Squandering a Golden Economic Opportunity

1. Monthly Economic News and Views
Lagos Business School
Executive Breakfast Meeting
Presented by B.J. Rewane
Financial Derivatives Company Limited
April 6, 2016
Squandering a Golden Economic Opportunity

2. 2
Outline
March in Review
Global & Regional Context
Outlook for April/May
Policy Direction & the IMF Article IV Review
Business Proxies & Stock Market
Political Risk Analysis

3. 3
The Squandering of a Golden Economic Opportunity
“There is a tide in the affairs of men.
Which, taken at the flood, leads on to fortune;
Omitted, all the voyage of their life
Is bound in shallows and in miseries.
On such a full sea are we now afloat,
And we must take the current when it serves,
Or lose our ventures”
-Brutus, Julius Caesar,Act 4
If an opportunity is omitted, you will find yourself
stranded in miserable shallows

4. March Highlights

5. 5
Macro-Economic Scorecard
S/N Indicator March 2015 March 2016 Percentage Change
1 Spot price (avg $’pb) 57.09 39.75 (-30.37)
2 Oil production (mbpd) 1.82 1.75 (-6.42 )
3 Treasury Bill Rates (%) 15.15 5.99 (-916bps)
4 MPR (%) 13 12 (-100bps)
5 Inflation (%) 8.5 11.4 2.90
6 External Reserves (US$’Bn) 29.79 27.87 (-6.45)
7 Exchange Rate (N/$)
Interbank 199.16 198.55 (0.31)
Parallel 220 322 (-31.68)
Source: NBS, OPEC, CBN, NSE, FDC Research

6. 6
Macro-Economic Scorecard
S/N Indicator Position as at March 29, 2015 Position as at March, 2016 Percentage Change
1 Market Capitalization (N’ Bn) 10,720 8, 690 (-18.94)
2 FAAC (N’bn) 435 345 (-6.76)
3 M2 (N’trn) 19.14 20.49 (Feb) 7.05
4 CBN PMI 48.9 45.5 (-6.95)
5 Vacancy Factor - Residential (%) 25 11.4 (-13.60)
6 Vacancy Factor - Commercial (%) 20.33 33.33 (-13.00)
7 Power grid (MW) 4,044.6 2,030 (-49.8)
8 Misery Index (%) 16 21.8 5.8
9 NIBSS Transaction(N’bn)
Cheques 548 501.17 (-8.55)
PoS
30 46.14 53.8
In 12 months there have been a general deterioration in macroeconomic conditions
Source: NBS, OPEC, CBN, NSE, FDC Research

7. 7
Scarcity Bites and the Budget Languishes
 Nigerian economy slides into a double dip slowdown
 Economy expected to contract for the second consecutive
quarter to 2% in Q1‟16
 2015 growth now estimated at 2.79%
 First time in decades when Nigeria has underperformed SSA
average

8. 8
Scarcity Bites and the Budget Languishes
 Contraction of economic activity has its genesis in a misaligned
exchange rate
 A consequence of sharply lower oil prices: 68.1% and
deteriorating terms of trade
 Compounded by chronic shortages of inputs of power, fuel and
forex

9. 9
Scarcity Bites and the Budget Languishes
 Economic imbalances exacerbated by:
 A dogmatic obsession with exchange rate rigidity
 A convoluted rationing of forex being abused by operators and regulatory
arbitrage
 Price control contradictions in the downstream petroleum sector
 Chronic underinvestment in the power sector
 Strategic acts of economic sabotage by vested interest groups
 Aided by collusion with insiders and policy making collaborators

10. 10
Q4 Data Output
Expanding Sectors Contracting Sectors
Sector (Y-o-Y) Q3’15 Q4’15
Trade 4.4% 4.69%
Agriculture 3.46% 3.48
Manufacturing -1.75% 0.38%
Arts, Entertainment,
Recreation
6.39% 6.54%
Accommodation & Food
Services
-5.42% -3.55%
Sector (Y-o-Y) Q3’15 Q4’15
Oil 1.18% -8.28%
Real Estate 2.06% 0.79%
Financial Services 6.56% 6.41%
Construction -0.1% -0.35%
Transport and Storage 4.86% 4.39%
Source: NBS Source: NBS

11. 11
Scarcity Bites and the Budget Languishes
 Factors curtailing growth include:
 Trade credit evaporation
 Shrinking supplier credit and bills for collection
 Cold feet by export credit agencies
 Import restrictions
 Astronomical cost of forex plus smuggling
 Power failure from the grid

12. 12
PMI Up in March
 PMI data from both FBN and CBN increased
in March
 FBN up from 50.6 to 54
 CBN up from 45.5 to 45.9
 Mainly due to inventory build up
 Hiring headcount is down
 Suggesting that inventory build up is defensive and
speculative as a hedge against possible currency
devaluation
52.6
54.4 54.2
44.6
50.6
54
49.2
51.2 51.2
47.2
45.5
45.9
40
42
44
46
48
50
52
54
56
Oct'15 Nov'15 Dec'15 Jan'16 Feb'16 Mar'16
FBN CBN Threshold
Source: CBN, FBN Quest

13. 13
Power Down Sharply in March
 Power output from grid down sharply to 2,030MW in March
from 2,695MW
 System collapsed for a few hours to zero output
 First time this century
 High temperatures averaged 33ºC and humidity of 80%-85%
 Sweltering heat and massive use of air conditioning are tasking
the grid

14. 14
Headline Inflation Spikes and will rise again
 Headline inflation reached a 34-month high of 11.4%
 Spurred by forex and petrol shortage
 Nigeria among the 12 most expensive countries in Africa
5.00
7.00
9.00
11.00
13.00
Oct'15 Nov'15 Dec'15 Jan'16 Feb'16
Monthly (YoY) Inflation Rate vs. MPR
Headline Inflation All items less farm produce Food Inflation MPR
Source: NBS

15. 15
Propelled by a Combination of Factors
Low
Low
Low
 Seasonality
Tomatoes
N6,000 (1Basket)
Pepper
N4,500 (1 Basket)
Yam
N500 (1 medium tuber)
Price Elasticity

16. 16
Low
 Cost Push/ Smuggling
Moderate
High
Low
Transport fares up
200%
Manufactured finished
goods up 20%
Palm Oil
N9,600 (30L)
Noodles
N1,800 (1 carton)
Propelled by a Combination of Factors
Price Elasticity

17. 17
High
Moderate
Moderate
Moderate
 M2 Propelled
 Forex shortage
Cement
N1,700 (50kg)
Diesel
N130 (1liter)
Sugar
N9,000 (50kg)
Flour
N8,800 (50kg)
Propelled by a Combination of Factors
Price Elasticity

18. 18
Unemployment and Underemployment Up Sharply
 A lagging indicator of falling corporate profitability, sales and margins
 Nominal figures are more startling when analysed demographically
 Unemployment is higher at the lower age bracket
Q3’15 Q4’15
15-24 years 25-34years 15-24 years 25-34years
Unemployment 17.8% 10.8% 19% 11.4%
Underemployment 31.8% 18.5% 34.5% 19.9%
Source: NBS

19. 19
Misery Index Up
 The Misery index analysis confirms a sense of national desperation and
anger
 Unemployment + Inflation = Misery Index
 10.4% + 11.4% = 21.8%
 When it increases in 2 consecutive quarters it results in electoral
defeat or a sharp rise in disapproval ratings
 Nigeria‟s ranking among miserable states is 6th

20. 20
Monetary Conditions
 Money supply grew marginally in February
 Shrank in March after the CRR and MPR increase
 Average long opening position in march was N306bn
608,969.19
817,519.18
566,659.97 542,564.00
306,481.65
-
100,000.00
200,000.00
300,000.00
400,000.00
500,000.00
600,000.00
700,000.00
800,000.00
900,000.00
Nov'15 Dec'15 Jan'16 Feb'16 Mar'16
Average opening position (N'm)

21. 21
FAAC Down
 The FAAC allocation (revenue shared by the states) has been sliding
since 2015
 In spite of improved revenue collection
0
50
100
150
200
250
300
350
400
450
500
Sept'15 Oct' 15 Nov' 15 Dec'15 Jan'16 Feb'16 Mar'16*
FAAC (N/bn)

22. 22
Stock Market
 FY‟15 corporate revenue up 3.18%, at par with GDP growth
 FY‟15 PBT down by 3.83%
 Stock market scott-free lost 17.17% in Q1‟16
 Volatility up 19.99%
 One year dollar adjusted return (-32.94%)
 Average P/E up to 8.26x
 AVDT down by 17.86% to N2.29bn

23. 23
External Reserves Accretion
 External reserves accretion of $40m in March to $27.86bn
 Imports and payment cover of 4.51 months
 Total forex sold by CBN up to $921bn in March
 Highest monthly volume in recent times
 Backlog of payments reduced marginally
 Airline unremitted funds now in excess of $600m
 Parallel market stable at N320-N324/$

25. Global & Regional Economics

26. 26
US Economy Resilient
 The U.S economy showing strength in spite of election
distractions
 Real GDP growth up to 1.4% in Q4‟15
 Initial estimates were for a growth of 1%
 242,000 jobs were added in February
 Unemployment ticked up by 0.1% to 5%

27. 27
US Economy Resilient
 Fed held interest rates steady at 0.25%-0.5% p.a.
 JanetYellen says US interest rate increases will be slower
 Alluding to the fact that global economic growth will be weaker in
2016
 Inflation eased to 1% in February from 1.4% in January
 Next Fed open markets committee meeting is on April 26/27
 Interest rates are likely to be unchanged and dovish stance maintained

28. 28
Euro Zone
 Caught between the Brussels bomb blasts and immigration
problems
 The EU is trying hard to avoid a deflationary spiral
 The ECB reduced its benchmark interest rate to 0%
 Deposit facility rate was cut by 10bps to (-0.4%)
 Lending facility was lowered by 5bps to 0.25%

29. 29
China: Slowing Growth, Rising Debt
 Chinese GDP growth rate of 6.9% in 2015 is the slowest pace in
25 years
 2nd largest economy in the world and SSA‟s largest investor
 Growth target of 6.5% - 7% in 2016
 China increased its debt to GDP rate projection to 3% in 2016
from 2.3% in 2015

30. 30
China: Slowing Growth, Rising Debt
 Devalued its currency over 4 times between 2015 and 2016
 Has external reserves of $3.2trn
 The Chinese currency will now join the four other Reserve
currencies in the Special Drawing Right (SDR)
 US dollar, British pound, Euro and Japanese yen

31. 31
Currency Markets
 Dollar depreciated 1.33% against the basket of currencies since the
March FOMC meeting
 The Euro gained 4.24% against the dollar to $1.1218
 Canadian dollar appreciated by 5.26% to $0.76/CAD
 Highest level since March 23

32. 32
Implications
 The US remains a major trading partner of Nigeria
 China is the leading supplier of finished goods
 Nigerian terms of trade improved marginally in Q1from 29.1
 Price of exports increased relative to imports
 Buhari and economic team are visiting China next week
 To raise additional funding to finance capital projects

33. 33
Top Trading Partners
INDIA:17.3% NETHERLANDS: 9.5% SPAIN: 9.5
CHINA: 25.6% USA: 9.9%
EXPORTS
IMPORTS
BRAZIL: 11.5%
INDIA:4.8%
 Three factors affecting trade:
 Forex restrictions, currency weakness, declining disposable income

34. 34
SSA- Nigeria Comparison
2016 SSA Nigeria
Population (m) 978 187
GDP ($’bn) 1,395.2 458
GDP per head ($) 1,427 2,448
Real GDP growth (%) 2.9 2.7
Inflation (%) 8.2 11.4
% of SSA
19.1
32.8
71.5% above SSA
-0.2% below SSA
3.2% above SSA

35. 35
SSA- Q1’16 Review
 3 countries (Ghana, Uganda and Kenya) have reported lower
inflation in March
 While Nigeria & South Africa are reporting a spike in inflation
 In Q1, four SSA countries increased interest rates to defend their
currencies
 In Angola and Ghana, Central Bank Chiefs shown the door
 Most emerging market currencies gained from higher commodity
prices

36. 36
Ghana
 Abdul-Nashiru Issahku is the new governor of the Bank of Ghana
 After former Governor Kofi Wampah retired early
 Issahku has been deputy governor since July 2013
 Worked previously at theWorld Bank, African Development bank
and Export Development and Agricultural Investment Fund

37. 37
SSA: Economic Outlook
 Growth in the East African Community will be boosted by
regional integration
 Economic growth in Central andWest Africa is forecast to slow
from 3% in 2015 to 2.9% in 2016
 Ghana‟s economy to soften to 3.7% in 2016, due to election
related tensions and high inflation
 Growth in Cameroon will moderate slightly to 4.7% in 2016
from 5.2% in 2015

38. 38
SSA 2016 Outlook
 Real GDP growth in SSA will slow to 2.9% in 2016 from 3.2%
 African Oil producing countries are bracing themselves up for
weaker fiscal revenues and increased pressure to cut spending in
2016
 Major challenge: maintaining a policy stance that supports economic
growth while combating weaker commodity prices and global
uncertainty

40. Commodities

41. 41
Commodity Prices in March
 Average oil prices may increase to as high as $42pb in April
 April 17 oil producers meeting unlikely to achieve any
meaningful agreement
 Iran and Saudi Arabia already bickering

42. 42
Commodity Prices in March – Grain Prices Bearish
 Weak outlook for grain prices in April
 Large stockpiles and prospects of a bumper harvest
 Increased production driven by lower costs and weaker currencies
 Cocoa prices to moderate as weather conditions improve in top
growing region inWest Africa – Ivory Coast
 Expectation of a shortfall in production will support sugar prices

43. Policy Changes

44. 44
IMF Article IV Consultation – Nigeria to Work Harder
 Growth in 2016 is expected to decline further to 2.3%
 Non-oil growth projected to slow to 3.1% in 2016
 Oil growth to remain negative at (-4.8%)
 IMF expects Nigerian Bonny Light to average $36.1pb in 2016
 Inflation expected to remain in the double digit region at 12%

45. 45
IMF Article IV Consultation
 Directors encouraged implementation of an independent price-
setting mechanism to address petroleum subsidy
 Welcomed tightening of monetary policies and recommended
targeting price stability
 Urged gradual increase inVAT and expanding tax base
 Stressed the need for structural reforms to enhance
competitiveness and support investment

46. 46
IMF Article IV Consultation
 Key risks to the Outlook
 Lower oil prices,
 Shortfalls in non-oil revenues,
 Further deterioration in finances of state and local Governments,
 Deepening disruptions in private sector activity due to constraints
on access to foreign exchange
 Resurgence in security concerns

47. Budget 2016 Passed at Last – Buhari Set to Sign
Exchange rate: N197/$.
Fiscal deficit: N2.2trn
Benchmark price of $38pb
.
Production of 2.2mbpd
 Senate has passed the 2016 budget of N6.06trn
 0.33% below proposed budget of N6.08trn
 Left the key assumptions unchanged
47

48. 48
Challenges
FUEL SHORTAGE
POWER SHORTAGE
FOREX SHORTAGE
Government is faced with three major challenges

49. Funding the Fiscal Gap
 Is N6.06trn reflationary or balanced against
2015?
 Depends on the exchange rate used
 President and Finance Minister to
source for international loans
Chinese EX-IM≈ $3bn2016: N6.06trn÷N300= $20.2bn
2016: N6.06trn÷N197= $30.76bn
World Bank≈$2bn
AfDB≈$1bn
2015: N4.49trn÷N190= $23.63bn
2015: N4.49trn÷N220= $20.41bn
Parallel Market
Interbank Market
-1.04%
30.17%
% Change
49

50. 50
S&P Cuts Outlook to Negative
 S&P cuts Nigeria‟s outlook to negative, rating remains at B+
 Due to exchange rate pressures
 Factors that could lead to a downgrade
 Deterioration of Nigeria‟s fiscal or external accounts
 Increased stress in the financial sector than currently expected
 Possibility of a credit downgrade would make it more difficult to
access international funds

51. 51
MPC Tightens Policy Stance
 MPC resumes tightening after three months of accommodative
monetary stance
 MPR up 100bps to 12% p.a.
 CRR up 250bps to 22.5%
 Asymmetric corridor narrowed to +2/-5%

52. 52
MPC Tightens Policy Stance
 MPC empowered to formulate forex policy
 Meaning that exchange rate changes can be made in between
meetings
 After the
 World Bank spring meeting
 Meeting with potential lenders
 Exchange rate policy review may take place in May

53. 53
Policy
 Government is targeting aggregate revenues of $12.5bn in 2016
 The new N50 per transaction stamp duty is a major earner
 A new communications tax on voice, data and Pay TV will fetch
$100m per month
 New vehicle registration tax based on the value (price of car) to
be introduced

54. Business Proxies

55. FAAC Allocation to Remain Low
 FAAC allocation likely to increase in March to N360bn
 Average oil prices in March were 15% higher compared to February
 Oil production down due to outages in the Forcados pipeline
Source: FMF, FDC Research
55
442.6
389.9
473.83
369.88 387.77 370.4 345 360
0
100
200
300
400
500
Aug-15 Sep-15 Oct-15 Nov-15 Dec-15 Jan-16 Feb-16 Mar-16
FAAC (N'bn)
55

56. 56
Volume & Value of Transactions to increase in April/May
 Transactions volume and value to increase after budget approval by
President
Source: NIBSS
0
500
1000
1500
2000
2500
3000
3500
4000
4500
PoS Cheque Neft
Dec-15
Jan-16
Feb-16
Volume (‘000)
0
200
400
600
800
1000
1200
PoS Cheque Neft
Dec-15
Jan-16
Feb-16
Value(N’bn)

57. Ships Awaiting Berth Down Sharply
 Ships awaiting berth will hover around 25
 Below 2014‟s average of 70 and 2013‟s average of 94
 Lower profit margins and shift in consumption patterns will continue to hurt
imports
 May increase in April due to an increase in orders for goods such as petrol
Source: NPA, FDC Research
57
28
0
100
200
300
400
0
20
40
60
80
Ships Awaiting Berth
Parallel Rate (N/$)
57

58. Rig Count will Remain Flat in Q2
 Nigeria‟s rig count in March is 3, down from 6
 Sharply lower levels than the U.S and other producers
 PIB and new fiscal incentives must change before new investments and rigs
Source: Baker Hughes, FDC Research
1543
394
0
50
100
150
200
250
300
350
400
450
0
200
400
600
800
1000
1200
1400
1600
1800
US
Canada
Nigeria
58

59. Power Generation to Improve Slightly
 Power output from the national grid
at 2500MW
 Approximately 50% lower than the 12-
month high
 Bombing of the Forcados pipeline
disrupting gas supplies
 Hydro power is improving because
of the rainy season
Source: Nigeria Power Reform
0
500
1000
1500
2000
2500
3000
3500
4000
4500
5000
Power Generation (Average) MW
59

61. Retail Industry

62. 62
Retail Industry
 Customer traffic to the shopping malls lower due to fuel shortage
 Retail prices for groceries, weekly and monthly needs are up
approximately 15%
 Consumers continue to down trade by patronising value brands –
buying cheaper goods
 Prices are reflecting the parallel market exchange rate and shortages
 Replacement cost pricing is being used for inventory valuation

63. 63
Retail Industry
 Wholesalers hoarding in anticipation of price increases has
reduced
 Inventory levels of cheaper goods growing
 Price volatility will increase as interest rates spike making carrying
costs high and prohibitive
 Importers of products now sourcing goods from countries with
weak currencies and quality products
 South Africa, Brazil,Argentina,Turkey etc

64. 64
Domestic Retail Industry
 Stability in the forex market will reflect in retail price level in April
 Cost pressures will persist with fuel scarcity, forex scarcity and naira
weakness
 Shift in consumer demand towards necessities and price inelastic
goods
 Brand variety of goods offered will shrink
 Inventory levels of cheaper goods will increase

65. 65
Retail Industry
 Prices of some goods increased slightly while others declined or remained flat
constant
Item January’16 February’16 March’16 Feb-Mar % Change
Rice (50kg) N9,000 N13,500 N13,500 -
Milo Sardine (125g) N150 N140 N175 25%
Heinz Baked Beans
(200g)
N199 N210 N180 -18%
Samsung Galaxy A5
(A500)
N61,000 N86,000 N80,000 -7%
Samsung Galaxy A8
(A800)
N90,000 N127,000 N142,000 12%
Peak Milk (900g) N2,000 N2,140 N2,140 -
Carton of Indomie
(Small)
N1,300 N1,800 N1,800 -
Source: FDC Research

66. Real Estate Industry
Vacancy factor in Lagos – Flat in March,
to be higher in April

67. 67
Lagos Vacancy Factor Index
 We are introducing the FDC/LagosVacancy Factor Index
 It measures the vacancy levels in (Residential, Commercial & Office
accommodation) in the Ikoyi,VI & Lekki axis
 High brow neighbourhood vacancy factor is a lagging economic
indicator
 An increase happens after a change in the level of economic activity
 For example, following an expansion, vacancy factor will decline
 More tenants than properties available

68. 68
Lagos Vacancy Factor Index (LVFI) – Flat in March
 Index flat in March‟16 relative to February‟16
 Compared to base year of January 2015, it increased by 76.9%
 Commercial VFI lower due to the small pool of alternatives available
in the short run
Month/year Residential Index Commercial Index
January 2015 100 100
February 2015 92.3 96
March 2015 96.2 91
January 2016 169.2 148
February 2016 176.9 148
March 2016 176.9 148

69. 69
Lagos Vacancy Factor Index (LVFI) – to increase in April
 Factors influencing LVFI
 Banning dollarization of rents
 Reduction in the number of visiting expatriates & oil industry workers
 Investor confidence sharply lower
 Inflationary pressures & disposable income erosion
 Higher interest rates making mortgages less attractive

70. 70
To Let/For Sale ratio
 To let/for sale ratio in March was 2.3:1
 Properties up for lease were 2.3 times more than properties that were
put for sale
 Economic downturn not as severe as depicted
 If so, more properties would be on sale
 Economic downturn reducing cash flow
 Hence, landlord‟s have decided to hedge this risk by letting properties
and spreading rents over a longer time span

71. 71
Outlook
 LVFI to increase pending a shift in Nigeria‟s economic cycle
 Pace of increase in residential index to remain above
commercial
 To let/ for sale ratio expected to increase as macroeconomic
headwinds shrink cash flow
 However, budget approval expected to have a positive impact on
LVFI in Q2‟16

73. Aviation Update
Nigerian aviation suffering from airline
blocked funds

74. 74
Global Aviation
 Global industry passenger load factor increased to 80.8% in
January 2016
 Industry loads are elevated while breakeven loads have declined
 This combination has supported the strong financial results of
airlines in 2015
 Average global fares in US$ terms fell 12% in 2015

75. 75
Global Aviation
 Strong appreciation of the US dollar
 There has been downward trend in exchange rate adjusted fares
 Recessions in Brazil & Russia caused declines in air travel demand
 Naira weakness threatens aviation in Nigeria
 Load factors in March through April were anaemic

76. 76
Global Aviation
 Easter spike but long term averages sharply lower
 Airlines suffering from remittance backlog and possible devaluation
jitters
 Average load factors by cabin
Class Ave. Load Factors
First 30%
Club 45%
Premium Economy 60%
Economy 40%

77. 77
Global Aviation
 Most carriers have increased their published fares
 Many have restrictions on non-gateway destinations
 (Heathrow, JFK, Frankfurt, etc)
 Some airlines are taking advantage of the situation
 Keeping fares flat and offering promos
 e.g. Emirates,Turkish, United & Kenya Airways
 Passengers are spending an average of 23 hours from Lagos to the
US

78. 78
Published fares are reflecting the forex backlog
British Airways Virgin Atlantic
First Class N2,668,686.00 ----
Business Class N1,946,916.00 N1,718,436.00
Premium Class N939,756.00 N903,006.00
Economy Class N834,976.00 N801,796.00
LOS – LON – LOS
British Airways Virgin Atlantic
First Class N3,061,350.00 ----
Business Class N2,065,320.00 N2,091,990.00
Premium Class N1,170,720.00 N1,194,240.00
Economy Class N989,490.00 N949,590.00
LOS – LON – NYC – LON - LOS

79. 79
Aviation
 Emirates have increased the London-Dubai frequency to 10 daily
 Putting B/A under pressure
 The backlog of airline remittances are at staggering levels
 CBN is claiming that airlines are receiving significant levels of
forex

80. Stock Market

81. 81
Equity Markets – Tepid investor sentiment
 The equity market has been mostly negative in 2016
 Scott-free index year to date return is now -17.17%
 The Scott-free Blue chip 30 index returned -1.89%
 Blue Chip Index in USD terms returned -1.87% and in euros -
6.46%

82. 82
Asset Mix – Investor’s sentiment moves in this direction
Asset Classes 15-Dec 16-Mar
N'bn % N'bn %
Equity 500.34 9.46% 449.08 8.15%
Money Market 586.75 11.09% 607.08 11.02%
FGN Bonds 3,009.19 56.88% 3,407.67 61.86%
Treasury bills 822.28 15.54% 611.05 11.09%
Mutual funds 28.69 0.54% 32.60 0.59%
State bonds 172.01 3.25% 169.85 3.08%
Supra-National Bonds 1.30 0.02% 1.31 0.02%
CORPORATE BONDS 125.40 2.37% 139.08 2.52%
Real estate 23.81 0.45% 24.30 0.44%
Cash & Others 20.61 0.39% 66.65 0.00%
TOTAL 5,290.38 5,508.67
 Allocation to equities declined from 9.46% in December 2015 to
8.15% in March 2016
 Due to the general decline in equities prices for the period

83. 83
 State bond allocation declined to 3.08% in March from 3.25% in
December 2015
 Due to possible state governments default
 Preference for FGN Bonds and Treasury Bills
 A marked pickup in average yields in 91-dayT-bill, NIBOR and 10-yr
FGN bond respectively
 Q4‟15: 5.3%, 1.7% and 12.2%
 Q1‟16: 5.9%, 7.27% and 12.35%
Analysis of Asset Mix

84. 84
 Corporate earnings dictated equity market
returns during the month
 NSEASI extends rally by 2.99% from February‟s
gain of 2.74%
 BringingYTD return of the index to (11.65%)
 Market capitalization increased by 2.99% to
N8.7trn
 The average daily volume of trade
increased by 31.57% to N791.89mn
 Average market PE ratio increased to 8.26x
from 7.75x
NSEASI March 2016 - Extends Gains
90,000,000
1,140,000,000
2,190,000,000
3,240,000,000
4,290,000,000
5,340,000,000
6,390,000,000
7,440,000,000
24,000.00
24,500.00
25,000.00
25,500.00
26,000.00
26,500.00
NSE ASI March 2016
Daily Volume Traded

85. 85
ScottFree Index
 Total market capitalization for the SFNG Total Share Index increased
by 3.04% to N8.66trn
 SFNG Total Share Index (representing 99.5% of the Nigerian equity market)
 Free-float market capitalization for the index decreased by 0.53%
from N2.98trn (Feb) to N2.96trn (Mar)

86. 86
ScottFree Index
 8 companies in the SFNG Total Share Index paid dividends in March
compared to the one paid in February
 Dividend yield for the index increasing from 3.63% in February to 4.13% in March
 Negative returns over the month of March
 Exception to Mid Cap 40 Index returning 0.95%

87. 87
ScottFree Index
 BC30 index lost 1.68% in March
 30 day volatility of 19.99%
 Sharpe ratio of 0.91
 1 year return of -32.94%
 Trailing P/E 5.31
 Market volatility, economic policy
direction and bank balance sheets
concerns have taken their toll on
businesses
ScottFree BC 30

88.  Data released from NBS during the month points to increased
investor uncertainty
 Unemployment Q3‟15: 9.9% vs Q4‟15: 10.4%
 Weak growth and high inflation
 CBN resumes tightening cycle, citing inflationary pressure
 Markets were shocked
 There was a kneejerk reaction following the CBN's announcement
 1.09% loss was recorded in the trading day
Soft Patch Forcing a Policy Reversal88

89.  2015 full year earnings season commenced
 Results were in-line with market expectation
 Systematic Important Bank „SIBs‟ released encouraging results
 Exception to FBNH and ETI who had earlier released profit warning
 2015 Pre-Tax Profit down by 3.83% from N869.04bn, Earnings up
by 3.18% from N4.25trn
2015 Earnings89

90. 90
Global Market Review
 Stock exchanges across the globe had a great
month with exception to GGSECI
 MSCI Emerging market index & CASE 30 with the
highest return of 13.03% & 22.42% respectively
 S&P 500 & FTSE 100 are rebounding back to
January‟s index of 2058.9 & 6242.32 respectively
 Backdrop of supportive liquidity environment of
Fed and oil price recovery
 YTD return of (0.041%) and (1.09%) respectively
2.99%
11.75%
1.13%
5.92%
13.03%
1.28%
6.60%
5.74%
-3.05%
3.10%
22.42%
-4% 0% 4% 8% 12%16%20%24%
NSE ASI
SHCOMP
MSCI Frontiers
MSCI Europe
MSCI Emerging Markets
FTSE 100
S&P 500
JALSH
GGSECI
KNSMIDX
CASE 30
Global Indices March 2016

91. 91
Sectoral Performance - March 2016
 The NSE Industrial Index up by 5.63%
 Led by gains of DANGCEM and CAP Plc 18.45 and 7.6%
respectively
 Positive earnings result of DANGCEM
 Year-to-date returns is in the negative territory of 9.49%
 The NSE banking index declined by 6.28%
 In spite of positive gross earnings of 10.89% and PBT of
6.63% respectively
 Earning results of Diamond Bank, ETI, FBNH, Unity Bank and
Stanbic IBTC are yet to be released
 Concerns still boarder around bank’s asset quality and
macroeconomic conditions
2.99%
0.97%
0.12%
-6.28%
-8.15%
1.90%
5.63%
-9% -5% -1% 3% 7%
NSEASI
NSE 30
Insurance
Banking
Oil & Gas
Consumer Goods
Industrial Goods
Sectoral Performance

92. Banking Sector Earnings - FY’15
 Tier 1 banks remain resilient in spite of macroeconomic headwinds
 Extraordinary items pushed up earnings
 Impairments are also up
 Average gross earning up by 17.64% from N1.38trn
 Average PBT growth was 29.59% from N332.29bn
 UBA and Access Bank were outliers with PBT growth of 21.8% and
87.99% respectively
92

93. Banking Sector Earnings - FY’15
 Banks like UBA and GTBank benefitted from Pan-African strategy
 Rising loan loss provision is worrisome
 2015: N55.42bn vs 2014: N42.38bn
93

94. Banks
 24.26% of total banking assets
 Risk weighted assets of N2.63trn
 23.12% of total banking deposits
 Sound risk management with NPL of
2.2%
 Efficiency ratio of 54.63%
 Well capitalized with CAR of 21%
 ROE of 18.42%
 Dividend yield -14.12%
 Strong and profitable retail banking
segment
 15.29% of total banking assets
 Risk assets of N1.83trn
 14.79% of total banking deposits
 Sound risk management with NPL of
3.21%
 Efficiency ratio of 42.01%
 Well capitalized with CAR of 17.96%
 ROE of 25.76%
 Dividend yield – 10.64%
ZENITH GTBank
94

95. 95
Beyond the Banks - FY’15 Corporate Earnings
Company Revenue
(N’bn)
% PBT (N’bn) % Finance Cost (N’bn) %
Forte Oil 124.62 (73.2%) 7.01 16.8% 5.15 22.29%
Ashaka Cement 17.41 (17.6%) 3.21 (38.88%) - -
Dangote Cement 491.73 10.3% 188.29 (11.3%) 54.35 43.7%
Lafarge Africa 267.23 2.46% 29.27 (27.46%) 11.21 (0.48%)
Nestle 151.27 5.45% 29.32 19.95% 4.86 (8.24%)
Champion Brewery 3.5 6.04% 0.21 119.6% - -
NB 293.91 10.3% 54.51 (11.3%) 7.71 43.7%
GSK 30.63 0.37% 1.15 (57.94%) 0.037 (27.61%)
Dangote Sugar 101.06 6.54% 16.54 8.35% 0.664 524.64%

96. Cement - Stark Contrasting Results
 Revenue growth due to Africa expansion
 Pan-African expansion of 47.8MT pa still on
track
 Revenue up 25.56% to N491.73bn
 Market share of 63%
 Gross Margins declined from 63.4% in 2014 to
58.96% in 2015
 Pioneer tax ups PAT by 13.68% to N181bn
Operating profit of N207.82bn
 42.3% of sales
 PE ratio of 15.77x
 DividendYield – 4.68%
 FY2016Target Price of N160
 Revenue up by 2.46% to N267.23
 Group consolidation costs pare profits
 PBT down 27.46% to N29.27bn
 Gross Margins at 30.8%
 Operating profit of N45.5bn
 17.06% of sales
 Forward integration strategy and reduction
in expensive fuel dependency to translate
to improve margins
 PE ratio of 7.64x
 DividendYield – 3.92%
 FY2015Target Price of N92
DANGCEM Lafarge Holicum Africa
96

97. FMCG - Same Sector Different Outcome
 Revenue up by 6.22% to N59.2bn
 Cost of sale ratio marginally
increased to 64.45% in 2015 as against
63.8%
 Finance cost rose by 65.99% to
N3.17bn
 ROA declined from 5.27% to 2.37%
in 2015
 Revenue edged up by 6% to
N151.27bn
 Cost of sale ratio marginally
decreased to 55.48% from 57.3%
 Finance cost down 8.24%to N4.86bn
 ROA declined slightly from 20.96%
to 19.9%
Unilever Nestle
97

98. 98
Outlook - Stay diversified and focus on the long-term
 Notwithstanding the 2016 budget passage, near-term headwinds to
persist as imbalances (unrealistic key assumptions) likely to intensify
 Currency misalignment remains a tail risk
 Valuations are relatively cheap but weak growth and challenged
banking system continues to affect investors sentiment
 Market sell off to begin after earnings‟ result announcement on lack
of other market catalyst
 Tightening financial conditions and lower oil prices to weigh on the
markets

100. Political Risk Analysis

101. 101
Political Risks – Economic backlash intensifies
 The Federal Government is suffering from an economic backlash
 Poor economic performance is eating into the favorability ratings
of the Buhari administration
 Inflation up, unemployment high and growth down
 The public is silently groaning and kicking

102. 102
Political Risk – Tough Political Challenges
 Misery Index has increased in 4 consecutive quarters to 21.8%
 The contentious re-run election in Rivers state was a proxy war
(APC vs the economy)
 If the economy is not reinvigorated
 Edo State and Ondo State may be difficult for the APC

103. 103
Political Risks – PDP is not credible
 The PDP is in complete disarray and is uncompetitive
 The real opposition will be within the APC
 Buhari needs to fill board seats with APC members
 The APC is split between the party machine and those in
government
 i.e Politicians,Vs Technocrats plus Conservatives

104. 104
Its the Economy Stupid – Bill Clinton
 Buhari runs the government but not the party or NASS
 The administrative apparatus of the government is still under a
veiled PDP machine
 Buhari needs to double down and focus on the economy
 An economic re-orientation is now critical

105. 105
Political Risks
 The SW wing of the APC is struggling to consolidate
 The SE, mainly PDP, is hoping to back a splinter Northern
candidate in 2019
 Will try to carry along the disgruntled South-South
 And galvanize the economically marginalized
 18% of GDP is wholesale and retail trade
 These are exchange rate dependent and will vote in favor of
economic prosperity

106. 106
Political Risks
 The message here is that Buhari must fix the economy urgently and
big time
 The political sands are shifting
 Analysts believe that Buhari will change economic direction in Q2
 He will make major changes to the apparatus of government
 And will lean more on professionals who can make things happen

107. Outlook For April

108. 108
Outlook April/May
 Buhari will go to China and get $3bn to $4bn of project-specific
funding commitments
 Time between commitment and cash flow will be long
 This will not alleviate the current forex shortages
 Rationing of forex and abuse will become a source of political
backlash
 The CBN will move from a rigid to a dual exchange rate policy

109. 109
Outlook April/May
 Intensify exchange controls and increase transparency of the rationing
process
 Thus reducing the current abuse
 This will provide mild forex relief but not enough
 The post-budget expenditure pressure on the reserves will force a
major rethink
 The pre-conditions for external borrowing will be the game changer

110. 110
Outlook April/May
 Headline inflation will breach 12% for the first time in 5 years
 Fuel scarcity will continue into the 2nd half of April especially
outside Lagos and Abuja
 Effective average price of petrol will be N120 per liter
 Stock market to stay flat and dip approximately 2 – 3% in April
 Foreign Portfolio investors will shun the Nigerian market

111. 111
Outlook April/May
 Until a clear path to an exchange rate policy emerges
 Interest rates will edge up as the level of T/Bills on issue increases
 The Buhari team will align itself with the transition Committee report
 The transition committee report have more solutions to the current
problem
 No need to reinvent the wheel
 They say it is better late than never

113. Bismarck J. Rewane, MD/CEO
Financial Derivatives Company Ltd.
Lagos, Nigeria
01-7739889
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