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By Patrick Atuanya & Bala Augie
As the year slowly grinds to an end and 2014 approaches we have decided to unveil our top investment themes for next year. The NSE has gained 39 percent year to date (Nov 29), providing ample returns for investors, however gaining alpha in 2014 may prove a little trickier.
Re-pricing of global risk:
There will be a reprising of risk globally in 2014 as abundant liquidity due to QE, starts to get rolled back by the US FED. Foreign investor holdings of Nigerian bonds and Treasury bills stood at $11.6 billion as at September 2013 (25 percent of total debt stock). If investors feel risk adjusted returns are more attractive in developed markets as US interest rates rise, then they will pull funds from Emerging Markets (EM), including Nigeria.
Scoping Sanusi’s successor:
Investors will be keenly watching to see if a credible successor is appointed to replace Nigeria’s highly effective CBN Governor Sanusi Lamido Sanusi. As one offshore fund manager told us “reforms at Nigeria’s financial sector will continue to require a safe pair of hands.”
For Banks size matters:
The NSE Banking index has gained 21.36 percent (Nov.27) underperforming the wider All Share Index (up 39 percent) year to date. This is largely as a result of regulatory actions (such as the hike in CRR for public deposits), which has squeezed bank earnings.
Tier one banks will in our opinion be better positioned to withstand the fallout from any further regulatory actions due to their broad access to cheap deposits. Tier I banks gross lending growth has averaged 21 percent over the past three years, compared with 15 percent for tier II names. They also have higher net interest margins and lower non performing loans to gross loans ratios.
Return of the large caps:
While small cap stocks have largely outperformed large caps in 2013, next year may however be different. Investors seeking some level of protection and safety against global uncertainty will be attracted to domestic large cap stocks.
Power to the people:
The successful take-off of Nigeria’s newly
privatised power sector has the potential to lift 2014 growth rates to double digits providing a boost to consumers and investors alike, (Forte Oil stock is up 1,300 percent and Transcorp 274 percent year to date) .
Operational problems abound though, from inadequate gas supply to power GENCOs to unrealistic assumptions in the MYTO model and it is uncertain when actual capex will be undertaken to improve output.
Watch the shrinking reserves:
The CBN’s gross dollar reserves of $44.5 billion (Nov. 28) are down 7.5 percent since June 3, while the Excess Crude Account (ECA) balance is down 70 percent in 2013 to $3 bn.
Meanwhile the rebasing of Nigeria’s economic statistics will push nominal GDP figures near the $400 billion mark, further exposing the inadequacy of fiscal savings as a percentage of GDP. We believe CBN reserves of below $40 billion; is a negative for the naira, macro- stability and equity markets.
As the 2015 general elections approach, fiscal spending is forecast to rise next year, while the rhetoric around the elections itself reach a fever pitch. Investors will be keenly watching to see if the crack in the ruling party gets wider before the end of 2014, or if they are papered over with the patronage that comes with pre-election spending.
Don’t get blindsided by Iran:
While traders are currently betting that the possibility of a comprehensive deal between Iran and the world powers is low, there is still the distinct possibility of a final deal happening. Iran which was OPECs second biggest oil exporter in 2011, now has its crude sales down by 60 percent since sanctions were imposed. A lifting of sanctions could potentially add 1.1 million barrels per day of Iranian oil to the markets depressing prices, which would be bad news for oil exporters like Nigeria.Brent crude, the benchmark for more than half the world’s oil, has fallen 3 percent this year after gaining 43 percent in the previous three years.
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