Quick View on COVID-19, Impact on Macro, & Asset Allocation

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CardinalStone Research
As it stands, global crude oil price (Brent: c.$35.14/barrel in today’s trading) is now 38.3% lower than Nigeria’s budget benchmark crude price of $57.00/barrel. The impact of COVID-19 on-demand outlook and fresh oil price wars( stoked by the failed OPEC+ resolution on production cut) have also led to material reviews of oil price projections.
The two most recent reviews have forecasted oil prices to trade between $30/barrel and $35/barrel in Q2’20 and Q3’20 estimates.
This development is likely to result in the following:
  • Weaker dollar earnings for the government
  • Wider than expected fiscal deficit and a consequent upward revision of Government borrowing plan of about N1.8 trillion. The Government may also have to increase the rates for its proposed Eurobond issuance to reflect rising risks. Domestic borrowing rates may also be slightly higher than previously expected
  • Dollar shortage could slow the implementation of capital expenditure in 2020, leading to weaker-than-expected growth
  • Weaker oil price outlook to force investors (FDIs and FPIs) to review the Nigerian investment case. A slow policy response to the current crisis could cascade to more aggressive FPI outflows with knock-on effect likely to worsen the balance of payment position and reduce CBN’s ability to maintain currency defense
  • We believe the CBN is likely to be slow in responding to these weaknesses and could possibly resort to more unorthodox administrative measures. This delayed response, amid deteriorating currency-related fundamentals, could drive panic in the black market for FX. Ultimately, we see a greater possibility for a devaluation before the end of the year if the weakness in oil price persists
Proposed Action Points
  • In view of the increased risk, we propose a flight to relative safe-haven investments and currencies
  • This may include investments in dollar fixed income instruments (as dollar equities may only guaranty a currency hedge and not a hedge on dollar equities returns).
  • Stay short in Nigeria’s fixed income market as bloating risks may combine with slower maturities and rising inflation to force yield repricing in coming quarters
  • This could still be a good time for long term (2+ years) equity investors to stagger purchases as fundamentally sound stocks may be oversold amidst the panic. Recall, the stock market rebounded in 2017 following the 2015/2016 crisis.
More analysis to follow…
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