MACRO | Nigeria: 2024 Mid-Year Outlook - At the Precipice of a Strategic Shift

    The global economy is dynamic. Hence, investment strategy must evolve to keep pace and remain relevant. This task is complicated by the differing outlook perspectives of market watchers, with a handful foreseeing an imminent recession in the US capable of fanning a flight to safety - particularly in the face of elevated fixed-income yields and the harsh lessons from equity market crises in previous recessions. A growing number of investment thought leaders are also simultaneously aligning with the IMF on the prospect of a safe landing for the global economy at the other extreme. Beneath this dichotomy is the consensus that global yields may have reached inflexion, and that duration-building must now gradually replace cash and other short-duration plays as re-investment risks loom large. However, such consensus has no place in current equity strategies as approaches to imminent recession and a safe landing may differ in the immediate term, given historical precedence. An interesting twist to this impasse is the potential place of the possibility of overheated equity markets in this discourse, with leading indices clearly trading at PEs above their 10-year mean levels.

    For us, the case for Nigeria is less cumbersome as investors may have reached the precipice of a strategic shift. Fixed-income yields are high and probably unsustainable; the government appears to be ahead of its 2024 borrowing plans; the exchange rate looks relatively stable vs Q1'24; and inflation looks set to dip on the impact of the high base effect starting from H2'24. A combination of these factors clearly favours a longer duration fixed-income strategy and a careful watch on re-investment risks linked with currently attractive short-dated FI instruments. In a sense, FI investors may be mindful not to eat the future now by overly focusing on the allure of currently elevated effective yields on T-bills and commercial papers at the expense of locking down north of 21.0% annual interest rate on government bonds for a more extended period. On this wise, we recommend an increasing tilt towards long duration and a calculated gradual de-emphasizing of short duration. 

    Similarly, the view on elevated interest rates for 2024 supports our sanguine position on sectors with positive interest rate exposure, like banking. Our positive view of the upstream oil and gas sector and stocks with lower leverage positions, net long or low net short FX exposures, and robust cash is also consistent with our macroeconomic outlook, reinforcing the confidence in our analysis. We expect savvy investors to juxtapose these strategic plays with tactical opportunities likely to be opened by the chain of corporate actions that appear queued up in the near term.


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