February 01, 2011

“We project a base case return of 18% for NSE ASI, which would largely be driven by banking (top picks: Zenith Bank, Access Bank and First Bank), Oil and Gas (top pick: Oando), and Food/Beverage stocks (top picks:Dangote Flour and Flour Mills) with expected returns of 30%, 18% and 21% respectively.” – Vetiva Research

 

 

Download the 2011 economic and financial outlook report titled “The Tipping Point”, where we  present our views on the direction of key macro variables and the attendant implication on the capital market. Kindly see highlights below:

 

Global Growth: Mixed Outlook, Overall positive but fragile

1.We align with the broad projections that emerging and frontier markets would remain drivers of global growth even as advanced economies focus on debt, deleveraging and fiscal consolidation (see our report titled Underlying Assumptions – 2011 Outlook dated January 4, 2011).

2.Notwithstanding the positives of the emerging markets, it is important to watch out for rising inflationary threats on the back of increasing commodities and energy prices.

 

Nigeria Macro Picture: Our crystal ball

1. Politics: With voting at the primaries adjudged as being relatively free and fair, we see it as a pointer to the April general polls, and expect this to gradually douse the impact of political uncertainty in the financial markets.

2. GDP Growth: We allude to government’s projection of at least 7% growth, though slightly lower than IMF’s forecast of 7.4%. We expect that the non-oil sector particularly agriculture, retail and wholesale trade would continue to drive economic growth. 
3. Inflation:Inflationary pressures are prevalent. We believe inflation would remain in double digits in 2011 despite a contractionary stance by the CBN.  Pre-Election spending spree, increasing energy and food prices on the global scene and the implementation of the deregulation policy (H2’11) are the most obvious threats to inflation. Following from this, interest rates are expected to continue to spike upwards even as bond yields become more attractive.

4. Exchange Rate:As revealed by CBN’s renewed stance on exchange rate stability,     the naira would likely remain stable in 2011, within the N150/US$ (+3/-3%) band as the MPC has taken steps to constrict dollar demand pressure through the hike in interest rates. More importantly, oil futures are projected to remain >$90/barrel in 2011. This, alongside our expectation of stable oil productionvolumes supports healthy reserves.

We remain long equities

1. Notwithstanding, the expected rise in yields on fixed income securities and the implied preference over other asset classes, we make a case for equities given their current low valuations (average forward P/E of 10.5x compared to similar emerging/frontier markets like South  Africa (JALSH) 15.7x, Brazil (BOVESPA Index) 13.6x, India (BSE SENSEX Index) 16.7x and China (HANG SENG Index) 14.8x. Lending support to this is the fact that investment alternatives are limited and the fixed income market is shallow.

 

2. Therefore, we project a base case return of 18% for NSE ASI, which would largely be driven by banking (top picks: Zenith Bank, Access Bank and First Bank), Oil and Gas (top pick: Oando), and Food/Beverage stocks (top picks: Dangote Flour and Flour Mills) with expected returns of 30%, 18% and 21% respectively.

 

Click Report to download this

 

PABINA YINKERE, Head, Research Division, Vetiva Capital Management Limited

Plot 266B, Kofo Abayomi Street, P. O. Box 73530 Victoria Island, Lagos, NIGERIA

Tel: +234-1-4617521-3, 2700657-8; Fax: +234-1-4617524., Website: www.vetiva.com