According to the National Bureau of Statistics, headline inflation in December inched up by 8.0% y/y. This marks a 0.1% rise from the 7.9% recorded in November and the second consecutive rise in inflation rate since October. In effect, inflation remained in single digits throughout 2013.

The consumer price index was demand-pushed in December given the festive season. Prices generally rose on the back of increases in eight of the eleven non-food divisions which contribute to the Core sub-index. Nevertheless, the upticks were offset by slower increases in “Alcoholic beverages, Tobacco, and Kola”, “Housing water, Electricity, Gas and Other Fuels” and “Transport” divisions. Consequently, the core index rose slightly by 7.9% in December, up from 7.8% in November marking the sixth sequential climb in the core index since July.

On the other hand, the Food sub-index grew by 9.3% in December, the same rate as it did in November. The rise in the Food sun-index was impacted by the rise in the price of Bread and Cereals, Meat, Fish and Dairy classes. Month on month, the index rose at a faster pace climbing by 0.78% in December relative to the 0.72% in November. This marks the highest month-on-month climb all through 2013.

 In summary, the percentage change in the average Composite Consumer Price Index for 2013 stood at 8.52%. This indicates a 3.72% contraction from 2012 levels of 12.24%. Despite the slight rise in the Headline Inflation in December which was expected due to the festive season, the CPI remained rather modest at 8% with a twelve month average of 8.52%.

Likely short term impact on the markets:

Fixed Income:

The bond market over the past week has seen sell-offs as traders reposition for a DMO auction this week. Post-auction, we anticipate yield contraction as system liquidity reduces over the month.

Equities:

We expect little reaction in the equities market. From a valuation perspective, the Nigerian equities market still appears attractive relative to other African markets although, the NSEASI is fairly priced at 14.60x price-earnings-ratio. This compares closely with 14.75x P/E for the Nairobi stock exchange and 20.40x P/E for the Johannesburg Stock Exchange (vs. 11.52x for emerging markets MSCI according to Bloomberg data).

Inflation Outlook:

The single digit inflation trend achieved all through 2013 reflects the strict monetary policy stance of the Central Bank over the year. We forecast about 150 basis points average jump by end of 2014. Inflation averaged 8.52% in 2013. Our forecast is driven by elevated fiscal spend ahead of the 2015 elections. Also due to statistical effect, a low 2013 base will impact inflation higher.

Source: Investment Management & Research

Investment One Financial Services Limited