The year 2019 was volatile for global growth as a result of trade tensions, civil unrest and weak investment sentiments. Towards the end of the year, the US reported its weakest manufacturing output levels in a decade. On the back of these uncertainties, major global research bodies repeatedly revised global growth lower as downside risks dominated 2019 discussions. In 2020, global growth is projected to improve to 3.5% from the 3.2% forecast for 2019, according to the International Monetary Fund (IMF). Despite the improved growth projections, downside risks that were a key feature of growth in 2019, are expected to persist, making growth expectations volatile.
To put the magnitude of the downside risks into perspective, 70% of the increase in global growth in 2020 relative to 2019 is dependent on the stabilisation or recovery in stressed economies ( Argentina, Turkey, Iran, Venezuela, Euro Area, Emerging Europe and Latin America) across the world. The key themes impacting global growth remain trade and technology tensions that have negatively impacted investment sentiment, driving a risk aversion outlook. Weak growth in major world economies: Notwithstanding improved global growth projections in 2020, growth in major economies like the US, China and Japan is expected to weaken in 2020. Growth in the US is projected to decline to 1.9% in 2020 (2019: 2.6%) as the impact of the fiscal stimulus unwinds.
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China will see growth decline to 6.0% (2019: 6.2%) as the impact of trade tensions continues to permeate the economy, despite the monetary and fiscal stimulus of the Chinese, a result of the government having increased tax rate in October 2019, from 8% to 10% – the first increase in five years.
Across Europe, growth in 2020 is expected to be mixed. Resilient demand and rising wages in Central and Eastern Europe will see growth increase to 2.3% in 2020 (2019:1.0%). The Euro Area’s growth is projected to increase to 2.3% bps to 1.6% as the impact of vehicle emission standards rules wanes and Germany sees higher car registrations. The Euro Area growth projection also assumes no fresh protests in France similar to the Yellow vest movement protest. In the United Kingdom, growth is projected at 1.4% (2019: 1.3%) subject to an orderly Brexit.
Sub-saharan is projected to deliver 3.6% growth in 2020, up from the 3.4% estimated for 2019. This will be driven by growth expectations in the region’s two largest economies.
Nigerian economy: Sub 3% growth till 2021
We see modest economic growth of 2.3% for Nigeria in 2020e. We, however, expect much better growth of 2.8% in 2021e, mostly supported by output from the 650kbpd Dangote Refinery. Inflation will be a hotbed in 2020 – we forecast a base headline inflation average of 12%, higher at 12.6% (year-end: 14%) on a wage-adjusted basis. In our view, the strength of the naira will be tested in 2020e, which could force further regulatory interventions. We estimate the fair value of the naira at N445/USD (NAFEX: 375) by 2020 (year-end).
The fragility of public finances continues to be a focal point; revenue remains below expectations, debt accumulation has been rapid to N25.7trn (N30.6trn, adjusted for CBN net advance to government at 3% of GDP) at 18% of GDP, more than double 2013 levels. An adjusted debt service to revenue of about 70% (unadjusted: 45%) calls for urgent, but unpopular steps such as gasoline and electricity subsidy removal. We estimate the former at N1.1trn (52% of fiscal deficit) in 2020e. We recall in 2019 revised the country’s outlook to Negative (from Stable), indicating further deterioration in public finances could lead to a ratings downgrade. As such, we believe these amber indicators should be on the minds of investors as we navigate 2020 where we see some growth, but not enough. We overweight (OW) Nigerian equities in 2020e: Broadly, the Nigerian equities market is cheap, trading on a 2020e P/E of 7x, a 40% discount to peer African markets. While we do not call for the convergence of multiples across markets, we expect our coverage universe, 74% (10/01/2020), to appreciate 21% in 2020e on a market cap weighted basis from current levels.
We believe local pension funds and asset managers will increase their allocation to equities, from 5% ,in 2020e as yields of treasury and money markets securities have collapsed. Within our coverage, our top picks, in no particular order are, GTB (OW, TP: N54), Zenith (OW, TP: N28), Lafarge Africa (OW, TP: N22), Seplat (OW, TP: 260p, N1,232), MTNN (OW, TP:N145) and Nestlé (OW, TP: N1,642). Our next rated stocks, based on certain milestones are UBA (OW, TP: N14), Dangote Cement (EW, TP: N188), and Nascon (EW, TP: N15).
Fluidity of regulations remains a concern for Nigerian banks
We expect e-banking income growth to slow to 12% in 2020e (2019e: 53%) following the CBN’S downward review of bank charges. We also find that any plan to raise the loan-to-funding ratio to 70% will impact our coverage’s capacity adequate ratio by 400 bps. Valuation wise, our coverage is cheaper on a 2020e P/B of 0.9x relative to the 1.1x for Kenyan banks on similar ROE are trading at. We continue to prefer quality names [GTB (OW, TP: N54) and Zenith (OW, TP: N28)] in the banking sector. We like GTB for its operational efficiency and robust capital and see Zenith as an attractive dividend yield play in 2020e.
In Nigeria Cement sector, price competition will intensify in 2020 as BUA ramps up production, and price rebates and discounts become deeper. The sector will remain oversupplied at a utilisation rate of 43%, on our estimates, which implies only 2% y/y volume growth in 2020. We downgrade Dangote Cement to EW, TP: 188 (from N218) mostly on valuation grounds; 2020e EV/ EBITDA of 8x compares with GEM peers. We reiterate our OW rating on Lafarge Africa [(TP: N22 (from: N30), 2020e EV/EBITDA of 4.1x, as the company repositions to focus on Nigeria following disposal of the troubled South African operation.
In telecoms, regulatory-induced data pricing pressures and competition for data market share will dominate 2020, in our view. For MTNN, we upgrade to OW (TP:145), as we now value the company based on a DCF, rather than relative valuation. This is because we believe the withdrawal of demand by Attorney General (AG) on the$2bn tax matters offers some clarity on cash flows. MTN’S response to declining data market share and the final resolution of the $2bn tax case that has been passed on to the tax authorities and the Nigerian Custom service will be central to a re-rating. On our estimate, the valuation gap of $1.86bn, from current levels, could be a reflection of the $2bn tax settlement.
For oil and gas, the Us-iran hostilities have dominated headlines in early 2020 supporting oil prices. Bloomberg consensus forecasts the 2020 oil price at Us$65/bbl. We find Seplat’s (OW, TP, 260p, N1,232) acquisition of Eland as earnings accretive; we estimate about 30% – 50% upsides to 2020e production (64kboepd), revenue ($1.0bn) and EBITDA ($619m) on this basis. However, we find the acquisition to be value dilutive (-9%). Nonetheless, Eland introduces an exciting near-term exploration upside to Seplat’s portfolio, from Amobe prospect and appraisal drilling on Abiala, which could more than double the reserve base of OML 40. Seplat’s valuation is compelling, with a potential upside of 100% and a 7% dividend yield.
For the consumer sector, volume growth in 2020e will be stifled as inflationary pressure from land border closures, VAT increase and planned electricity tariff increase, among others, are expected to pressure consumer wallets further. On a positive note, the closure of the land borders offers volume growth benefits for food staple companies such as Dangote Sugar (UW, TP: N13), Flour Mills of Nigeria (UW, TP: N16) and Nascon (EW, TP: N15). In our view, a key risk to watch out for in 2020 in the consumer sector is the direction of the currency. A devaluation will be negative for earnings given that our coverage consumer companies are exposed to imported inputs and trade payables in foreign currency.
General. The funeral ceremonies of Chief EE Okoye, Odu2 of Igboukwu took me two days, the first day as a member of the Idu Cabinet and the second as a member of the prestigious nze na ozo society. The highest Ozo initiation ceremony was the initiation of the 4 Ikwuetoghu brothers into the ozo-ship at a sitting, the first in Igboukwu history. I also had time for my usual academic pursuits as I was the Guest lecturer at the Achina Development Summit, 29/12/19 (A new Model for Achina Development: The need for a paradigm shift) and the Youth Social Club of Igboukwu 2019 Convention 31/12/19 (Preparing the Youths for Leadership)
I actually enjoyed the whole period without the usual stress of lectures, results and meetings. The weather was dry dusty and cold; NEPA, quite surprisingly gave us light for 80 percent of that period; there was traffic holdup everywhere and only those who knew the terrain very well could move freely and there were police escorts and sirens everywhere. Our people are now all doctors, all chiefs, all Sirs so that everywhere you go, you see Chief, Dr. Sir XXX. And the latest status symbol is to have police escorts and sirens. Where did they get all these from? Were all these official? Anyway, by next year, I will have my own; even if they are OOU security personnel or the village vigilante!
By 11/ 1/ 20, it was time to pack and return to the madness of Lagos. It was not necessarily because of activity drought. My pocket was almost dry; NEPA had taken light for two days; two of my sisters took ill simultaneously and one of them had to be taken to 5 hospitals before being admitted in the 5th. And of course, it was just time to go because of 1001 demands on me and other members of my family. I left Igboukwu by 7 am and we were on the road for 14 hours, and I was on the steering.