Nigeria Strategy Report H1, 2013 - ARM Research


Monday, January 28, 2013 / ARM Research  

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Despite looming risks, coordinated policy action in major markets led to signs of economic recovery, particularly in leading emerging markets in the tail end of 2012. We believe this development moved the risk facing the global economy away from being dominated by high impact uncertain events towards more conventional growth concerns which are nonetheless still important.

The inclusion of Nigeria into bond indices, in response to more favourable domestic policy drove an upsurge in portfolio investments. Alongside this, however, we believe domestic policy in 2012 also tied Nigeria more closely to trends in global oil prices.

Incidentally, oil prices found firm support in H2 2012 amid substantial turbulence in global investor sentiment and economic performance. We explore trends that suggest crude oil pricing will continue to be undergirded by improving economic outlook, particularly in major emerging markets, in 2013.

The NSEASI rebounded sharply from its 16.3% decline in 2011, rising 35.4% in 2012—30.4% in H2 alone. Performance was underpinned by a major turnaround in the banking sector, which rose 50.5% in 2012, as well as continued buoyancy of Brewers (up 43%). An H2 2012 surge in the Banking and Consumer sectors underscored a significant increase in foreign portfolio inflows, but also a modest rebound of domestic investor interest in the face of improving conditions.

After the post MPC meeting spike in July, fixed income yields contracted sharply, falling as much as 400bps on average for FGN bonds in Q3 2012. Declines were mainly on the back of a sharp increase in foreign investments sparked by Nigeria’s inclusion in the JP Morgan Emerging Market Bond index though a moderation in the implementation of monetary policy, with increased currency stability, also supported fixed income prices.

We believe portfolio flows will attain heightened significance in Nigerian capital markets, tying outlook much more closely with global trends and oil prices.

This trend is underscored by recent domestic policy stance.

We expect buoyant performance in Nigerian equity markets to persist in 2013, largely on the back of a recovery in the global cyclical theme as global economic outlook improves. This should drive a tendency towards valuation convergence between domestic cyclical (e.g. banking and cement sectors) and richly valued defensives (brewers, food and personal care) amid an overall rerating of the Nigerian market.

We also expect duration to gain increasing momentum in the bond markets, though performance could become more volatile in view of many uncertainties in domestic markets and policy. We also see heightened risks for naira assets though we believe these are contained by more benign global economic outlook and increasingly supportive policies in major markets

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