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Breakfast Report - 09 November 2020

Nigeria's Finance Minister, Zainab Ahmed, recently revealed plans to shore up public debt to ₦32.51trn and ₦38.68trn by 2020 and 2021, respectively. This indicates a 4.9% increase in debt from Jun’20 (₦31.01trn) and a 19.0% y/y increase by the end of 2021. The projected increase in debt for 2021 alone constitutes 91% of the proposed 2017 budget, indicative of the magnitude of debt accumulation. While we note that the economy needs an expansionary fiscal drive amid low revenue capacity, it will be counterintuitive to raise taxes as firms are yet to recover from the double devaluation of the Naira and energy reforms. Given the expansionary nature of the 2021 budget and expectation of low oil prices ($40), the government must resort to borrowing to finance its expenditure operations. However, public debt stock could rise to unsustainable levels, given Nigeria’s low revenue profile and high debt service-to-revenue ratio. Any further weakness of the Naira could raise the cost of servicing external debt, reducing funds available to fund critical expenditure. If low oil prices persist, the capacity of the government to reflate the economy could be further constrained. Thus, fiscal authorities must prioritize capital projects with high multiplier effects, which can propel economic recovery.

Equity: With no significant improvement in yields in the fixed income market, the Nigerian equities market continued to enjoy positive investors patronage, as fund managers continue to deploy funds into attractive counters in the equities market. However, in spite of the rally witnessed in the last few weeks, dividend yields on a number of fundamentally sound stocks remain above short dated instruments in the FI market, as such, we expect the positive performance to continue in the next few sessions, though the possibility of profit taking cannot be overruled.

Stock Watch: Following sessions of sideways trading, the Bull dominated the trading session on Friday as bargain hunting activities were recorded in ETI (+980bps), FBNH (+620bps), DANGSUGAR (+611bps), UACN (+600bps), UBA (+584bps), GUINNESS (+574bps), WAPCO (+484bps), GUARANTY (+372bps), DANGCEM (+325bps) and ACCESS (+250bps) among othershe Nigerian equities market again benefited from the unattractive yields in the FI market, as investors' again took position in INTBREW (+10.00%), NESTLE (+10.00%), MOBIL (+998bps), BUACEMENT (+990bps), TOTAL (+925bps), UACN (+685bps), UNILEVER (+570bps), UBA (+405bps), GUARANTY (+400bps), WAPCO (+389bps), DANGCEM (+303bps), MTNN (+286bps), ZENITHBANK (+279bps), ACCESS (+260bps) and FBNH (+236bps) among others.

Fixed Income: We expect participants in the fixed income space to remain buy–side inclined, primarily in the bonds space, due to current levels of system liquidity. However, we note that the fears over a second wave of the coronavirus could weigh on sentiment in the OMO segment, in given its impact on oil demand.