaries to Negative on Parent Action
  6. NSR H1 2020 (4) - Commodity Prices - Contrasting Fortunes for Global Soft Commodity Market
  7. NSR H1 2020 (3) - Global - After a Slowdown in 2019, 2020 Growth Receives a Timely Boost
  8. NSR H1 2020 (2) - Crude Oil - Tug of War; the Bears Win
  9. NSR H1 2020 (1) - MEA Region: Modest Growth With Positive Outlook
  10. Top Priorities for the African Continent 2020-2030
  11. Global Growth: Modest Pickup to 2.5% in 2020 amid Mounting Debt and Slowing Productivity Growth
  12. Economic Associate's Conference on 'Nigeria's Economic Outlook' To Hold On Feb 19, 2020
  13. Meristem Research 2020 Outlook - Finding Alpha Amidst The Haze
  14. Nigeria in 2020: Awakening the Sleeping Giant
  15. Nigeria's Economy in 2020; Understanding The Past, Preparing For The Future
  16. Nigeria Economic Outlook 2020: A Different Playing Field
  17. Is a Negative Fitch Outlook a Kiss of Death?

Proshare Nigeria Pvt. Ltd.

Proshare Nigeria Pvt. Ltd.
READ MORE:
Related News
SCROLL TO TOP