Bracing for a Different Future - Meristem Annual Outlook 2021

Monday, January 18, 2020 / 12:12 PM / By Meristem Research / Header Image Credit: Meristem

Global and DomesticMacros

The outbreak of the Coronavirus pandemic hadfar-reaching impacts for the global economy. Most economies across the worldplunged into recession with unemployment hitting record numbers. Its impact on capitalflows was almost devastating in the emerging markets as it triggered exchangerate depreciation and declines in capital markets. The crude oil market was hitseverely by the sharp drop in demand, following the imposition of lockdowns andthe restrictions in the aviation industry. The breakout of a price war by thetwo largest producers could not have been more ill-timed, as it sent pricesdown with oil futures briefly trading in the negative.

Fiscal and monetary responses have been verysupportive, with most advanced economies expanding their quantitative easingprograms to support the growth of their respective economies. Interest rateshave dropped near zero while record amounts are being spent as intervention forindividuals and households. While these liquidity injections helped therecovery witnessed across markets, global growth is still expected to declineby 4.4% in 2020. The global economy should however recover in 2021, with realGDP projected to expand by 5.2% by the IMF. The optimism for global growthderives from the current vaccination efforts across the world and the publichealth measures put in place to ensure a safe resumption of economic activitiesin 2021. The outlook for commodity prices is also improved by expectations ofstronger demand and as economic activities gradually kick back into gear.

However, even though several other vaccines are indevelopment, we have mapped the current vaccine manufacturing landscape andnote that available manufacturing capacity falls short of the required demandneeded for the world to achieve herd immunity in the near term. As such,uncertainties still abound with regards to the global economic outlook in 2021,particularly as the number of daily infections continue to grow. Elsewhere, theglobal geo-political landscape witnessed major shifts in 2020, which will havemajor bearings on the economy in 2021. Key highlights include the election offormer Vice President, Joe Biden, as the new President of the U.S, the finalsevering of ties between the European Union and the United Kingdom, as well asthe operationalization of the Africa Continental Free Trade Agreement (AfCFTA).

Like the global economy, the Nigerian economy alsofell in line, slipping back into recession in the third quarter of 2020. Whilethe oil sector contracted due to the crash in the price of crude oil, thenon-oil sector was affected by the lockdowns in place in some of the mosteconomically active States of the country. It is safe to say that the pandemicamplified the vulnerabilities of the domestic economy. In the absence of crudeoil earnings, the fiscal deficit widened to record levels. In addition, the CBNhad to devalue the currency thrice, in recognition of the pressure on externalreserves. Unemployment rose higher, while the shutdown of the borders andsupply side challenges drove the inflation rate higher. We urge for fiscalprudence through the review of the cost of governance and more importantly, theuse of public-private partnerships to finance critical infrastructure. Thederegulation of the downstream sector is laudable but will require a strongwill to follow through on its implementation.

Growth is however expected to return in 2021, at2.33%, as we expect the economy to gradually recover from the shocks caused bythe pandemic. However, we acknowledge that risks to the growth forecasts loomlarge due to the rising number of COVID-19 cases in the country would threatenfull recovery of some of the worst hit sectors.

Equities

The equities market recovered from deep selloffs tofinish as the best performing equities market last year. Unattractive yields inthe fixed income market, excess liquidity and relatively resilient corporateperformance in the middle of a pandemic were the major factors which drove themarket. We expect this to continue, thereby sustaining the positive momentum ofthe market through the better part of the year. We see a correction on thehorizon given the overbought status of the market, especially for majorbellwethers. Nevertheless, the first half is expected to be dominated byattractive dividend yields and the low yield in the fixed income market, whichwe expect to persist through the first half of the year at the very least. Ourmodels forecast a weighted return of -6.09%.

Fixed Income

The policy of the CBN to keep local investors from theOMO market precipitated excess liquidity in the fixed income market,compressing yields. Both publicly listed and private corporates have takenadvantage to raise cheap funds in the market. We expect this to continue in2021 given the loose stance of monetary policy.

Global Economy

Scarred by Corona, A Year Like NoOther

The global economy has changed drastically since thefirst cases of COVID-19 (SARS-CoV-2) were reported in Wuhan, China, in December2019. Early genetic assessments, according to the World Health Organization(WHO), revealed that the virus had an ecological origin from bats which,scientists believe, was transmitted into humans from a zoonotic source. Thenovelty of the virus and the speed at which it spread prompted unprecedentedlevels of nationwide lockdown in virtually all countries across the world. Inaddition, the pandemic exposed fragilities in the global healthcare systemwhich was ill-equipped to cope with the surging number of infections. By March,the WHO had declared the virus a pandemic as over 100 countries had recordedcases of the virus, causing widespread shutdown of international travels, and ahalting of all non-essential services.

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The containment measures proved effective,particularly in China, whose aggressive contact tracing and decontaminationapproach was able to significantly reduce the number of new cases by over 80%after its Joint mission with the WHO. These, alongside an improvement of thehealthcare system, introduction of face masks, and enforcement of socialdistancing protocols, provided a framework for the gradual reopening ofeconomies across the world by the second quarter of the year. Although thetotal number of cases continued to rise, the curve of daily new infectionsbegan to flatten between July and early October, reflecting the effectivenessof this approach. Eventually, the average number of new cases reported dailyover the period steadied at about 258,000 globally.

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