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Breakfast Report - 28 September, 2020

In the face of a pandemic-induced recession and consistent build up in inflation, the MPC was faced with a policy dilemma, which is - raise interest rates to rein in inflation or reduce interest rates to reflate the receding economy. The Committee noted that inflation was caused by supply side shocks while noting a rate hike will stifle recovery. Hence, it decided to reduce the Monetary Policy Rate by 100 basis points to 11.5%, being the second rate cut in the year. This expansionary move was necessary as low crude oil prices, lack of fiscal buffers and high debt burden constrains the ability of fiscal authorities to intervene in the economy. In addition to the rate cut, the Committee further adjusted the asymmetric corridor to +100bps/-700bps around the MPR. The adjustment in the corridor rate effectively reduces the interest income receivable on interest earning deposits with the Central Bank under the Standard Deposit Facility, which was earlier capped at ₦2 billion. On the other side of the coin, this also reduces interest payable on loans obtained from the Central Bank. The Central Bank believes this will stimulate lending to the real sector given the moderation in interest expenses occasioned by the drop in the savings deposit rate and existence of LDR checks. While we believe the move may induce lending, we do not expect a rapid rise in credit growth to the private sector due to heightened risks in the business environment given energy reforms and ongoing exchange rate unification efforts that can crystallize forex risks. However, we expect increased credit flow to the government as CBN revealed that it will fund 78% of the ₦2.3 trillion Economic Sustainability Plan of the Federal Government.

Equity: Last week, investors reacted positively to the announcement of the reduced MPR, as increased liquidity flowed into the equities market. This resulted in several fundamentally sound stocks closing the week higher. We expect the positive performance to filter into this week as both institutional and retail investors continue to channel their funds into attractive counters. However, given the rally witnessed last week, the possibility of profit taking cannot be overruled.

Stock Watch: Investors again took advantage of cheap valuations of fundamentally sound stocks, taking position in counters such as NB (+982bps), ARDOVA (+777bps), PRESCO (+707bps), WAPCO (+674bps), FLOURMILL (+670bps), JBERGER (+467bps), GUARANTY (+385bps), STANBIC (+358bps), DANGCEM (+228bps) and FBNH (+98bps) among others.

Fixed Income: System liquidity continued to dictate activity in the fixed income space last week, as crude prices traded relatively flat for the week. We expect to see continued buying-activity in the bonds space this week, given current yield levels. Furthermore, we expect trading activity in the OMO space to open the week on a tepid note, as market participants expect incoming maturities to be rolled over.