Over the past two years, Nigeria has offered stimulating returns to investors in the financial market and real sector. Our theme “Value in the Mire” is drawn from the likely unpleasant note in the investment space in 2014, which is a reflection of the possible price correction in equities (having returned 2012: 35.45% and 2013: 47.19%, respectively) as well as expected impact of 2014/2015 general elections. Our emphasis on strategic approach for consolidating on past gains guides the undertone of this excerpt.
Macro-economic indicators
Key global and domestic macro indicators are set to be the pillars of our growth outlook for 2014, as well as in the medium-term. While major indicators suggest a positive investment environment in 2014, we note the likely impacts of political tensions in the country as the 2015 elections draw closer. Notwithstanding, these macro factors support our optimistic case for Nigeria as a choice investment destination in 2014.
Equities market expectations
Equities market sustained previous year’s bullish run gaining 47.19 percent in 2013. Key drivers include buoyant corporate earnings and benefits and u-turn decision on QE tapering. Banking sector, consumer goods, industrial goods and oil and gas sectors retained dominance in terms of returns and activity level. With recovery in the global economy in sight, modest equities valuation, sustained attractiveness of the domestic economy, though, tainted with pockets of domestic political concerns, we expect positive returns in the equities market in 2014.
A myriad of factors including contracting interest and non- incomes and growing operating costs saw the Banking Sector record slower earnings growth (18% as at 2013Q3) as compared with 2012, when earnings growth averaged c.100 percent.
In our view, within upward trending yield environment in 2014, we expect banks’ asset mix to tilt towards treasuries. With the promising infrastructure and power sectors financing, we expect some level of risk asset growth but the level of asset quality should keep the cost of risk at around 2 percent.
Insurance stocks inarguably outperformed analysts’ expectations in 2013. Key drivers of this performance include regulatory reforms such as “No Premium No Cover” and emerging opportunities in the industry, such as micro-insurance amongst others. Hinged on higher quality of premiums and healthier balance sheets, and with 40.48 percent returns in 2013 (vs. 7.07% in 2012), we are modestly upbeat on the sector in 2014.
While the 2013 fundamentals and market performance of the Food and Beverages Sector stayed positive, 2014 performance will be driven by improved consumer spending, robust demographics and attractive fundamentals. We expect the sector’s return to be modest.
We forecast slower revenue growth for Brewery Sector’s to an average of 6 percent in 2014, while we anticipate earnings to stay upbeat as most brewers continue to improve on efficiency. The sectors expected return is put at 3.36 percent.
Building and construction sectors’ activities have remained buoyant and expected to support cement demand, paints and coatings operations as well as construction projects of the Industrial Goods counters. Players in the industry are sustaining their cost management efforts with some taking steps at reducing their loan exposure which should strengthen earnings expansion in the year.
As for Oil and Gas Sector, 2013FY a dark year in activity turnover when compared with 2012FY. The sector recorded turnover decline of -5.6 percent compared with 10.6 percent growth posted in 2012FY. With the key players’ focus on deepening non-regulated petroleum products, we expect much better corporate scorecards in 2014 with forecast earnings growth of 32 percent.
… strategy for optimal returns
Given our outlook for 2014, in light of the direction of the domestic economic macros as well as the expected return on equities and fixed income market, we advocate an actively dynamic portfolio strategy modelled around specific timing and asset classes for optimised return in 2014. In proposing a winning strategy that delivers alpha, our strategy considers the potential risk inherent within the economic and financial landscape owing to the uncertainties
We structured our strategy around three major objectives, namely – optimal portfolio strategy, technical trading strategy and the fixed income strategy with specific portfolios conjectured to reflect the different time horizon.
