Tuesday 21 January, 2014/Cardinal Stone
Light in the macro tunnel - growth as the global anthem
There is a general upbeat expectation for growth, as prospects improve in advanced economies. Global growth is projected at 3.1% by the International Monetary Fund (IMF), with the US economy expected to see the fastest growth among developed economies, despite the expected asset purchase tapering from January 2014. On the other hand, key emerging market economies would be in a slower growth mode relative to previous years, as China for instance concentrates on reforms. Notwithstanding, emerging markets, would continue to be a key driver of global growth in 2014.
Nigeria - Stable macro, rising political intrigues
Nigeria's Gross Domestic Product (GDP) is projected to grow at 6.75% in 2014, higher than 2013 estimate of 6.2%. Despite the optimism, we note that Nigeria's output growth remains susceptible to weather shocks (which affect agriculture) as well as dwindling exports of crude oil resulting from oil theft and a slow-down in global demand. With a new Central Bank of Nigeria (CBN) governor expected on or before June, 2014 poses a lot of uncertainty for monetary policy. Irrespective of who is appointed, we do not expect a sudden overhaul of monetary policy given the destabilising effect this would have on the economy. Hence, we expect to see continued tightening, especially in H1' 14. We see a high probability of Naira devaluation given the likely decline of both crude oil revenues and foreign exchange reserves in 2014. While we expect inflation to be higher in 2014, with core inflation posing a major risk in the face of likely excessive liquidity, single digit average is still achievable for the year. On the fiscal side, though budget assumptions are deemed conservative, achieving the oil production budget benchmark will prove daunting with the challenges of bunkering and pipeline vandalism carried forward from 2013. Political intrigues would heighten in 2014, as the race for 2015 elections peaks - posing some risk to macroeconomic stability.
Financial markets - Is moderation looming
With the record gains seen in the equity market over the past two years (c.35% and c.47% in 2012 and 2013 respectively) we expect a slow-down in 2014. Hence, our expected return on Nigerian equities in 2014 is about 10%. We expect fixed income yields to rise with modest returns in the low single digits and also expect shorter tenored treasuries to continue to see more interest as investors seek to minimise duration risk.
Our top picks
Though we project a moderation in equity market return from the record five year high of 2013, we remain bullish on the financial services stocks with UBA, ETI, FCMB and CUSTODYINS as some of our top picks. We highlight the fact that a few of the stocks in the consumer goods sector (e.g NESTLE, NB, CADBURY) would likely continue to see strong investor interest due to illiquidity premium and foreign ownership structure.
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