Stanbic IBTC Asset Management Limited

Quarterly Economic Review Q1:2015

ECONOMIC REVIEW
The global economy is yet to witness significant growth improvement as the economy of
developed countries such as the United States is showing some level of moderation.
According to the U.S. Bureau of Economic Analysis, the Gross Domestic Product (GDP)
in the United States expanded at a seasonally adjusted annual rate of 2.20% in fourth
quarter (Q4) 2014, down from 3.90% recorded in third quarter (Q3) 2014. The
deceleration in real GDP growth in the fourth quarter primarily reflected a rise in imports,
decline in federal government spending, deceleration in non-residential fixed investment
and exports that were partly offset by acceleration in personal consumption
expenditures, rise in private inventory investment, and acceleration in state and local
government spending.
The Federal Open Market Committee (FOMC) on 18 March 2015, emphasized on
improved labour conditions within the United States, with strong job gains and a lower
unemployment rate. Accordingly, the United States Bureau of Labour Statistics in
February 2015 reported a decrease in unemployment rate to 5.50% from 5.70% in
January 2015. The FOMC further recognized that household spending is rising
moderately as decline in energy prices has improved household purchasing power.
Contrary to most analyst expectation of possible hike in interest rate at the recently
concluded FOMC meeting, the Committee anticipates that it will be appropriate to raise
the target range for the federal funds rate when it has seen further improvement in the
labour market and is reasonably confident that inflation will move back to its 2.00% target
over the medium term.
In the United Kingdom, the British GDP advanced by 2.70% year on year in Q4 2014 up
from a 2.60% increase over the same quarter of the previous year and the highest since
2007. This was driven by rise in consumption, investment and net trade. On the other
hand, the unemployment rate for the Brits according to Office for National Statistics
stood steady at 5.70% in the three months to January 2015, the lowest since mid-2008.
Similarly, the Euro zone, despite the battle with deflation which currently stands at 0.20% in February 2015 up from -0.50% in January 2015 recorded a slight improvement
in the annual GDP growth rate from 1.20% in Q3 2014 to 1.30% in Q4 2014.
The Chinese economy has continued to demonstrate a muted expansion as the annual
GDP growth rate remained steady at 7.30% in first (Q1) 2015 and Q4 2014. In addition,
exports in China decreased to $169.19 billion in February 2015 from $196.36 billion in
January 2015. Export growth has been a major component supporting China's rapid
economic expansion as export of goods and services constitute 30% of GDP.
Corroborating slower than usual growth in Chinas economy, the National Bureau of
Statistics of China reported that despite the ease on restriction to owning homes, Chinas
newly built house prices decreased 5.70% in February 2015 relative to the same month
of the previous year; thus representing the largest drop on record. This was due to fears
by citizens and investors that the price of the houses may decline further.
At the home front, the Nigerian economys GDP advanced by 5.94% year-on-year in the
last quarter of 2014, slightly down from a 6.23% increase in the previous period. It is the
lowest figure in five quarters due to a slowdown in the services sector. According to the
National Bureau of Statistics (NBS), services sector expanded 6.15%, compared with a
7.61% rise in the previous period. Internal trade went up 5.32%, slowing from a 6.81%
increase in Q3 2014; finance and insurance grew by 8.14% while real estate activities
increased by 5.96%.
Also, the annual inflation rate inched up for the third consecutive month to 8.40% in
February 2015 from 8.20% recorded in January 2015 according to the data released in
March by the National Bureau of Statistics (NBS). All major divisions that contribute to
the index increased at a faster pace during the period, the only exception being
Recreational and Culture Division which increased at a slower pace. The faster pace
growth in items that drive headline index was also evidenced in both the Food and Core
sub-indices. The imported food sub-index rose by 9.40% (year on year), 0.2 percentage
points from January. The rise in annual inflation for the third consecutive month is largely
attributable to the falling naira which has steadily pushed up prices of imported food
items.

M ARKET REVIEW
In the domestic equities market, going into 2015, the key dominant theme was the
heightened political risk on account of 2015 general elections. As such, the equities
market opened the year on a negative note and continued the bearish run throughout the
quarter. Consequently, the All Share Index (ASI) in January recorded the highest ever
loss in January over the last six years losing 14.70%. Following the bearish run
witnessed in January, we saw a rebound in the market in early days of February in the
run up to the general elections but this was short-lived by the postponement of the
election by six weeks as that initially triggered panic in the market causing a free fall. As
a result the ASI returned -8.38%.
During the quarter, the Monetary Policy Committee (MPC) of the Central Bank of Nigeria
(CBN) met twice in January and March, maintaining status quo on all the monetary policy

tools as the Monetary Policy Rate (MPR) was held constant at 13.00%. The committee
at both MPC meetings held in Q1 2015 emphasized that the decision made at the
November 2014 MPC meeting is still adequate to ensure stability in the economic and
financial system. In another development, following the placement of Nigeria on a
negative watch list by JP Morgan due to the less liquid flow of dollars within the system,
the apex bank increased the Net Open Position (NOP) limit of banks from 0.10% to
0.50% of the banks shareholders fund. This is to enable the banks take some position in
the provision of foreign currency to meet genuine demand in the system.
In the currency market, the USD/NGN experienced severe pressure earlier in the quarter
as foreign investors continued to reduce their exposure to emerging and frontier markets
like Nigeria. As such, the USD/NGN further depreciated by 11.22% from N182.00 levels
to N205.00 due to shortage of dollar flows and increased demand from exiting foreign
investors as well as genuine demand from importers. In a bid to calm the pressure on
the USD/NGN and close the gaps in foreign exchange market, the CBN on 18 February
2015 scrapped the Retail Dutch Auction System (RDAS) and Wholesale Dutch Auction
System (WDAS). In light of this, the new forex market consists of two segments i.e. the
inter-bank foreign exchange market (where 90.00% of forex transactions are carried out)
and the Bureau De Change (BDCs). The apex banks intermittent intervention in the
market and the sale of dollars by oil multinationals also cushioned the pressure at the
interbank. As a result, the USD/NGN which opened the quarter at N183.01 depreciated
by 8.76% to close the quarter at N199.05. Also, the foreign exchange reserve declined
by circa 13.55% from $34.47 billion to $29.79 billion owing to the increased demand of
dollars and the decline in crude oil prices.
In addition, the apex bank on 03 March 2015 commenced the operation of the Treasury
Single Account (TSA) system which seeks to pull all the funds meant for the Federal
Government i.e. MDAs (such as Federal government Ministries, Departments and
Agencies) into a single account in the coffers of the CBN. By implication, some funds
such as FAAC allocation belonging to the Federal government which ordinarily would
have flowed into the system via the deposit money banks are now retained in the TSA by
the CBN. Furthermore, the apex bank revised the Cash Reserve Ratio (CRR) monthly
averaging debit to bi-monthly averaging debit in a bid to ensure excess liquidity is timely
mopped up from the system. These measures should significantly improve CBNs ability
to effectively manage the liquidity in the system. In light of these developments, yields
across the curve took on a hawkish trend due to the increased sell off by foreign
investors or lack of active participation following the negative watch placed on Nigeria.
Yields rose by an average of 250 basis points across the curve with greater movement
experienced at the short end of curve as banks sold their short dated securities
particularly treasury bills due to tight liquidity in the system causing a rise in yields by
circa 200 basis points. In the bond market, yields peaked at 16.50% during the quarter
due to the sell off by foreign investors on the back of negative watch placed on Nigeria
for JP Morgans GBI-EM Indexes. Yields assumed a new level of about 100bps decline
relative to its quarter high as calm had returned to the market with positive outlook
around the conclusion of presidential elections and anticipated peaceful transition.

OUTLOOK
We remain less optimistic concerning the release of Q1 2015 result by companies listed
on the Nigeria Stock Exchange as we opine that the results of these companies will be
significantly impacted by the exchange rate devaluation and reduced consumer
spending especially in the Fast Moving Consumer Goods and Industrial sectors. Also,
we expect the Banking sector to continue to face regulatory headwinds as the apex
regulator continues to tighten liquidity in a bid to curb inflation and stabilize exchange
rate. However, upon the successful conclusion of elections and peaceful transition of
government, we expect to see significant improvement in investors sentiments as the
election has been the single largest factor driving market sentiments. Consequently, if oil
prices are sustained at about an average of US$55 per barrel, we expect the overall
market performance to be positive in second quarter (Q2) 2015.
On the domestic scene, we expect increased liquidity in the system owing to over N1
trillion OMO maturities, N500 billion bond maturity (i.e. 4.00% April 2015 FGN Bond) and
FAAC inflow of circa N200 billion for the respective months in Q2 2015. In addition, the
Q2 2015 bond issuance calendar released by the Debt Management Office showed a
reduction of circa 16.50% in the proposed volume of bonds to be issued in Q2 2015
compared to the actual volume issued in Q1 2015. In light of this, we expect to see
yields decline early in the quarter across the curve by circa 100 basis points due to the
huge liquidity expected in the system and pressure from investors seeking outlets for
their maturities. Furthermore, in a bid to stem the impact of the excess liquidity in the
system, we envisage increased issuance of OMO bills by the CBN. As a result, we
expect yields in the treasury bills space should trade within a range of 13.50% to 14.50%
in Q2 2015 while bond yields should hover around 15.00% level for the same period. In
another vein, we expect that the successful conclusion of the Presidential election with a
new president elect in the person of Retired General Muhammadu Buhari should restore
reasonable level of confidence to investors with regards to investing in Nigeria. Possibly,
the current downgrade of Nigeria from BB- to B by S & P could be reversed in the near
term as the major component of uncertainty surrounding Nigeria has been laid to rest.
Consequently, we expect yields in both the treasury bills and bonds market to continue
to chart a downward trajectory as renewed interest in Nigeria by the foreign portfolio
investors should drive prices up and increase the downward pressure on yields.

CONTACT US: Jide Allo or Ehis Uzenabor WEALTH HOUSE Plot 1678 Olakunle Bakare Close Off Sanusi Fafunwa Victoria Island Lagos P. O. Box 71707 Victoria Island Telephone: +234 (0) 1 2801266 Ext 2315:
1423, Fax: +234 (0) 1 2805442, 2805443 Website: www.stanbicibtcassetmanagement.com