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‘Financial market investments in 2020 will require extra craft’

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Financial analysts are of the view that investment decisions in 2020 will require extra craft, given the current external pressures, low foreign investment, weak investor confidence, high inflation and weak oil prices that are impacting negatively on the nation’s economy.
 
Analyst at Afrinvest Securities, while x-raying the nation’s economic and financial market outlook for 2020, pointed out that Nigeria needs to build a more stable macroeconomic environment, in addition to new growth levers that would help to accelerate economic growth and prosperity.
 
According to them, the levers should include dumping petrol subsidies, establishing a more flexible foreign exchange market, leveraging on technology for human capital development and incentivising the private sector to lead the much-needed infrastructure boom.
 
The analysts noted that without a change in policy direction, the current low-growth cycle is likely to persist.
 

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“In the financial market, the playbook has rapidly changed following apex bank’s decision to shut out non-bank financial institutions, local corporates and individuals from its large Open Market Operations (OMO).
 
“With weak depth in the treasury bills and bond markets, and without other outlets for low-risk and high yielding investing products, there has been a dramatic fall in yields.
   
“The fixed income market has now become a less attractive proposition for investors. With another cloud gathering over the economy, given external account pressures, low foreign investment, weak investor confidence, high inflation and weak oil prices, the future of the current arrangement looks uncertain.
 
“Thus, investing in 2020 would require extra craft. In our opinion, Nigeria needs new growth levers to accelerate economic growth and prosperity.

In the financial market, the playbook has rapidly changed following the CBN’s decision to shut out non-bank financial institutions, local corporates and individuals from its large OMO market.
 
“With weak depth in the treasury bills and bond markets, and without other outlets for low-risk and high yielding investing products, there has been a dramatic fall in yields.

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“The fixed income market has now become a less attractive proposition for investors. With another cloud gathering over the economy, given external account pressures, low foreign investment, weak investor confidence, high inflation and weak oil prices, the future of the current arrangement looks uncertain. Thus, investing in 2020 would require extra craft,” the analysts said.
 
In the fixed income market, they noted that investors must be extra alert to the dynamics of the market.
 
They also urged investors to take advantage of the falling yields for strong gains by prioritising high duration bonds in the first half of 2020.
 
“The strategy in the second half of 2020 could change given the prospect for higher rates, which means active trading may be required,” they added.
 
“With weak depth in the treasury bills and bond markets, and without other outlets for low-risk and high yielding investing products, there has been a dramatic fall in yields.
 
“The fixed income market has now become a less attractive proposition for investors. With another cloud gathering over the economy, given external account pressures, low foreign investment, weak investor confidence, high inflation and weak oil prices, the future of the current arrangement looks uncertain. Thus, investing in 2020 would require extra craft,” the analysts said.
 
In the fixed income market, they noted that investors must be extra alert to the dynamics of the market.
 
They also urged investors to take advantage of the falling yields for strong gains by prioritising high duration bonds in the first half of 2020.
 
“The strategy in the second half of 2020 could change given the prospect for higher rates, which means active trading may be required,” they added.

Meanwhile, Vetiva Capital Management Limited in its banking sector update for 2020 argued that while the decision to raise CRR is expected to help curb excess liquidity, the potential drag on banks’ cost of funds and by extension, profitability, could raise some concerns for investors.

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“Although CRR had been set at 22.5 per cent since 2016, the inclusion of a special intervention reserve of 5 per cent means that some banks have reported a higher effective CRR, with the average among Tier-I banks closer to 30 per cent.

“Without further clarification, we cannot speculate on the implementation of the new benchmark; however, due to the CBN’s intention to tighten liquidity, the likelihood of an average effective CRR above 30 per cent is high.

“For the banks within our coverage that have relatively high CoF (ACCESS, UBA, FCMB), the CRR hike would worsen this. This will also affect our Interest Expense projections and consequently, Net Interest Margin (NIM).

“However, we believe that, all things remaining equal, the overall effect on our coverage banks’ profitability will likely remain below three per cent for FY’20.

Nevertheless, due to our expectations of weaker growth in interest income and income from trading and investment, our FY’20 PAT growth expectation (+6 per cent y/y) is already expected to lag FY’19 (+17 per cent y/y).

The analysts argued that in the short-term, the new regulation would squeeze banks’ liquidity, causing them to raise funds by shedding short-term assets, most likely in the T-bills market.

“Thus, we expect an uptick in yields at the short-end of the curve. However, we expect this effect to be short-lived, with yields likely to normalize over time.”

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