Nigeria In 2019: The Investment Banking View

The central theme in the investment outlooks for 2019 by Goldman Sachs, Bank of America Merrill Lynch, Morgan Stanley and Citigroup is for a recovery in emerging market assets, particularly, equities.

JP Morgan Chase, however, was the only one of the five investment banks surveyed by Business Day, Nigeria’s largest English-language newspaper, to adopt a cautious stance, as it cast a worrying look on the impact of a stronger dollar in the early part of the year and volatile oil prices.

While global growth accelerated, 2018 was harsh to emerging market assets, including Nigerian equities. Although the naira was relatively unscathed compared to other currencies, Nigerian equities lost 18 percent, as foreign capital fled emerging markets on the back of rising interest rates in the United States and slower global growth.

The New Year, however, holds better prospects for emerging markets, as asset prices and market expectations have adjusted significantly lower versus a year ago, offering a better deal and creating the potential for positive surprises.

Goldman Sachs

“Valuations look more attractive after a challenging year for assets and we believe 2019 offers some important advantages relative to 2018,” the asset management unit of Goldman Sachs said in an outlook report.

“We remain pro-risk heading into 2019 until we see clearer signs of a deterioration in fundamentals.”

Goldman has a “preference for equities, especially in emerging markets, where the period of growth moderation is likely behind us.” The US-based bank however emphasizes dynamism and selectivity in investing. Goldman also sees potential return particularly in Emerging Market currencies. Based on estimates of fair value, EM currencies appear undervalued by 12 and 23 percent, when aggregated using the MSCI EM and GBI Indexes respectively.

“The magnitude of this undervaluation is similar to what we observed in early 2016 and in the early 2000s. Both periods were followed by good returns for EM currencies. EM equities are trading at an attractive 25 percent discount to DM equities, while offering potentially higher expected earnings growth,” the Goldman team said.

The bearish run is over for emerging markets, according to James Lord, an investment strategist at Morgan Stanley, who says he sees brighter days ahead where total fixed income returns should be comparable with 2017.

“It has been hard slog for EM investors in 2018 but we believe that markets have turned a corner and a better year waits ahead,” Lord said.

According to Lord and his team, weaker growth outlook in the US should help to rebalance capital flows back into EM that in recent quarters have left seeking the higher returns provided by USD assets.

The expected rebalancing in global growth and capital flow dynamics comes at a time when valuations in EM are cheap.

“We turn bullish on EM local markets and raise EM credit to neutral from bearish.”

“Our US economists expect the first quarter of 2019 to be the high point, which suggests that the biggest risk to our bullish local markets view is in 1Q,” Lord added.

On appetite for sovereign credit, Lord said credit selection is important in Sub Saharan Africa, as a lot of the cheapness is on back of rising concerns about debt sustainability.


Like the others, Citigroup expects the sharp emerging market equity underperformance in 2018 to reverse, at least partially in 2019.

“Underpinning our view is the likelihood of on-going Asian growth accompanied by contained inflation, moderating US growth limiting the extent of US rate rises and dollar strength, and significant easing in China helping to offset most of the drag from trade tensions,” said David Bailin, the Chief Investment Officer at the American investment bank.

Also, strongly bearish investor positioning – particularly in China – is likely to reverse as investors diversify away from the US market.

“Against this backdrop, we believe the markets and sectors that sold off most heavily in 2018 – but which still have solid growth prospects – are likely to outperform,” Bailin added.

Bank of America Merrill Lynch

BofA Merrill Lynch Global Research forecasts modest gains in equities and credit, a weaker dollar, widening credit spreads and a flattening to inverted yield curve, signaling a tighter squeeze on liquidity that calls for higher levels of volatility.

This comes against a backdrop of slowing, but still-healthy economic growth; mild inflation, except in the U.S. where inflationary pressures are building; and a notable slowing in global EPS growth from the torrid pace of 2017 and 2018.

JP Morgan Chase

JP Morgan was probably the most conservative of the five banks in its outlook.
Expectations of further dollar strength early in the year will likely restrain EM assets, according to David Kelly, Managing Director and Chief Global Strategist at JP Morgan.

However, Kelly admits that as Chinese data stabilizes, the Fed pauses and the dollar’s climb reverses later in the year, EM assets may finally have some room to take off.

He however warns that as global liquidity continues to be drained next year, not all EM planes will fly at the same altitude.

“Investors are likely to continue being very selective, focusing on countries where economic growth differentials are widening versus developed markets, fiscal policy remains responsible and external vulnerabilities are kept in check,” Kelly said.

Moving into 2019, Kelly thinks bond yields may rise relative to stock dividend yields and earnings growth should slow, given that rising interest rates historically drag on equity performance.

In conclusion, JP Morgan fingered good quality fixed income exposure and dimming down credit risk in 2019. The bank will maintain equity exposure but also urges investors to stay diversified in anticipation of elevated volatility.