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Breakfast Report - 16 March, 2020

Following a crash in oil prices to $33.22/bbl, the exchange rate in the parallel market soared above ₦400 to the dollar, as the fall in oil prices increased local demand for the USD. In its press release to the public the apex bank stated that despite the slowdown in global economic activity due to the COVID-19 outbreak, public health concerns have led to a contraction in production activities in China, travel restrictions and a substantial drop in imports, which have eased the pressure on demand for foreign exchange. In addition, the bank believes that with the size of the nation’s foreign reserves ($36.17 billion), the demand for FX in the country can be met. However, in the latter stages of 2019, the head of the CBN, Godwin Emefiele had stated that the regulator would only devalue the naira should the nation’s external reserves drop below $30 billion and Brent crude prices fall below $45/bbl. Nigeria remains vulnerable to prolonged periods of low oil prices, and the ability of the nation to ramp up production is limited by operational, regulatory and infrastructure challenges. As the nation still generates a bulk of its FX revenues from oil exports, the value of the naira remains intrinsically tied to global oil prices. As such the CBN will be pressured in its efforts to prop-up the naira as foreign reserves trend lower. A devaluation of the naira would result in increased importation costs for raw materials as well as other commodities that must be paid for using FX. Raw material inputs for manufacturers will become more expensive, with the average consumer bearing the brunt of the cost of the devaluation by the weakening of their purchasing power.

Equity: The domestic bourse was significantly battered last week due to an uncertain global and macro-economic environment, leading to most fundamentally sound stocks trading at multi-year lows. However, with most counters trading at deep discounts to their expected fair value in the face of massive sell pressure during the week, we expect several stocks to enjoy positive investor patronage at the start of the week.

Stock Watch: Contrary to the massive selloffs witnessed in the previous sessions, a number of stocks including but not limited to UBA (+982bps), ZENITHBANK (+968bps), FLOURMILL (+808bps), OKOMUOIL (+850bps) and GUARANTY (+497bps) closed higher on Friday.

Fixed Income: Barring any positive outcome from talks between major oil producers (Russia and Saudi Arabia), we expect the market to trade in a bearish manner at the start of the week.