Afrinvest 2010 Pharmaceutical & Healthcare Sector Update (459).

Vetiva Research - Cement Sector Study (2587).

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.

ECONOMIC REVIEW

The economy continued to record impressive output growth in Q4 2010. Provisional data from the National Bureau of Statistic  (NBS) indicates a real Gross Domestic Product (GDP) growth of 8.29% compared to 7.86% in Q3 2010.  The overall GDP growth for 2010 is estimated at 7.85% compared to 6.96% recorded in 2009.  This also compares favourably with the average growth rate in Africa of 4.5%.  The growth was driven by the Agricultural and Crude Oil sectors, which makes up approximately 42.32% and 19.70% of GDP respectively.  The CBN’s Monetary Policy Committee (MPC) shifted its policy stance from accommodative to monetary tightening.  The benchmark interest remained unchanged at 6.25% but the standing deposit facility rate rose to 4.25% from 3.25%. Consequently, headline inflation fell to its lowest level since the CPI basket was rebased, from 13.40% inOctober to 12.80% in November. We expect the CBN to maintain the current policy in 2011. Similarly, the CBN maintained its stable exchange ratepolicy throughout the year despite the slight pressure witnessed on the demand side in the second half of the year.  As such, the CBN exchangerate (offer) which opened the year at N147.60/$ reached a high of N149.55/ $ and closed the year at N149.17/$.

MARKET REVIEW
The All Share Index (“ASI”) opened the quarter at 23,050.59 closed at 24,770.52 representing an appreciation of 7.46%. For the year in review, the ASI rose by 18.93% as against -33.78% returned in 2009. Similarly, all sectors of the Exchange closed on a positive note with the banking sector recording the highest appreciation (21.93%) for the quarter, while the building material sector recorded the highest appreciation (44.98%) for the year.

Our analysis attributes this change in market trend to the increase in confidence in the market as a result of the announcements from the Asset Management Corporation of Nigeria (“AMCON”), the sanitization of the Nigerian Stock Exchange and strong Q3 performance by majority of the banks. During the quarter, AMCON announced the purchase of all non-performing loans in excess of the 5%. These loans were paid for with 3 year Zero coupon bonds guaranteed by the Federal Government of Nigeria.  Our analysis suggests that this will increase the liquidity of banks and theirability to create risky assets, thereby boosting their profitability further.  In addition, we expect this to significantly reduce the sellingpressure experienced in the equities market due to the overhang of margin loans.   The selection of Mr Oscar Onyeama as the new Director General of the Nigerian Stock Exchange was also announced on the last day of the quarter.

In the fixed income market, the Debt Management Office (“DMO”) raised a total of N282.17 billion via bond issuance which was lower than the N351.46 billion raised in Q3. The DMO reduced the total debt raised in Q4 due to increased crowding out of private sector borrowing by the federal government.  The 3, 5, and 20 years FGN Treasury Bonds opened the quarter at yields of 8.43%, 9.90% and 12.53% respectively and closed higher at yields of 10.82%, 11.42% and 14.24% respectively. In addition, Edo State, Ebonyi State and Flourmills of Nigeria issued 7 year, 5 year and 5 year bonds in N30 billion, N16.5 billion and N35 billion tranches at yields of 14%, 13.50% and 12% respectively. Also the Federation Account Allocation Committee (“FAAC”) disbursed a total of N880 billion during the quarter.

Quarterly Economic Review - Q4 2010 And 2011 Outlook - Stanbic IBTC (152)

Here is an excerpt from the report:

Investment Summary
We update our view on Nigerian brewery sector with NEUTRAL ratings on the 2 biggest players – Nigerian Breweries Plc and Guinness Nigeria Plc with pooled market share of 80%.

- Volume drivers still at work. With a 15m hectolitres (mhl), (2009 est.) according it the second largest in SSA, the Nigerian brewery market, in our estimate, will grow to 23mhl by 2015 premised on the combined impact of beer per capita consumption (PCC) growth (13litres expected vs. 10litres currently), population build-up (2.8% p.a.) and nominal per capita income growth (8.3% p.a.). Consumption of brewed products is intrinsically linked to GDP growth which is rising across SSA economies, with Nigeria expected to deliver aboveaverage growth performance, based on IMF and World Bank forecasts.

- Eyed by the bigwigs… Nigerian brewery sector is increasingly attracting the attention of global majors: SAB Miller, Carlsberg and Castel. These interests re-affirm the growth opportunities embedded in the sector and we expect it to generate a positive development for the sector in terms of volume growth and deeper market penetration.

- …in view of robust investment thesis. The investment case for the Nigerian brewery sector is uncomplicated: the sector is largely dominated by 2 global players, Heineken and Diageo, through their subsidiaries (Nigerian Breweries Plc and Guinness Nigeria Plc respectively); beer consumption is notably at low levels with PCC of 10litres, which is a 56% discount to comparative benchmarks and 40% discount to levels attained in the 1980s; medium to long-term economic outlook is healthy at 5%-plus real GDP growth expectation over the next decade; supportive demographics characterised by growing youthful population with avid thirst for fun and social culture that encourages festivities. These fundamentals form the basis of our conviction for a deserving long-term call on the sector.

- Credible route to economic growth potential… Nigerian brewers are moderately shielded against Nigerian macroeconomic risks as sales recover quite swiftly from unfavourable economic cycles, proven once again in the 2009/10 financial years. We believe the sector provides a solid route to accumulate direct exposure to Nigeria’s medium-term growth potential, and indeed SSA, as we think domestic beer consumption rate will increasingly set the Nigerian market apart on the heels of expanding economy. We will play this growth theme through NB and Guinness from a long-term perspective given their operational scale, market dominance and impressive CAPEX.

- …but we are NEUTRAL on full valuation, in the near-term. From a valuation standpoint, the shares of quoted brewers offer a long-term attractive proposition but, on a 12-month horizon we find the risk-reward profile limited, as the shares have performed strongly (41% in 12 months) and trade at forward P/E multiple of 17.1x and EV/2010e EBITDA of 9.8x. We are on the sidelines to make an inroad into the sector’s long-term growth prospect on better valuation attraction. At this point, we think direct acquisition and repositioning of fringe players is a potent source of alpha.

I must say, it is not comforting in any way. Here are some reasons for concern – Nigeria’s investment rating has been downgraded from Stable to Negative, there has a huge depletion of the foreign reserves, the government is still on a borrowing binge, and the Naira is reducing value. And dont forget the upcoming elections.

The report also contains brief analysis of their top 20 stocks on the NSE:
Access Bank
Berger Paints
Custodian and Allied Insurance
Dangote Cement
Dangote Flour Mills
Fidelity Bank
Fidson Healthcare
First Bank of Nigeria
Flour Mills of Nigeria
GlaxoSmithKline Consumer
Guaranty Trust Assurance
Guaranty Trust Bank
Guinness
Lafarge Cement WAPCO
Nigerian Breweries
Oando
PZ Cussons
Skye Bank
Sterling Bank
Zenith Bank

Some excerpts are below. But to get the full benefit, read the entire report.

On the macroeconomic front, an analysis of provisional data provided by the National Bureau of Statistic (NBS) indicates that real GDP grew by 7.7% in Q2 2010, up from the 7.4% recorded in Q1 2010. The CBN has revised the GDP estimates upwards, forecasting a 7.8% growth in GDP for 2010 (with growth estimates of 7.7% and 8.2% in Q3 and Q4 respectively). The upward review in GDP forecasts rides on the back of favourable rainfall (a critical input for agricultural produce), improved crude oil and natural gas production, and the relative stability in crude oil prices. The non-oil sector is expected to remain the key driver of overall growth. External reserves stood at $36.6bn as at mid September, compared to $37.2bn by the end of July 2010. This range is expected to hold, depending on the stability of oil prices and output.

Oil production has remained relatively stable around the 1.9–2.1mbpd range (year to date), following the return of stability to the Niger-Delta earlier in the year and the success of the on-going amnesty programme. Oil prices have however been volatile all through the year; it stood at $83.30 at the end of Q3 ’10, which is above the country’s benchmark oil price of $60.00. We re-iterate our belief that oil prices will hover between the $70.00 – $80.00 range in the near term as the global economy firms up. The Naira, which remained fairly stable in the first two quarters of the year, saw more volatility in the third quarter and closed the quarter in the CBN, inter-bank and parallel market windows at N149.85/US$1.00, N154.60/ US$1.00 and N156.00/US$1.00 respectively.

The devaluation is not unconnected with the huge surge in dollar demand, particularly at the tail-end of the third quarter. The CBN Governor, Sanusi Lamido Sanusi, explained that this was as a result of an increase in the volume of petroleum products as well as rice imports, following enhanced credits from the Federal Government’s Petroleum Stabilization Fund (“PSF”) and waivers granted to rice importers. By the end of October, the Naira had appreciated to N148.50/US$1.00, N150.85/US$1.00 and N154.00/ US$1.00 at the CBN, inter-bank and parallel market windows respectively. The CBN has promised to intervene and defend the naira where necessary while it continues to monitor developments in the market, taking measures to eliminate speculative demand and exchange rate volatility.

The NBS recently revised and rebased the Consumer Price Index (CPI) to a November 2009 base period, in a bid to reflect the current consumption structure. Subsequently, inflation rose by 70bps from July to August 2010, and dropped marginally by 10 bps in September, closing at 13.6%. Afrinvest Research is of the opinion that fiscal injections related to election expenses may spur an upward trend in inflation. We however observe that the CBN is actively combating inflation through tighter monetary policies, an example of which is the recent increase in MPR to 6.25% and Standing Deposit Rate (SDR) to 3.25%.

The stock market was up 20.2% by the end of October 2010, after varying degrees of oscillation in the course of the year. This is however an improvement from the 30.5% decline recorded in the corresponding 2009 period.

….

Stability in Oil Prices…
Crude oil prices remained stable during the quarter with a Q3 2010 average (Bonny light) of $77.84 per barrel, a slight drop from the $80.06 per barrel recorded in Q2 2010. This drop in price has been compensated for by an increase in daily production, from approximately 2.35 million barrels per day in Q2 2010 to about 2.41 million in Q3 2010. Consensus analysts’ forecasts indicate that the outlook on oil prices is stable both in the short and medium term. Investor expenditure on commodities picked up during Q3 2010 after very strong flows during the tail end of 2009. Recognizing this upward trend in oil prices, analysts have reviewed their forecasts up towards the $95.00 mark over the next 12 months. Afrinvest Research expects fundamentals and investor flows to drive oil prices, though the potential increase in production quota/output may lead to a supply glut and check an upward movement in price.

With the return of stability in the country’s leadership, President Jonathan has taken a number of steps, seemingly in the right direction, aimed at boosting economic performance in the third quarter. Top on the list is the unveiling of a very articulate strategy designed to put an end to Nigeria’s chronic power shortages through the privatization of the country’s inefficient power generation and distribution facilities. The recent sanitization of the Nigerian Stock Exchange (NSE) (which should help rebuild investor confidence) and the incorporation of the Asset ManagementCompany of Nigeria (AMCON), are further indications that the president seeks to create the desired enabling environment for economic growth and development.

The exchange rate assumption of N150.00/US$1.00 is proving difficult to sustain given the drastic reduction in the nation’s foreign reserves, the depletion of the windfall oil savings and the fact that inflation has climbed to a high of 13.6%, a sharp contrast to the 11.2% assumed for the budget. We believe that this will pose a threat to exchange rate stability with the exchange rate at N151.50/US$1.00 as at end of October 2010. Cost efficiency ratios are also a major concern, as the quality of government expenditure is suspect, while the level of budget performance remains poor.

….

Piling Debt Despite Increasing Revenues…
A Sovereign Wealth Fund (SWF) is a state-owned investment fund composed of financial assets, which include money, stocks, bonds, property and other financial instruments. In the Nigerian context, the SWF is expected to replace the current Excess Crude Account (ECA). The ECA was set up as a stabilization fund to bridge budget deficits and fund domestic infrastructure investments. It was however set-up as a political arrangement (and without legal backing) during the Olusegun Obasanjo administration. The bill for the National SWF was submitted to the National Assembly on the 13th of September, to ensure that it has a legal underpinning. About N153.0bn (US$1.0bn) has been set aside as seed capital for its take-off. The fund is to be used for three distinct purposes; savings for the future generation, an economic stabilization fund, and an infrastructure fund for co-investment with other investors.

The Debt Management Office (DMO) released figures in Q3 2010 showing an outstanding domestic debt of N4.2tn (US$28.2bn) from N3.8tn (US$25.3bn) in Q2 2010. FGN bonds accounted for 64.0% of the Q2 2010 domestic debt amount, while Non-treasury Bills (NTBs) and Treasury Bills accounted for 23.9% and 10.4% respectively. Development Stocks and Promissory Notes made up the balance of the debt figure with both responsible for just less than 2.0% of the domestic debt figure. The increase in domestic debt can mainly be attributed to the financing of Federal Government budget deficits and expenditure on capital projects. The DMO also released its issuance calendar for 2010 showing a quarterly increment FGN auctions from N300.0bn in Q2 2010 to N330.0bn in Q3 2010, with a scheduled issuance of N408.8bn in Q4 2010.

….

The Federal Government also plans to issue a N75.0bn (US$500.0m) Eurobond to fund outstanding infrastructural projects. This is expected to be a five year bond with a fixed coupon rate of 8.625% that will also help finance the budget deficit in the country. This means that the country’s domestic debt figure could climb to over N4.5tn (US$30.0bn) by Q4 2010. In a related development, the international rating agency, Fitch Ratings, downgraded Nigeria’s credit rating to a BB-, and from a stable to a negative outlook. This was based on certain factors, including the near total drawdown of the excess crude account and the continuous fall in foreign reserves.

A depleted excess crude account, amid oil revenues of N7.2tn (US$48.0bn) is a major cause for concern, while the quality of Government expenditure remains worrisome. Apart from the cost incurred from Nigeria’s bureaucratic structure, there is a risk that if a project funded through an FGN Bond is unsuccessfully completed either through mismanagement or poor execution by the contractor, the Federal Government would have to redeem its initial debt on the maturity and re-issue another debt instrument for the same project. This, coupled with the interest paid on any debt facility, means that a project could cost 2-3 times its original price. The Minister of Finance however noted that the steps needed to ensure that Nigeria’s outlook be upgraded to stable are already being implemented. Standard & Poor’s Rating Agency however affirmed Nigeria’s B+/B global scale rating and the NGA+/NGA-1 national scale rating. They also confirmed a stable outlook, reflecting expectations that the country will maintain her strong external and fiscal balance sheet, and improve in budgetary performance.

……

Our Overall Expectation: 2010
With election related activities on the rise, we fear that progress on the roadmap to reforms in the power sector may stall. The revival of the power sector is a key factor in the continuous growth of industries and businesses in particular and the economy in general. There is therefore an urgent need to follow through on these reforms. We expect that the relative peace in the Niger Delta, as well as stability in crude oil prices, will enhance the country’s foreign exchange revenues. The excess revenue, which will be saved in the SWF, is expected to be used to improve on infrastructure and close budget deficits where necessary.

The CBN stipulated a September 2010 deadline for AMCON to become fully operational. This has however not been the case. We however hope to see some clarity as to the direction of the banking sector when AMCON becomes fully operational. There has also been interest in certain banks by both local and foreign participants, suggesting that mergers and acquisitions are likely to occur. We also believe that the banks will resume lending, although at a gradual pace. Persuasive mechanisms by the CBN may also encourage this to happen as quickly as possible. The resilience of many listed companies in the face of harsh macroeconomic and business conditions has been shown by the relatively decent financial results released. We expect investors to continue to show interest in stocks with positive results and growth potential, as well as a high level of transparency and corporate governance.

The drive by the SEC to ensure transparency and corporate governance in the NSE is expected to boost investors’ confidence and renew interest in equities. The uncertainty around the outcome of the forensic audit on the NSE has somewhat dampened this. We therefore believe that the timely conclusion and release of the audit findings will help restore investor confidence and encourage positive sentiments towards the equities markets. Participants will however remain cautious and eager to lock in any significant short term gains. This suggests that there will be constant profit-taking activities in the market, signifying volatility in trading which may persist till the end of the year.

In our Q1 2010 Market Review, we re-iterated our expectations of significant volatility within the NSE ASI 20,000 to 28,000 points range. Afrinvest Research remains bullish on equities, although we are slightly cautious. We review our forecast to a bear case scenario of a 10.0% -15.0% downside and a bull case of a 5.0% – 10.0% upside from around the 25,000 mark. We also expect lending rates to slowly dip and savings rate to rise as the year comes to an end.

Fitch Ratings moved toward a possible downgrade of Nigeria’s junk-level ratings, raising concerns about the country pulling money from a crude-oil account the help fund government operations.

That and a continued gradual fall of international reserves at a time of high oil prices and record oil production is a major concern, according to Fitch. It also raises vulnerability to any renewed fall in oil prices and threatens macroeconomic stability.

Fitch director Veronica Kalema said that while there were plans to remedy the situation through the establishment of a sovereign wealth fund and removal of the fuel subsidy currently taken out of the country’s excess crude account, implementing those actions “will be challenging before elections expected in April next year.” The poll has increased short-term political uncertainty, Fitch said.

Other major constraints on the rating — low per capita income, weak transparency and governance and the infrastructure deficit, especially the power shortage — remain in place. Nigeria’s national infrastructure is poor and power generation is grossly inadequate, resulting in low industrial production while offices and homes go for days without electricity.

Fitch revised Nigeria’s outlook to negative.

Fitch did note that Nigeria’s ratings — which stand at BB-, or three notches into junk — are supported by robust non-oil sector growth, and low public and external debt ratios. The recovery in oil production in the fourth quarter last year, and renewed reform momentum this year, also support the ratings.

In August, the nation said gross domestic product grew 7.4% in the first half of the year, building on 5.9% growth the same time in 2009. The enhanced economic development was linked to growth in non-oil sectors and improvement in oil production.

Earlier this month, the International Monetary Fund said the economies of sub-Saharan Africa will be among the best performing in the world this year and next, lagging only behind those in emerging Asia. It raised its growth forecasts for Nigeria’s economy to 7.4% in both 2010 and 2011 from 7% and 7.3%, respectively.

But in the last week, Fitch affirmed it’s long-term investment rating of B+ for Nigeria. Here is the excerpt of that report from Bloomberg:

Standard & Poor’s Ratings Services affirmed its ‘B+’ long-term rating on Nigeria, Africa’s most populous nation and top oil producer, with a stable outlook before a $500 million Eurobond sale next month.

The agency also affirmed its ‘B’ short-term foreign and local currency sovereign credit ratings on the West African nation, it said in a statement today.

“The outlook is stable, reflecting our expectation that Nigeria will maintain its strong external and fiscal balance sheet and that its budgetary performance will gradually improve over the next few years,” it said.

The announcement “will help to allay the concern of potential investors in Nigeria’s Eurobond,” especially after Fitch Ratings cut its outlook on the country to negative from stable on Oct. 22, said Bismarck Rewane, chief executive officer of Financial Derivatives Co. Ltd., a fund manager.

Nigeria plans to appoint bookrunners next week for its first-ever Eurobond sale, planned for mid-December, Abraham Nwankwo, director general of the Debt Management Office, said today.

“The ratings on Nigeria are constrained by high political risk, but supported by a strong balance sheet,” Standard & Poor’s said in the statement.

Elections

The nation of about 150 million people is scheduled to hold general elections in April in which incumbent President Goodluck Jonathan, from the mainly Christian south, has said he will run. Politicians from the predominantly Muslim north say that decision runs counter to an agreement by the ruling People’s Democratic Party to reserve the office for the region until 2015. Jonathan stepped in to the office after the death of former President Umaru Yar’Adua, a northern Muslim, on May 5.

Fitch Ratings lowered its outlook on Nigeria’s BB- rating to “negative” on Oct. 22, concerned about withdrawals from the excess crude account and a drop in foreign currency reserves. The decline in reserves increased the risk to the economy from any renewed drop in oil prices, Fitch said.

Nigeria’s foreign-exchange reserves fell 7.6 percent to $33.9 billion in the month to Oct. 21, according to data on the website of the Central Bank of Nigeria.

Nigeria’s economy, the second-biggest on the continent after South Africa, is expected to grow 7.8 percent in 2010, up from 7 percent last year, driven by non-oil industries such as agriculture, central bank Governor Lamido Sanusi said on Sept. 21.

To get the full details, you can download a copy of their report below. I believe that the report by Fitch is the most detailed analysis and description of the Nigerian economy.
Fitch Ratings For Nigeria 2010 (188)

And here are the official NSE reports for the month of September and October 2010
NSE Monthly Report - Sept 2010 (144).
NSE Activity Report For October 2010 (181)

FSDH has also released the Economic and Financial Review for Q3 2010 and their outlook for Q4. It is a very thorough and detailed report. Please take time to read it. It is worth the time.
FSDH - Quarterly Economic Review - Q3 2010 (692)

And here is Proshare’s Quarterly Report for Q3 2010:
Proshare\'s Quarterly Report for Q3 2010 (88)

And importantly, here are the CBN’s reports for Q2 2010, May 2010 and March 2010. Bear in mind that their reports are usually months late in being released:
CBN - Developments In The External Sector Of Nigerian Economy - March 2010 (57).
CBN - Economic Report for May 2010 (70).
CBN - Economic Report For Q2 2010 (60)

CONSUMER PRICE INDEX: AUGUST 2010
(BASE PERIOD NOVEMBER 2009 = 100)
BRIEF METHODOLOGY:
This edition of the Statistical News contains the revised Consumer Price Index (CPI) based on Nigeria Living Standard Survey (NLSS) 2003/2004. The consumption expenditure data were revalued to November 2009 which is the base period for the revised CPI.The May 2003 based and September 1985 based indices are being continued using factors derived from the new CPI. All of these indices will yield the same price change for any commodity group contained in all the series.

A new sub index – Imported Food Index- is available in the revised CPI.A TOTAL of 10534 informants spread across the country provide price data for the compilation of theNew CPI each month. Also, 740 product specifications are priced in each centre for computation of the New CPI. More enquiries relating to the CPI revision can be obtained from ofnwaboku@nigerianstat.gov.ng or kocimo@nigerianstat.gov.ng.

ALL ITEMS INDEX
The Composite Consumer Price Index (CPI) rose by 13.7 percent year-on-year in August 2010. This is higher than 13.0 percent recorded in the previous month in the new CPI series. The monthly change of the CPI was 1.8 percent increase when compared with July 2010.  The urban All Items monthly index rose by 1.3 percent while the corresponding rural index recorded 2.1 percent increase when compared with the preceding month. The year-on-year average consumer price level as at August 2010 for Urban and Rural dwellers rose by 10.9 and 15.6 percent respectively. The percentage change in the average composite CPI for the twelve-month period ending August 2010 over the average of the CPI for the previous twelve-month period was 13.5. This was marginally higher than what was recorded by making similar comparison in July 2010. The corresponding 12- month average percent change for urban and rural indices rose by 10.2 and 15.3 respectively.

FOOD INDEX
Average monthly Food prices rose by 2.0 percent in August 2010 when compared with July of same year. The level of the Composite Food Index was higher than the corresponding level a year ago by 15.1 percent. The average annual rate of rise of the index was 14.7 percent for the twelve-month period ending August 2010. The rise in the index was caused mainly by slight increase in the prices of some food items like yam, potatoes, meat, fish, cooking oil, fruits and vegetables.

ALL ITEMS LESS FARM PRODUCE
The “All items less Farm Produce” index which excludes the prices of agricultural products rose by 1.5 percent in August 2010 when compared with July 2010. The increase was due to price rise observed with some pharmaceutical products and household equipments. In the twelve-month to August 2010, the index rose by 12.4 percent while the average annual rate of rise of the index was 11.5 percent for the twelve-month period ending August 2010.

They also released the Revised GDP for 2009 and the Estimates for Q1 and Q2 2010. The GDP economy grew by over 7% in Q2 2010. Here is an excerpt:

On an aggregate basis, the economy when measured by the Real Gross Domestic Product (GDP), grew by 7.69 percent in the second quarter of 2010 as against 7.45 percent in the corresponding quarter of 2009 as shown in Figure 1.

The 0.24 percentage point increase in Real GDP growth observed in the first quarter of 2010 was accounted for by the increase in production in the oil sector and wholesale & retail trade activities in the economy. The nominal GDP for the second quarter of 2010 was estimated at 6,824,477.43 million naira as against the 5,872,694.58 million naira during the corresponding quarter of 2009 thus indicating an increase.

The economy, which can be broken into two broad output groups, that is, Oil and Non-oil sectors, had both sectors witnessing increased output in the second quarter of 2010. The non-oil sector growth was driven by growth in activities recorded in the wholesale & retail trade sector, while the oil sector output increased as a result of the Federal Government’s amnesty and post amnesty development programme for the Niger Delta which restored peace in the area thereby ensuring re-entry/ recommencement of operations and encouraging investments in the sector.

You can download the report below:
National Bureau of Statistics - Revised 2009 GDP and Estimates for Q1-Q2 2010 (635)

Access Economic Quarterly Q2 2010
FSDH – Economic and Financial Market Review and Outlook – HY2 2010
IBTC Quarterly Economic Review – Q2 2010

Here is Access bank’s outlook for the rest of the year:

- GDP growth to stay above 6% in the near – medium term. NBS recently projected that the economy would grow by 7.74% by end-2010, up from 6.66% recorded in 2009. However, the growth trajectory may be undermined by a downward spiral in oil price at the international market, amid weak demand fundamentals, poor state of infrastructure, sustained inflationary pressures and the possibility of breakdown of FG’s Amnesty Programme.

- Moderate inflationary pressures due to CBN’s AMCON, SME and Power Sector Intervention Funds. Expansionary nature of the budget, moderate increase in commodity prices, announcement effect of salary increase for public sector employees and the proposed removal of petroleum products subsidy may pose additional upside risks to price stability. However, inflation appears to be effectively balanced by the continued underperformance of monetary aggregates, well-anchored inflationary expectations, weak aggregate demand, adequate supply of food and petroleum products, as well as stability in Naira’s exchange rate.

- Naira to stay stable against the US Dollar in the near term. CBN remains the largest supplier of foreign exchange in the economy and with expected increases in sale of FX by oil companies following FG’s peace deal with militants, Naira would further stabilize at current levels. Naira’s outlook remains tied to size of external reserves, FX demand, sustained high crude oil price, as well as development in global economy.

- Domestic interest rate to remain stable at current levels. Decline in statutory returns and the erosion of confidence in the market pose upside risks to a stable interest rate outlook. However, the CBN extension of its guarantee for all interbank transactions from December 2010 to June 30, 2011 will likely stabilize rates at current levels.

- Equities market to experience rebound from recent lows. Improved investors’ optimism and expected positive effect of the AMCON arrangement would likely put key indicators of the equities market in an upward trajectory in the medium term, when the company is expected to buy up banks’ toxic assets.

- The bond market is set to receive a boost. We also anticipate an increase in state and corporate bond issues to better fund longer term projects. Also FG has plans to finance N897 billion of its total deficit worth N1.5 trillion from the local bond issues.

- Banks earnings likely to be suppressed, as competition is expected to reduce profit margin, especially with respect to interest rate spread. A resurgence in massive deposit mobilization drive may distort the relatively stable interest rates in the money market.

Executive Summary
“Market rode on the back of blue chips to marginal gain of 1.79%”
The NSE index which began 2010 with very promising up trend appears to be turning into a whimper as activities in February 2010 indicates unless things change fast. From an impressive and optimistic 8.5% ASI gain by January month end, the NSE finished the month of February with a 1.79% gain suggesting that the index has gone into a holding pattern by trading in a very tight range. The review conducted revealed that the market outcome achieved in the month far removed from the expectations at the beginning of the month from both ends of the investment market spectrum – investors and operators. Indeed, while most stocks have picked up or either stopped their erosion, the rate of recovery has been hampered by new volatilities; perhaps a distortion of trends owing to the re-entry of speculators in the market.

Although, the NSE ASI is not increasing by leap and bounds, it appears that some individual stocks within some sectors are being favoured by traders/investors as indicated by volume and price. February witnessed some activities which ought to have indicated a measure of improved liquidity situation and investors interest in the market, as measured by the rising profile of the volume and value of market transactions as seen in the upbeats recorded on some days in the month. The market however could not sustain the uptrend which appears to have been influenced by some investors selling into any uptrend to get out of their old losing positions. Reviewing the charts, the trading volume does not reflect convictions by traders. It seems that traders are unwilling to chase or buy stocks above certain price thresholds.

This is becoming a market of selective performance rather than a broad base rally which meant that trading in the market was motivated by a keen watch for stocks experiencing increased volume and price – with traders riding the trend. It would appear that despite the occasional positive signals seen, suggesting an imminent liquidity situation, the reality appears to be no more than an illusion at this time as the rallies could not be sustained over the month (indeed year-to-date). Investors, it would appear, are justifiably more careful with ‘trusting’ the stock market with their investible funds – which explains the downward trends in the midst of the upbeats. The unaddressed ‘loss of confidence’ in the market, accentuated by the increased political, business and investment risk profile of the country has combined to impact the market’s expected upswing.

Further, the unfulfilled promises of the regulators to improved the oversight and operating environment in the market is yet to be seen, or perhaps has faltered with aconstant shifting of the goal post. The operating environment is unsettling and provides little direction as to economic policy, regulatory framework and financing of the productive sectors of the economy to provide retail and institutional investors with the required liquidity. The NSE current bearish market trend will be two years old on March 5, 2010, and technically one would have expected that most of the aggressive sellers should have been washed out by now, but evidence abounds that some sellers are still hanging on to recoup some of their losses.

For the Nigerian capital market to get back on the road to recovery (a subject of our yet to be released NCM 2010 report); we must have a situation where the buyers overwhelm the sellers. It does not appear that a lot of investors are willing to or have been sufficiently motivated to take a brave stand at this point. Technically, certain positive indicators are beginning to emerge – the movement of the ASI is clearly indicative of a market that has bottomed out (though in danger of a major reversal if the protracted political crisis cum stagnation of the economy is left unaddressed), and the resurgence of the trading volumes.

The market in Q1 end and Q2 2010 is thus expected to move above the current levels as we ensure a sustained oil production targets, take major structural changes that encourages integrity and transparency at the NSE and SEC, reduce the country political risk considerably and devote time to set a clear cut direction for the economy; any capital market performance benchmarks. Failure to develop a roadmap for achieving a market recovery and secure a buy-in of the stakeholders, it appears that the anticipated ‘speedy’ recovery from Q3 2010 may be delayed or compromised. The long bearish trend has left most investors badly wounded and unwilling to invest in the capital markets.

The market regulators appear not to get this point.
We however remain hopeful and encourage investors to take the long view mindset in reviewing their portfolios and new engagements. This report allows you to appreciate the market in a more personal way; and empower you to engage in a much more intelligent manner. Thank you for reading and do take time to share with us your thoughts on the market, especially your personal realities as a guide in better appreciating how to relate with your professional financial advisers. E-mail our analyst at research@proshareng.com

LBS Executive Breakfast Session - March 2010 - Pt 1 - BJ Rewane (209).
LBS Executive Breakfast Session - March 2010 - Pt 2 - BJ Rewane (179)

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.

Vetiva 2009 Review And 2010 Outlook- Sectorial Analysis