Slow Rise To Economic Redemption – Gradual Recovery But Weaknesses Persist


Global Markets

The United States economy reported an improvement in unemployment levels in June 2020, despite the rising new cases of people infected with the coronavirus. The United States currently has over 2.9 million total cases, with a total death toll of 130,332. Nonetheless, the United States Bureau of Labor Statistics reported a 4.8 million rise in total nonfarm payroll employment, thus lowering the unemployment rate to 11.1% in June 2020 from 13.3% in May 2020. According to the Bureau, the gains recorded in the unemployment numbers reflected the partial resumption of economic activities that had been curtailed due to the coronavirus pandemic in April 2020 and March 2020.

Inflation (data for May 2020, released in June 2020) declined for the third straight month due to the weak demand for goods and services, resulting from the loss of jobs and income by households, induced by the coronavirus pandemic. Notably, the core personal consumption expenditures (PCE) increased by 1.0% year-on-year (YoY) in May 2020. The PCE price index is tracked by the Federal Reserve (Fed) as the preferred inflation measure to compare with the Fed’s 2.0% target.

The rally in the United States stock market (measured by the S&P 500) extended in June 2020, albeit at a slower rate. The S&P 500 rose by 1.84% in June 2020 from 4.53% in May 2020 and 12.68% in April 2020. The slowdown in the rally that began in April 2020 is attributed to fears of a second wave of the coronavirus pandemic which is seen to hamper the gradual reopening of the economy.

Domestic Economy

Using the Purchasing Managers’ Index (PMI) data released by the Central Bank of Nigeria as an indicator, the Nigerian economy contracted in June 2020. The manufacturing PMI in June 2020 stood at 41.1 points, which implies that the economy contracted during the month. The contraction recorded during the period represented a second consecutive monthly decline. The subsectors that recorded a decline include printing & related support activities; textile apparel; leather & footwear; primary metal; plastic & rubber products; non-metallic mineral products; fabricated metal products; food, beverage & tobacco products; chemical & pharmaceutical products and furniture & related products. However, growth was recorded in some subsectors which include electrical equipment; cement; petroleum & coal products; transportation equipment and paper products.

The non-manufacturing PMI stood at 35.7 points in June 2020, which implies that there was a contraction in non-manufacturing activities during the month. Although the contraction in June 2020 was the third consecutive monthly decline recorded, the performance showed a gradual recovery in non-manufacturing activities when compared to May 2020 index. A decline was recorded in all the 17 subsectors surveyed, some of which include agriculture; real estate rental

  • leasing; finance & insurance; transportation & warehousing; accommodation & food services; health care & social assistance; wholesale/retail trade; information & communication; educational services; construction and public administration and others.

We attribute the decline in both the manufacturing and non-manufacturing PMI to the sustained impact of the lockdown directive by the Federal Government. Although we note that a gradual resumption of activities is taking place, the levels are still low relative to normalised levels.

Inflation data (for May 2020, released in June 2020), as reported by the National Bureau of Statistics (NBS) showed that inflation rose to 12.40% YoY in May 2020, relative to 12.34% YoY in April 2020. The rise in inflation levels was driven by increases in the food index and the core index. Based on our assessment, we posit that the increase in food prices was related to the disruption in the supply chain (induced by the coronavirus pandemic), seasonality effect, and high transportation costs. On the other hand, we attribute the rise in the core index to be significantly driven by the exchange rate adjustment by the CBN in March 2020.

In summary, the economy was weak in June 2020, largely resulting from the continued impact of the coronavirus pandemic. The lockdown directive by the FG, to curtail the spread of the virus took its toll on the overall level of economic activities.

Equities Market

The Nigerian stock market, as measured by the NSE All-Share Index declined by 3% on a month-on-month basis, from 25,267.82 points as of the end of May 2020 to 24,479.16 points as of the end of June 2020. After two consecutive months of the rally in April 2020 and May 2020, we believe that the decline in prices in June 2020 was partly driven by profit-taking activities by investors, and partly due to heightened risk expectations in the markets.

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SAHCO Plc led the top gainers in June 2020, as the stock returned 62% to investors. On the other hand, GSK Plc led the top losers in June 2020, as the stock price dipped by 32% during the month. We attribute the rally of SAHCO Plc to the release of its FY 2019 audited financial statements, where the company recorded an impressive performance. Specifically, revenue rose by 25% YoY from N6.14bn in FY 2018 to N7.67bn in FY 2019. Furthermore, the company recorded a rebound in the bottom line, as profit before tax improved significantly from a loss of N284.84mn in FY 2018 to a profit of N545.52mn in FY’2019. Profit after tax also improved from a loss of N696.99mn in FY 2018 to a profit of N446.53mn. We believe that the strong FY 2019 performance spurred the increased demand for the stock in June 2020.

Meanwhile, we attribute the 32% price decline in GSK to profit-taking by investors. Although the company reported an 11% YoY growth in the bottom line in its recently released Q1 2020 result, we think that the performance was below investors’ expectations. Notably, the stock recorded a 39% YTD return in May 2020, in which we attribute to the positive sentiments trailing health stocks following the outbreak of the coronavirus pandemic.

Fixed Income Market

The bullish run in the fixed income markets sustained in June 2020, as continued demand persisted amid the excess liquidity in the financial system, coupled with the lack of other viable alternative investments. Average yields in the secondary markets declined across all tenors, save for the 1-year fixed income instruments. In the primary market, there were three treasury bills (NTBs) auctions conducted in June 2020. Yields across the three tenors declined from 2.02%, 2.20%, and 4.02% during the first NTB auction of the month conducted on June 10, 2020, to 1.80%, 2.04%, and 3.75% during the last NTB auction of the month conducted on June 17, 2020, on the 91-day, 182-day, and 364-day, respectively.

The yields at the primary market auctions of the OMO instruments were unchanged in June 2020. Across the three OMO primary auctions conducted during the month, yields remained flat at 4.95%, 7.79%, and 8.99% on the 91-day, 182-day, and 364-day bills, respectively.

Foreign Exchange Market

The foreign exchange market was relatively stable in June 2020, owing to the gradual recovery of crude oil prices in the global markets. However, there were poor levels of supply and activities in the I&E FX window, resulting from weak inflows from portfolio investors. The intervention of the CBN in the I&E window rose by 300% in June 2020. The external reserves declined marginally by 1% from $36.49bn as of the beginning of June 2020 to $36.19bn as of the end of June 2020. Overall, the exchange rate at the I&E window remained stable at N386/$1 in June 2020.


As noted in our previous report, we expected to see an improvement in the levels of economic activities in June 2020, owing to the gradual easing of the lockdown. Using the information from the PMI report, although the data revealed that the economy contracted, the contraction was relatively milder than the previous month’s levels. Going forward, we expect to see continued recovery in the economy, albeit very slow and weak.

Our bearish outlook for the equities market remains the same. The two consecutive months rally witnessed in April 2020 and May 2020 snapped in June 2020. In our view, the fundamentals of the economy did not justify the rally in the two months, and we expect to see a normalisation in subsequent months. We note the upcoming release of half-year results by corporates and the possibility of the market to price-in the prospects of interim dividends. Nonetheless, we believe that the impact of half-year results release will be minimal due to an overall weak sentiment in the Nigerian equities market.

We posit a sustained trend of declining yields in the fixed income markets, resulting from the excess liquidity in the financial system. In the foreign exchange market, we expect to see an improvement in FX liquidity owing to a possible sustained rise in crude oil prices. However, we note the significant pressures that pose a threat to the stability in the exchange rate such as the current accounts deficit and potential outflows (amid flight for safety) in the Nigerian financial markets once the FX liquidity situation improves.