Nigeria Strategy - H1 2015: ARM (Report)

Table of Contents

  • Summary
  • Introduction
  • Review of Global Economy and Markets
  • Key Developments in Domestic Economic and Policy Environment
  • Economic Review and Outlook
  • Capital Markets Review and Outlook
  • Capital Markets Strategy
  • Abbreviations

Read the full report below.

Summary
Global growth softened over H2 2014 as a tepid economic macro-picture across Europe and Japan combined with EM deceleration to offset robust growth in the US. Reflecting the uneven economic pattern across countries, IMF thrice downgraded global growth forecasts over H2 14.

Feeding off the divergent economic signals, global financial markets headed in different directions with US equities outperforming DM peers while commodities buckled on the heels of slack EM demand.

One key outcome of the mixed global growth picture is rising monetary policy divergence with the threat of deflation and slowing growth driving further policy accommodation by BoJ, ECB and PBoC while strengthening economic fundamentals provided conviction for US Federal Reserve to retrench its $85 billion monthly LSAP program over 2014.

In the aftermath of the Fed’s decision, the USD firmed while commodities markets re-coupled with underlying fundamentals, with oil prices plumbing to multi-year lows—aided by OPEC’s reluctance to cut cartel production. Reflecting depth of fundamental weakness, the bear trend in oil emerged despite heightened geopolitical tensions in East Europe after Russia’s actions in Ukraine, which drew western sanctions and unrest in Iraq and Syria. The shockwaves of the declines hit emerging markets, and in tandem with weaker portfolio flows, delivered significant pressures on currency and market performance.

Nonetheless, political tailwinds offset flagging growth concerns to drive robust market performance in some countries, in particular India — following the election of pro-business Narendra Modi.

Similar to the slowdown across emerging markets, economic growth across Africa softened with the IMF lowering 2014 forecasts for SSA by 30bps from H1 14 to 5.1% YoY reflecting the combined impact of bearish commodity prices, tightening external financing conditions, civil unrest and the Ebola epidemic across West Africa.

Despite still strong appetite for African debt in 2014, slowing growth concerns and balance of payment weakness resulted in significant currency and asset price volatility across the continent. The foregoing was most evident across Nigeria’s financial markets with equities recording their worst annual return since 2011 (-16.1% YTD), underpinned by sizable foreign outflows in the aftermath of the oil price downdraft. The eroding foreign influence in financial markets and tumbling FX reserves drove the Central Bank of Nigeria (CBN) to an 8% upward adjustment of naira peg to N168/$. The apex bank also tightened monetary stance resulting in a spike in yields across the naira curve in Q4 14. Elsewhere, on the domestic front, GDP growth decelerated 32bps QoQ to 6.23% in Q3 14 as contraction in oil GDP (-3.6% YoY) offset impact of higher non-oil GDP growth (+80bps from Q2 14 to 7.5%). Amid the dour economic picture, inflation maintained its single digit run for the second consecutive year averaging 8.1% YoY – 40bps lower than 2013 mean on improved food production which contained conflict-induced shocks to food prices.

Going forward, Saudi Arabian intransigence over cuts to oil production and weak EM growth continue to drive scope for weaker oil prices over H1 15, given supply glut. Assisted by stronger US economic outlook, IMF forecasts an uptick in global growth over 2015 as oil-consuming countries benefit from lower energy costs and improved current account balances.

On the flipside, the depressed oil prices, and commodities, pose daunting challenges to economic managers of commodity exporters in the absence of fiscal buffers to smoothen government expenditure.

Further complicating outlook is the prospect of greater monetary policy divergence as the US looks set to normalize interest rates over 2015 whilst the ECB looks set to unleash further monetary stimulus to stave off deflation; global financial markets look set to be roiled by volatility over 2015.

Consequently, whilst Africa’s economic growth remains robust, plunging commodity prices and a heavy electoral cycle drive a moderation in 2015 growth projections and prospects for FPI interest in the continent’s financial markets.

Closer to home, cocktail of softer crude receipts, weaker FX reserves, double digit inflation, and higher fiscal imbalances set the stage for bearish asset class performance. Whilst the keen nature of Nigeria’s 2015 general elections create uncertainty over likely policy trajectory of the winner, the altered fiscal landscape following the oil plunge points to limited flexibility and growing importance for greater momentum for structural reforms. The winner also faces the burden of battling a raging insurgency in the North East and tackling oil theft in the Niger Delta.

Overall, a more volatile external environment compounded by tamer macro-economic balances set the stage for ‘domestic flight to safety’ theme across naira assets, which informs a strategy of rotating into quality names, amid a generally boorish outlook. For equities, whilst potential for aftershocks make us reticent to fully succumb to the enticements of long-term attractive valuations, the naturally lower risk profile of top players in most sectors mitigates such fears.

For fixed income, fundamental underpins of higher supply of debt to finance deficits and tight CBN forward guidance on monetary policy speaks to high yield environment but we will place more emphasis on sovereign exposure than on sub-nationals or corporates.

Nigeria Strategy – H1 2015: ARM

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Source: ARM Investment Managers

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