An excerpt of their outlook for the different sectors of the economy is below:

Sector Outlook

Banking Sector: Risk gives way, eyes on fundamentals
We are overtly upbeat on 2011 earnings, as the key drags on growth fizzle out. Aside our modest outlook on loan growth which is expected to enliven interest income as well as fee and commission books, the steady uptick in the overall yield environment will provide support for appreciable growth in FY’11 earnings over 2010 levels. Our top calls in the sector are ZENITHBANK, ACCESS and FIRSTBANK. These three banks have an expected return of 27%, 25% and 17% respectively.

Consumer Sector: Tough year ahead…efficiency, requisite
The global factor of rising commodity prices, and constrained domestic credit growth will combine to pose challenges for companies within the consumer sector in 2011. It is worthy to note that these stress points would play differently for the sub-sectors within the Consumer industry. Importantly, the ability of consumer companies to improve and sustain production efficiencies would gird against some of these pressures. In the consumer space, we are bullish on Dangote Flour and Flour Mills on the basis of our expected return of 29% and 11% respectively.

Energy Sector: Elections to slow reforms
With far reaching reforms in the pipeline in of the oil, gas and power segments of the Energy industry, electioneering for the April polls seems to be shifting the focus of the legislators, and also the ability of the executive arm of government to focus on implementation. We note that for most segments, less activity on the reforms would be felt pre-election, whilst the Government is likely to put more focus on the pressing issues in the Energy Industry, post-elections. Our top shot in the sector remains Oando, based on our estimated return of 32%.

Infrastructure Sector: Set for mixed realities
Our focus on the building materials sub sector is on the cement producers, as they dominate the infrastructure sector. The outlook for the cement producers follows from our overall expectations of slow infrastructure development. In line with the additional capacities expected to come on stream this year, the sub sector is set to witness a major boost in cement supply. On consumption, we expect some improvement in Q1’11 given the onset of the dry season. The construction sub sector will still be dependent on government capital expenditure. We expect a reduced level of government contract awards and mobilization as focus on elections stalls decision making in government quarters. Notwithstanding the strong fundamentals of the sector, most of the stocks are stretched at current prices. However, we remain bullish on Lafarge WAPCO and Julius Berger based on our estimated potential return of 18% and 14%.

Insurance Sector: Searching for value
With the Nigerian economy forecast to grow at 7.0% in 2011, and given rising income levels and higher risk awareness among the populace, we are cautiously optimistic about the demand for insurance products. However, intense competition with rate undercutting, moderate returns from investments, and adjustments to the new regulatory guidelines is likely to continue to taper short-term profitability. Our favorite in the Insurance space remains Custodian and Allied Insurance based on our estimated return of 32.1%

Capital Markets: High Expectations Amid Uncertainty
Our expectation is that the equity market will close 2011 18% up, with the benchmark index ending the year at 29,246.49. In our view, this base case scenario would be driven by a 30% return by banks, while Petroleum Marketing and our new Infrastructure (includes building materials and construction companies) sectors are forecast to return 18% and 9% respectively. We expect our new Consumer group to return 15%, however, sub sector forecast puts Food & Beverages at 21%, the Brewers at 12%, while the Conglomerates will throw in a 6% return. As in 2010, we believe the Insurance sector would once again lag the broader market with 2011 return forecast at 5%.

Our Bull case estimate for the equity market performance rises 606 bps above our base case scenario to 24%. Again the banks will lead with a 40% return, Petroleum Marketing and Consumer sectors will follow with 25% and 19% respectively. The Infrastructure sector will post 18% return, while Insurance counters will return 10%.

Our Bear case estimate sees equities returning 10% for the year. This scenario forecasts banks adding 25%, the Petroleum Marketing and Consumer sectors posting gains of 10% and 6% respectively, while the Infrastructure and Insurance sectors will shed 4% and 5% respectively.

Given the expected hyperactivity in local Bond issuances by AMCON and the federal government early in the year, we expect the bond market to continue to attract capital flows as bond yields would trend higher in 2011, hence shaving off, only slightly though, some of the potential investments in equities. Stronger still, the uncertainty in the Nigerian Political environment might delay significant investments in the capital markets further into the year as investors exhibit caution over the outcome of the elections.

Political activity intensifies ahead of 2011 polls
• As political campaigns intensify towards the 2011 elections, the President’s ailing health condition is sparking political manoeuvres as there have been calls from the public for the President’s resignation.
• The missing link seems to be the lack of much-anticipated electoral reforms, even as Nigerians go to the polling booth for the Anambra state gubernatorial elections in February 2009 without any change to the 2007 electoral system.
• The battle for supremacy between members of the upper and lower legislative chambers delayed the presentation of the 2010 Appropriation bill, and also continues to impede the review of the country’s constitution.

Policy environment remains uncertain
• The much-anticipated passage of the Oil and Gas industry bills continued to be stifled by opposition from diverse interest groups and delays by the legislature.
• Even as the deregulation of the downstream petroleum sector portends long term benefits, we are not convinced that the deregulation policy will take a foothold before the next elections given the antagonism from the powerful labour unions.
• The Niger Delta security situation is improving following the conclusion of the 60-day amnesty programme. However, the risk lies with the absence of the President given that he has been championing the agenda and holding peace talks with the militant leaders.
• The failure to deliver on the promised 6,000MW power generation and apparent reluctance in conveying the true situation continue to place a credibility burden on the government’s policy pronouncements.

Macroeconomic conditions are improving
• The Nigerian economy witnessed another year of strong growth in 2009 (NBS preliminary estimate: 6.9%) due to the positive contribution from the oil sector, and a resilient performance in the non-oil sector.
• With the continuous rise in crude oil prices and improvement on crude oil production levels in the third quarter of 2009, the Naira enjoyed stability around the N150/$ mark, while reserves stabilised at $43 billion.
• Liquidity conditions improved in the second half of 2009, following the series of expansionary monetary policy initiatives and the N620 billion capital injection into the troubled banks.
• Even though improved liquidity has translated into lower deposit and interbank rates, lending rates (prime and maximum) appear to be downward sticky.
• Headline inflation picked up in the second half of 2009, as food supply shortage resulted in food price inflation, while imported inflation pushed non-food inflation higher.

Markets suffered another year of woeful performance
• The NSE All Share Index (ASI) declined 33.8% in 2009, while the ARM index of the 40 most capitalised stocks on the NSE lost 27.4%.
• The banking sector, which represents about half of the market capitalisation, declined 38.7%, counteracting gains recorded by some non-financial sectors (building materials, conglomerates and brewery sectors).
• The decline was triggered by the CBN Governor’s pronouncement that the Nigerian banking sector suffered a huge crisis of credibility from bad debt overhang particularly from margin loan and oil sector loan losses.
• Equity market losses were subsequently magnified by the release of the outcome of the CBN/NDIC joint audit on the 24 banks in August and October, where 9 out of the 21 quoted banks were found wanting. This, coupled with the release of debtors list of the rescued banks in the newspapers, sparked an equity sell-off by debtors in a rush to repay margin loans.
• Activity remained vibrant in the bond market with a tilt towards the longer tenors in line with the country’s debt management strategy. State governments have also made forays into the bond market.

Fiscal policy inconsistent with economic priorities
• The proposed government spending for 2010, tagged ‘fiscal stimulus budget’, is focused on stimulating consumption and not particularly focused on spending on productive sectors to boost economic recovery.
• The government also lamented about the poor implementation of 2009 capital votes, but we have not seen any tangible plans to address the situation in the coming fiscal year.
• Government intends to fund the huge budget deficit (N1.6 trillion) mainly with the issuance of external and domestic debt, with serious implication for crowding out the private sector borrowing. We also expect a complete drawdown of excess crude savings in 2010.

Economic outlook for 2010 looks promising
• Improvements in the oil sector following the relative calm in the oil-rich Niger Delta region should drive strong economic performance in 2010.
• The non-oil sector’s performance will continue to play an important role in the economy, as agricultural production continues to be boosted by increased investment in the sector and better weather prospects.
• Manufacturing output, on the other hand, is expected to remain in decline throughout the rest of the year as infrastructural bottlenecks, especially power supply and transportation systems, remain unresolved.
• We expect the CBN’s N500 billion quantitative easing plan, which includes investment in bonds to be issued by the Asset Management Company (AMC), to continue boosting liquidity in the system and expand money supply. However, we do not foresee any significant drop in lending rates in the short term given the high inflationary outlook and significant credit risk arising from high economic and industry risks in Nigeria.
• We expect inflation to remain high in 2010 with pressures mounting from both food and non-food components of the CPI basket. However, if the petroleum price deregulation occurs in 2010, the upward adjustment of petroleum prices will likely drive inflation far beyond our 13% target.
• While prevailing fundamentals point to the appreciation of the Naira in 2010 even as foreign reserves remain resilient at $US43 billion, the CBN’s deliberate effort to counter any significant appreciation, leads us to forecast a N/$US exchange rate around current levels of N150/$US.

Equity market shows signs of recovery
• We expect investor sentiment to switch gradually towards the supportive macroeconomic and liquidity outlook for 2010.
• Notwithstanding, we expect investor sentiment to remain fragile through much of the first half, given difficult economic and operating conditions as businesses struggle to access finance, unemployment increases, uncertainty deepens over the deregulation of the downstream oil sector, and the stalemate over the leadership of the country remains unresolved.
• We think support for market recovery will come partly from current deeply discounted valuations, especially in the context of a global market that has recovered to near precrisis levels with risk aversion thinning out significantly.
• Developments in the Niger Delta will also remain critical to market sentiment, directly impacting the nation’s medium to long term macro-economic prospects and the policy responses of the government to the myriad of issues facing the economy will set the backdrop for local and international re-pricing of Nigeria risk.

Bond market set for a surge in activity
• We expect the Federal Government to take the lead especially as its 2010 expansionary budget includes a deficit of over N1.5 trillion; at least N700 billion of which is intended to be funded through local bond issues.
• Given the cap (10% of loans) placed on bank lending to the public sector, we expect more states, in 2010, to follow the lead of the 4 states that issued bonds in 2009.
• We also anticipate an increase in corporate bond issues especially from banks as they try to increase the tenor of their liabilities to better fund longer term assets.
• Investors with long term investment horizons are advised to overweight state bonds (especially short tenors) given the significant yield pick-up (as much as 700bps) they offer over FGN bonds.

Here are excerpts from FSDH Securities report. I will add excerpts and notes from the others later.

The Nigerian Economy
The current global economic and financial crises had serious implications for the performance of the Nigerian economy in 2009. We observe that the global economic and financial landscapes are improving at a fast pace and the outlook is good. The Nigerian economy, being part of the global economic village should move in line with the rest of the world. Although there are current and potential political issues that need to be resolved in order to move the country forward, we believe the relevant parties will work together to resolve the crisis before it degenerates to an uncontrollable situation that could cause a collapse of the country’s burgeoning democracy.

The recent rising price of crude oil at the international market with the improved oil production in Nigeria following the Amnesty program of the FG to the militants in the Niger Delta area, in addition to the fact that the unspent portion of 2009 capital budget allocation will be added to 2010 fiscal year should improve the fiscal position of the FG in 2010. The current average oil price to date at US$78.25/b is higher than the 2010 budget benchmark oil price of US$57/b. The 2009 budget is predicated on an oil price assumption of US$57/b, oil production of 2.088mb/d an average exchange rate of N150/US$1 (average so far US$148.22/US$1).

In the year 2010 the outlook of inflation rate in Nigeria will be influenced by the expected fiscal expansion, quantitative easing strategy of the CBN to boost outputs & ensure credit creation in the financial system, supply bottleneck inherent in the economy as a result of the infrastructure deficits and expected rise in commodities prices. All these factors will exert inflationary pressure on the consumer price index in 2010, thus our forecast inflation rate is in the range of 12.5% -14.5% to end the year.

The weakening US Dollar as a result of restructuring of international investment from US Dollar denominated financial instruments to other commodities like Gold may help the value of Naira to appreciate in nominal term against the US Dollar. In addition, the rising price of crude oil at the international market, in the face of improving oil production, may improve the foreign exchange earning capacity of the country with its positive impact on the foreign exchange rate. Given these dynamics, we are persuaded to release a forecast exchange rate for 2010 in the region of N140US$1- N145US$.

- We doubt the ability of the proposed Asset Management Company (AMC) to produce the desired results as we believe a major constraint remains the transfer pricing of toxic assets. We however expect increased acquisition activities in banking industry in 2010.
- Given the structure of the economy which is in favour of Agriculture, and the progress recorded so far in the oil & gas sector, we are comfortable to release a GDP growth rate of between 7% and 8% in 2010.
- As the price of oil improves in the international market and oil output improves in the Niger-Delta area of the country, Nigeria should be able to increase its exports and consequently improve external reserve by about 12.5% to US$53.01bn.
- We expect inter-bank rates to trend downward on account of the expected monetary and fiscal expansion in 2010. Also the CBN guarantee of inter-bank placements and pension funds placements should increase activities in the inter-banks placement and prevent inter-bank liquidity crunch.
- We expect that the FIRS, DMO, FMF and Market Operators will finalize the challenges to the effective take-off of active Corporate Bond issuance and trading before the end of Q1, 2010. This will create another investment outlet for the excess fund in the financial market and reduce excessive oversubscription of the FGN bonds. Thus we expect the prices of FGN Bonds to trend downward and this will improve the yields of the bonds.
- We expect the new FGN Bonds issue for the year 2010 to carry low coupon rates.
Equities Market
Our review of the equities market shows that a number of the highly capitalized stocks across the sectors on the Nigerian Stock Exchange (NSE) are trading at their support prices as their share prices have refused to drop below certain price levels. We are of the opinion that there may still be some unresolved problems in the Nigerian Banking industry, the drastic actions of the CBN, especially in dissolving the board of the troubled banks and making them to make provisions for all non-performing loans have substantially addressed the problems in the sector.
- We expect a dramatic drop in corporate benefits that Nigerian banks will declare for the period ended December 31, 2009. This is expected to improve at the end of the current year as the banks’ profitability improves.
- The commitment of the CBN to guarantee all foreign credit lines to the Nigerian bank will ensure that large companies in Nigeria that have ability to access funds through their banks will continue to enjoy such foreign credits. This will boost the expansion drive of manufacturing companies and petroleum marketing companies and position them for better profitability in the quarters ahead.
As the global economy and financial market improve, we expect a return of some hedge funds and portfolio managers in the Nigerian equities market as we believe it offers some unique opportunities. In addition, the expected drop in interest rate in the money market in 2010 should be a good development for the equities investors.
- Bearing unforeseen circumstances in the nation’s polity that will affect the equities market negatively; we expect the equities market to appreciate in 2010. The factors that should support the expected appreciation in 2010 include: the global recovery that we expect; the improvement we expect at the macroeconomy level in Nigeria and some sectoral recovery prospects that exist for quoted companies. Given these factors, we are persuaded to release a forecast growth rate in the NSE ASI in the region of 15% and 20% to end the year 2010.

FSDH - 2010 Outlook (633).
Lead Capital 2010 Outlook (215).
Meristem 2010 Outlook (161)

Dont forget, you can also read the outlooks from the NSE and Afrinvest here and here.

Monthly Economic News and Views – Nov 09 – by BJ Rewane

Outlook for Q4, 2009
The Nigerian Economy
As noted in our earlier report, the current global economic and financial crises have serious implications for the performance of the Nigerian economy in 2009. But it is interesting to observe that the nation’s economic managers seem to be implementing policies that can lay a solid foundation for the economy in the medium to long run especially in the area of agriculture, manufacturing and broadening the revenue base of the country. However, we note that the country appears not to be making real progress in the area of power generation which is fundamental to sustainable growth and development of the nation’s economy. The Federal Government (FG) promised to make 6,000M/W of electricity available in the country by the end of December of 2009. If this target is achieved, it will help to improve the power problem in the country.

The recent rising price of crude oil at the international market with the improved oil production in Nigeria following the Amnesty program of the FG to the militants in the Niger Delta area, should improve the fiscal position of the FG slightly better than the picture that we painted in our Half-Year report.

With reference to the deregulation of the downstream sector of the oil industry which is scheduled to take effect from January 01, 2010, we maintain our inflation rate forecast for the year in the range of 9.5%-11.5%, year-on–year.

FSDH Research is confident that deregulation will bring about a lower pricing regime for petroleum products in the country in the long run. We hold this view because of the competition that will set in and the efficiency gains which would trickle down to the consumers. We maintain that the extent of the drop will depend on what happens to price of oil at the international market, the value of Naira and the refining capacity in the country.

We support the intention and the efforts of the CBN to sanitize the Nigerian banking system. We had argued that the growth of the capital market and the economy at large will depend on the banking system that is committed to its traditional function of financial intermediation in the real sector of the economy.

We review our exchange rate forecast to end the year to a range of N145US$1- N150US$1 from N140US$1- N150US$1 released in our HY2, 2009 report.
Learning from the experience of other countries of the world, we believe that a veritable financial institution that the CBN can use to increase access to credit among the small and medium scale industries in Nigeria is the Micro Finance Banks. In order to achieve this, the CBN needs to intensify its efforts in capacity building for the industry operators. Also, adherence to good corporate governance especially among the top executives, will determine how effective the financial sector will contribute to the growth and development of the nation’s economy.
We maintain our GDP growth rate of between 4% and 5% in 2009 in view of the developments in agriculture especially in the area of access to cheap funds.

Fixed Income Securities
As we anticipated in our HY2, 2009 report, the CBN maintained the MPR at 6% in Q3, 2009. The MPC also maintains the MPR at 6% in its November 03, 2009 meeting. Going forward in Q4 2009, we expect that CBN will maintain the MPR at 6% with its cap of +2 and -4%. We expect inter-bank rates in Q4, 2009 to moderate especially on account of the guarantee of inter-bank and pension funds placements by the CBN to prevent counter-party default.

We expect increased activity in the Bond auction market, especially by banks as they view it as one of the secured investment channels at the moment. FGN Bonds should continue to trade at a premium and at low yield. The new Bond issuance may also carry lower coupon rates. We expect slight volatility in bond yields in Q4, 09. The volatility will depend on the tenor of the bonds – shorter tenored bonds will be more stable while the longer tenored bonds will be more volatile.

Equities Market
We expect to see low levels of volatility in the equities market in Q4, 2009. We are of the opinion that the valuation of stocks quoted on the Nigerian Stock Exchange (NSE) appears attractive both in absolute and relative terms. As we noted in our outlook report for 2009, we expect corporate earnings of companies quoted on the floor of the NSE to decline in 2009, as a result of high cost of funds, exchange rate losses, and increased provisions for non-performing assets especially for financial institutions.

Nigerian banks are required to harmonize their financial year end starting from December 31, 2009. We believe that the CBN/NDIC special audit on the Nigerian banks have addressed most of the issues that would have created problems in December 2009, as a result of common financial year end. Given the provisioning that the CBN asked the banks to make in their accounts for the period ended September 30, 2009, we do not expect any major appreciation in the stock market for the remaining part of the year. Nevertheless, there may be some isolated demand in some stocks .We expect strategic investors to take positions ahead of improved earnings towards the end of Q1, 2010.

Companies they like:
- Custodian and Allied Insurance
- Dangote Sugar
- Glaxo Smithkline
- Guarantee Trust Bank
- Guiness Nigeria
- Nigerian Breweries
- Nigerian Bottling Company
- UAC
- UBA
- Lafarge Cement Wapco PLC