July 2018 Macro & Markets Update

August 3, 2018/InvestmentOne Report

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·         While the increase in oil output by OPEC & non-OPEC allies has put downward pressure on oil prices, we do not expect oil prices to significantly drop from current levels (around US$74 per barrel) in the near term. On the other hand, consumer spending could be encouraged by the monthly increase in FAAC disbursement as well as the implementation of the 2018 budget thus supporting the growth in the non-oil sector in the near term.  

·         We could see improvements in FAAC disbursements owing to the FG’s efforts to revamp the committee’s reporting template as well as the relative stability of Brent oil prices (above US$70 per barrel). Additionally, we believe the committee’s plans to revamp its  outdated template should enable for effective disbursement and cut    delays experienced in the approval of funds significantly. 

·         We could see upward pressure on consumer prices as the benefits of base effect fades in August 2018. Thus we expect the m/m increase in price levels in H2 2018 to outpace that of H2 2017; therefore we may begin to see an acceleration in the increase in price levels on a y/y basis.

·         Despite the pressures on the local currency in recent months, we expect the accretion to foreign exchange reserves since the start of the year (up 122% to US$47.12billion), potential for offshore borrowings to finance the 2018 budget deficit and stability in oil production and prices to provide the CBN enough ammunition to support the Naira at both the parallel and IEFX windows. 

·         Despite the earlier stated intention of the monetary authority to reduce the benchmark interest rate as headline inflation moves closer to its single digits target, we believe the authority may be constrained by the implication of the hike in rate by the US’s FED (to 2.00% from 1.75%) on the country’s economy. The potential for higher consumer prices in H2 2018 could see yields trend north in the second half of 2018. 

·          In the absence of positive news flow, we could see the equities market remain somewhat volatile. However, we point out the recent sell-off, which has restored attractive upsides on our top picks, presents a decent entry opportunity for investors with a medium to longer term horizon.