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Breakfast Report - 14 September 2020

A big headline that surfaced last week was the removal of price bands from the sale of premium motor spirit (PMS). The move comes at a time when public revenues have been constrained by the slump in oil prices and cartel production limits. According to the Minister of Finance, Zainab Ahmed, government revenue is expected to plunge by 65% in 2020. Thus, the need to eliminate subsidies is a welcome development as external debts service gulps a significant portion of revenues. While the move may heighten inflationary pressures, amidst tight consumer wallets, we expect short term price differentials to narrow within weeks, given the presence of many downstream players and absence of product differentiation. However, geographical variation in prices may occur due to distribution costs. With Apapa Port as the entry point of imported PMS products, we may see higher prices in the Middle Belt regions than in the South West. Going forward, the big question remains – will the Federal Government return to a subsidy regime? The pro-market policy may be sustained due to prevalent low oil price environment. In addition, this reform could enhance the country’s chance of securing cheap concessionary loans from the World Bank and IMF, which will buoy external reserves.

Equity: The domestic bourse recorded a mixed trading session last week, with significant selloffs at the beginning of the week, and bargain hunting activities in the last two sessions due to attractive dividend yields. We expect the performance of the market in the next few sessions to be largely dependent on events around indicators such as: global crude oil price movements, news around the second wave of the COVID-19 pandemic as well as liquidity in the FX market.

Stock Watch: Still recovering from the sell pressure witnessed at the beginning of last week, the Banking sector closed as the best performing sector on Friday, rising 76bps due to capital appreciation in STANBIC (+390bps), UBN (+204bps), ZENITHBANK (+147bps), ETI (+120bps), GUARANTY (+101bps) and FBNH (+100bps) w/w, largely on the back of bargain hunting activities in GUARANTY (+331bps), STANBIC (+133bps), ZENITHBANK (+116bps) and ACCESS (+78bps) among others.

Fixed Income: We expect the market to extend its run of positive trading days into Monday’s session, as system liquidity ought to support another round of buy-side activity across the domestic universe of the fixed income instruments.