FINANCIAL MARKETS ANALYSIS FOR 4Q 2014 & OUTLOOK FOR 1Q 2015 REVIEW & Q2-H OUTLOOK

Transcription

1 FINANCIAL MARKETS ANALYSIS FINANCIAL MARKETS ANALYSIS FOR 4Q 2014 & OUTLOOK FOR 1Q Q 2015 REVIEW & Q2-H OUTLOOK JANUARY 2015 MAY 2015

2 EVALUATION APPROACH This analysis follows a top-down approach, focusing on the following key areas: Fig 1 : Top-down Evaluation Approach Global Analysis What were the global trends/ occurrences and their likely impact on the Nigerian financial markets Source: DLM Research Regional (Africa) Domestic (Nigeria) Pension Industry & Financial Market What were the trends in the African region and how did they impact the business environment What were the Nigerian political, economic (monetary/fiscal), legal, social and/or technological trends that impacted industries What were the trends in the financial industry/markets and regulatory environment that impacted the respective industries? 2

3 SCOPE OF ASSESSMENT: PESTLE Political Economic Social Technology Legal Environment Global X X Regional (Africa) X X X Domestic (Nigeria) X X X LEGEND: Applicable; X Not Applicable 3

4 OUTLINE Global Macroeconomic Highlights 5 Regional Performance Highlights 12 The Nigerian Economy 16 Focus on the Pension Industry 25 Financial Markets - Analysis 28 Market Outlook 73 4

5 GLOBAL MACROECONOMIC HIGHLIGHTS DUNN LOREN MERRIFIELD 5

6 SOCIO-POLITICAL & ECONOMIC HAPPENINGS - GLOBAL Oil Prices : Despite numerous request for cut in oil productions, OPEC has left its members output targets unchanged whilst choosing to battle for market share with U.S shale producers by cutting oil prices for Asia. Stand-off on Greece bailout: With Greece facing bankruptcy and the recent deadlock in bailout negotiations, the possibility of a Greece exit from the Eurozone is looking feasible. This could cause a financial contagion as investors wake up to the fact that euro membership is not irreversible. Russia-Ukraine conflict: With the conflict between Ukraine and Russia still ongoing despite truce talks, the sanctions on Russia is still in play. With the possibility of a Greece exit from the Eurozone there could be a flight to safety as depositors pull euros out of other vulnerable Eurozone members such as Portugal, Spain or Italy to avoid taking a hit. Given current oil price and Nigeria's dependence on oil revenues, funding risks arise. Consequently, this limits the country s capabilities to fund its fiscal activities. 6

7 ENVIRONMENTAL HAPPENINGS - GLOBAL Earthquake off Papua New Guinea: A powerful earthquake of magnitude- 7.7 rattled the South Pacific nation of Papua New Guinea on March 30 th 2015, generating a small tsunami of half a meter (1.5ft), though with no reports of damage. South Australia bushfires: Thousands of Australians fled their homes as bushfires raged across the nation s south on, January 3 rd 2015; laying waste to many homes, and displacing residents of 19 communities. Flash floods in north-western Tanzania: Flash floods killed c.38 and injuring c.82 people in north-western Tanzania. The flood also destroyed food crops in the agricultural region located about 1,000 km from the commercial capital- Dar-es Salaam. Avalanche and flash floods in Afghanistan: Avalanches and floods submerged entire villages throughout northern Afghanistan; killing c.316 people, and leaving hundreds wounded. 7

8 WORLD ECONOMY GDP Growth Brazil Quarter-on-Quarter Source: Trading Economics, CBN, DLM Research Year-on-Year Q1 14 Q2 14 Q3 14 Q4 14 Q1 14 Q2 14 Q3 14 Q4 14 (%) (%) (%) (%) (%) (%) (%) (%) China Euro Area India Japan Russia UK USA Egypt South Africa Nigeria Comments In 1Q, 2015, the US led the global impetus to output growth as consumer demand strengthened on the heels of falling oil prices, lower US oil imports and accommodative monetary policy. In contrast, in the Euro area, continued output decline, in the face of positive oil price shocks, made the European Central Bank (ECB) to introduce a massive 1.1 trillion asset purchase programme, commencing in March 2015, involving a 60billion monthly asset purchase. Lower commodity prices were weighing heavily on output growth, especially in the oil exporting countries. In addition, expectations of a rise in US short-term interest rates continue to fuel capital outflows and currency weaknesses in the emerging markets and developing countries. 8

9 WORLD S MONETARY POLICY RATES WATCH Countries Current Policy Rate (%) Inflation Rate (%) Q1 Q2 Q3 Q4 Q1 USA UK EUR CAN AUS MLY S/A CHN BRZ IND RUS NIG GHN Source: Central Banks, Trading economics; DLM Research Note: Inflation March 2015; Policy Rates March /April 2015 Comments Most central banks kept policy rates relatively stable over the period to maintain economic stability. The sustained disparity between policy rates creates an incentive for the continued flow of FPIs to the BRICS nations. Nigeria s headline inflation averaged 8.40% in Q12015, up from 8.00% and 7.83% in Q4, 2014 and Q1, 2014 respectively. Given our inflation expectation for the fiscal year, we remain persuaded that the CBN is likely to maintain its contractionary monetary policy stance to rein in any upward inflationary pressures. 9

10 GLOBAL MARKET SNAPSHOT EQUITY RETURNS Country Exchange Index US NASDAQ OMX Composite Japan Tokyo Stock Exchange Nikkei UK London Stock Exchange FTSE 100 Brazil BM&FBOVESPA Bovespa Germany Frankfurt Stock Exchange DAX Index Russia RTS Stock Exchange RTS Index (RTSI) France Paris Stock Exchange CAC 40 India National Stock Exchange of India S&P BSE Sensex China Shanghai Stock Exchange Shanghai Composite Fig 2 : Global Equity Market Returns Canada TSX Group S&P/TSX Composite Nigeria Nigerian Stock Exchange ASI Source: Bloomberg Comments: Global equities advanced in the first quarter of 2015 amid rising M&A, heightened central bank stimulus measures in the euro-zone and China easing monetary policy. In the US, merger and acquisition activity coupled with hope for a further delay in rise in interest rates provided support for the US equities to record a modest gain over the quarter. The Japanese stock market rose strongly throughout the first quarter of 2015, with the TOPIX Index rising by 10.5%. Driven by strong corporate earnings, optimism that companies would begin raising dividends and expectations of further easing by the Bank of Japan. This is in addition with data showing that the Japanese economy is exiting recession. Whilst the MSCI Japan index rose by 10%, MSCI pacific index gained by 8%. The UK FTSE All-Share index rose 4.7% in the period, outperforming US equities but underperforming. 10

11 GLOBAL EQUITY MARKET SNAPSHOT Major events in Greece troubled the financial markets at some point in the Eurozone. The election of a left-wing anti-austerity party in January raised fears that Greece might default on its debts and abandon the Eurozone. However, a last-minute debt amnesty in February boosted investors confidence. Hence, Eurozone equities delivered a positive returns over the first quarter underpinned by the ECB s announcement of full quantitative easing (QE) with a total of 60 billion of bond purchases a month until at least September Overall, the MSCI Europe Index rose 12% in local currency and 3.5% in dollar terms. EMEA Equity & Equity-related markets were estimated at US$81.1 billion up 16.7% in proceeds from the same quarter in Asian equity capital markets activity in 1Q 15 proceeds were totalled US$51.8 billion, a 19.9% increase from the total raisings in the same period of Fig 2 : MSCI Global Equity Market growth Australian equities rose following news that the Fed might raise rates later than expected. As a result, gains in the four big banks in the country helped MSCI Australia index to a record gain of 10%. The MSCI Hong Kong Index rose 6%, while, China MSCI IMI gained by 8%. The MSCI Emerging Markets Investable Market Index (IMI) rose 5% amidst expectations for adjustment in monetary policies. Global equity capital markets activity in 1Q 15 is totalled US$242.2 billion, an increase of 24% over 1Q 14 Source: Rimes, Capital group, DLM 11

12 CRUDE OIL PRICES: SNAIL-SPEED RECOVERY Fig 3: Global Crude Oil Prices Note: WTI West Texas Intermediate Source: OPEC, Euroinvestor, DLM Research Comments: While we note the slight recovery in oil prices in recent months (fig.3), we remain cautious about economic performance in the near term as we maintain that economic stability in the short-to-medium term is hinged largely on concerted efforts from fiscal and monetary authorities in the months ahead. 12

13 REGIONAL HIGHLIGHTS 13 DUNN LOREN MERRIFIELD

14 SOCIO-POLITICAL HAPPENINGS IN AFRICA Terrorism : The proliferation of terrorism in Africa continues with Kenya experiencing heavy causalities in the Garissa siege; thus becoming the deadliest terror attack on her soil since the 1998 bombing of the US Embassy in Nairobi. Attacks have also been carried out in Tunisia with 19 people killed and c.24 people injured. Libyan Civil War: Nearly four years after Qaddafi s overthrow, the cohesive political entity known as Libya barely exists under the conditions of continuous battle for control by militia groups. This has contributed to the instability of the region, and thus continues to be a cause for growing concern. Xenophobic violence in South Africa: The sad event has led c.5 people killed and several others forced to flee their homes in one of South Africa's worst outbreaks of xenophobic violence in years These socio-political unrest have economic consequences i.e. diversion of FDI, capital flight, destruction of infrastructure, limitation of trade and consequently, reduced economic growth. 14

15 REGIONAL PERFORMANCE SNAPSHOT - MACRO INDICATORS Inflation GDP Growth GGI Reserves External Debt DRR (%) (%) ($bn) ($bn) Morocco Egypt Ghana Kenya South Africa Botswana Nigeria Angola Note: GGI GDP Growth to Inflation, DRR Debt to Reserve Ratio Figures in green/red implies better/worsening economic scenario Source: CIA World Fact book, World bank, 15

16 $'Billion REGIONAL EQUITY MARKET SNAPSHOT Fig 4 : Market Capitalization Fig 5: Major Africa markets returns Kenya Mauritius Nigeria Morocco Egypt South Africa Sources: World Bank, African Financial Market, African Securities Exchange Association (ASEA), Bloomberg Comments: Regardless the notable improvement in global equities, overall, Nigerian equities performances in the first quarter was impacted by investor nervousness driven by geopolitical risks i.e the unset of 2015 general election, uneven economic growth and monetary policy conditions- particularly interest rates and continuous depreciation of naira. Specifically, for the three months ending March 31, 2015, the Nigerian NSE-ASI declined by 8.38% to close the period at 31, points. The Johannesburg Stock Exchange (JSE) continues to dominate the region with a return of 4.84%, making it one of the best performing market in Africa in the period under review. 16

17 DOMESTIC HIGHLIGHTS (NIGERIA) DUNN LOREN MERRIFIELD 17

18 SOCIO-POLITICAL & ECONOMIC HAPPENINGS IN NIGERIA Political elections: The relatively peaceful 2015 presidential election marked by the relinquishing of power by the outgoing president signaled a deepening of democracy in Africa s most populous nation that few had expected. Closure of WDAS and RDAS: Due to unprincipled market behaviour such as round tripping, speculative demand, and other inefficient uses of scarce foreign exchange by economic agents, the Central Bank of Nigeria was compelled to close the Wholesale Dutch Auction System and the Retail Dutch Auction System. Fight against terrorism: The Nigerian military in joint efforts with coalition forces have gained ground in the fight on terror in the region. Their recent success is marked by the repossession of lands previous seized by the radical islamist group. Nigeria s peaceful presidential election had a very positive impact on the financial market. With reduced political risk it is expected that economic activities get back on track. 18

19 NIGERIA MACROECONOMIC INDICATORS SNAPSHOT Parameter Position Date Inflation (%) 8.50 Mar External Debt ($ bn) 9.71 Dec Domestic Debt (bn) 9, US$48.78 Dec Monetary Policy Rate (%) Mar Sovereign Rating Moody s Ba3 Fitch BB - (Negative) Unemployment Rate (%) M2 ( tr) Mar External Reserves ($ bn) Mar Current Account to GDP (%) GDP Growth Rate (%) 5.94 Q Source: CBN, DMO, NBS, Moody s & Fitch 19

20 MPR: 2010 TO Q Jan Feb Mar Apr 6.00 May Jun Jul Aug Sep Oct Nov Dec MPC ACTION Increased Maintained Reduced Source: Central Bank of Nigeria MPC Outcome (24 th Mar 2015) 13.00% 20.00% 75.00% Exchange N197/$ Exchange rate band to +/-5% Unscheduled Meeting Last change seen *Public Sector deposits to attract 75.00% CRR *Private Sector deposits to attract 20.00% CRR 20

21 INFLATION RATE TREND (YOY) & MONEY SUPPLY Fig 6: Inflation vs Money Supply Correlation value: Source: National Bureau of Statistics, Central Bank of Nigeria, DLM Research Comments: The correlation value of 0.10 reflects a weak positive relationship between inflation and money supply. The restrictive monetary policy stance of the CBN has kept inflation levels within single-digit levels despite the increase in money supply. However, we expect renewed inflationary pressures in the current year in reaction to the exchange rate dynamics, pressures arising from the increase in electricity tariff expected to kick-off from June 2015 and the duty on imported cars amongst other factors. 21

22 $'bn NIGERIA: SOVEREIGN DEBT V EXTERNAL RESERVES Fig 7 : External & Domestic Debt vs External Reserve & RDAS Supply External Debt ($bn) Domestic Debt ($bn) External Reserves (US$bn) RDAS Supply ($bn) Q '15 Source: Central Bank of Nigeria, Debt Management Office, DLM Research Nigeria s external debt as at 1Q 2015 stood at $8.28bn; 14.98% higher than $9.52bn recorded in 4Q More so, domestic debt stood at $40.12bn; during the same period. This was 7.46% higher than $45.71bn in Dec The continued depletion of the reserve and increasing demand in the FX market will continue to exert pressure on the exchange rate in the short-to-medium term. Comments External reserves figure for Nigeria as at end of 2014 stood at $29.79bn as at end of 1Q, 2015, had experienced a decrease of 13.58% quarter on quarter This was as a result of continued decline in oil revenue; and falling portfolio & FDI inflows and increase in rdas supply. 22

23 Jan-14 Feb-14 Mar-14 Apr-14 May-14 Jun-14 Jul-14 Aug-14 Sep-14 Oct-14 Nov-14 Dec-14 Jan-15 Feb-15 Mar-15 FOREIGN RES. V OPEC PRICE, OFFICIAL & INTER-BANK RATES Fig 8: Reserve vs Oil Price vs Exchange Rate $/ Foreign Reserves ($bn) OPEC Price Official Rate ($/ ) Inter-Bank Rate ($/ ) $bn Source: DLM Research, Central Bank of Nigeria (CBN) Comments: Foreign reserves, OPEC oil price & inter-bank exchange rate stood at $29.79bn, $51.06pbl & N respectively as at 31 st March, 2015 Nigeria s external reserves has declined steadily on the back of continued decline in oil revenue; depletion of excess crude oil savings. The foreign reserve, which stood at $29.79bn as at end of 1Q, 2015, had experienced a decrease of 13.58% quarter on quarter Following the closure of the RDAS/WDAS due to the widening margin between rates at the interbank and foreign exchange windows, the Central Bank unofficially devalued the Naira- now at N

24 NIGERIAN ECONOMIC SNAPSHOT Nigeria s macro-economic indices: A challenging scenario INDICATORS Q GDP per Capita (US$) 1, , , , , , N/A Average Official Exchange Rate (US$/ ) Equity Market Capitalisation (US$ billion) External Reserves (US$ billion) Credit to the Private Sector (CPS) (US$ billion) Source: National Bureau of Statistics, Central Bank of Nigeria, Nigerian Stock Exchange, DLM Research *N/A Not Available 24

25 PENSION INDUSTRY DUNN LOREN MERRIFIELD 25

26 NIGERIAN PENSION INDUSTRY: PORTFOLIO ASSET CLASSES Pension Investment Statistics ASSET CLASSES 31-Dec Dec Dec Dec-2011 'bn % 'bn % 'bn % 'bn % Domestic Ordinary Shares Foreign Ordinary Shares * N/A FGN Securities 2, , , , State Govt. Securities Corporate Debt Securities Supra-National Bonds N/A Nil N/A Local Money Market Securities Foreign Money Market Securities* N/A Open/Close-end Funds Real Estate Property * Private Equity Fund Cash & Other Assets TOTAL PENSION FUND ASSETS 4, , , , % 28.74% 29.04% Cumulative Average Growth Rate December, 2014: 23.80% *Closed Pension Fund Administrator (CPFA)/ Approved Existing Scheme (AES) only Source: PenCom, DLM Research 26

27 PENSION INDUSTRY PORTFOLIO ASSET PROFILE Fig 9 : Asset Profile Fig 10 : Asset Sizing N'Tr *Others Real Estate Properties Domestic Ordinary Shares Domestic Money Market Securities FGN Securities 100% 75% 50% 25% 0% Source: PenCom ; DLM Research Source: PenCom ; DLM Research * State, Corporate & Supra-national Bonds, Foreign Investments (Shares & Money Market securities) Open & Closed funds, Private Equity, Cash and Other assets 27

28 PENSION INDUSTRY ASSET PROFILE AS AT DEC 2014 Fig 11: Asset Profile by Instruments 11.79% 4.62% 3.74% 2.59% 2.76% FGN Securities Domestic Money Market Securities Domestic Ordinary Shares 61.81% Real Estate Properties State Govt.Securities 11.74% Corporate Debt Securities *Others * Supra-national Bonds, Foreign Investments (Shares & Money Market securities) Open & Closed funds, Private Equity, Cash and Other assets Source: PenCom ; DLM Research 28

29 DOMESTIC FINANCIAL MARKETS DUNN LOREN MERRIFIELD 29

30 FINANCIAL MARKET SNAPSHOT 11 TH MAY, 2015 Monetary Policy Rates (%) Standing Lending Rate (SLR) Monetary Policy Rate (MPR) Standing Deposit Rate (SDR) CRR (Private Sector Deposits) CRR (Public Sector Deposits) Liquidity Ratio (LR) T.Bill OTC Trading Yields(%) 1M 3M 6M 12M 11-May Market Capitalisation : N5.64tr Nigerian Inter-bank Offered Rate (NIBOR) O/N 1M 3M 6M 11-May Nigerian Inter-bank Treasury Bills True Yields Fixing (NITTY) 1M 3M 6M 12M 11-May CBN Repo Window (%) O/N D D D Domestic Inter-bank Rates(%) 11-May-15 OBB 9.67 O/N Auction Rates (%) PMA OMO 6-May May-15 91D D D D D D NSE Indices 11-May-15 NSE ASI 30, Mkt Cap N10.06tr Bond Yields 11-May-15 Benchmark Yields(%) Mkt Cap: N4.50tr FX 11-May-15 Window $/N CBN Interbank BDC Source: FMDQ, DLM Research 30

31 MONEY MARKET DUNN LOREN MERRIFIELD

32 MONEY MARKET REACTION TO SYSTEM LIQUIDITY Fig 9: Market Liquidity vs Interbank Rate OBB & O/N rates recorded an all-time high of 74.00% & 75.00% respectively due to increase in CRR on private-sector deposits from 15% to 20% Source: DLM Research, FMDQ Comments: In the first quarter of 2015, Naira market rates were unstable especially in mid-1q 2015 where heightened volatility was witnessed due to negative inter-bank liquidity and huge outflows of c.n327.98bn (settlement for CBN s RDAS and FX interventions, CRR debit, OMO & bond auctions) In 1Q 2015, inter-bank Naira rates averaged 18.71%, peaked at about 91.67% and bottomed at 6.29% as system liquidity continues to fluctuate Rates directions were mainly dictated by liquidity inflows via maturing T.bills & bonds, FAA funds, CRR credit, etc.; and outflows via funding for bonds & T.bills auctions, RDAS fundings, CRR Debit, etc. 32

33 2-Jan Jan Feb Mar Apr May Jun Jul Aug Sep-14 9-Oct-14 6-Nov-14 4-Dec-14 1-Jan Jan Feb Mar-15 NIBOR VOLATILITY: 1Q 2014 TO 1Q 2015 Fig 10: NIBOR Volatility % M 3M 6M High volatility due to liquidity squeeze stemming from withdrawals traceable to FX funding & deductions relating to the newly introduced 50.00% CRR on public sector deposits & 0.50% AMCON sinking funds Money market interest rates were relatively volatile in the beginning of 1Q 2015 but stabilized on average from the mid-end of the quarter as banking system liquidity fluctuated. Source: DLM Research, FMDQ Comment: The CBN s monetary policy measures via its OMO activities, CRR debit/credit and intervention in the FX markets at various times has helped in managing market liquidity and stabilise money rates as the inter-bank Naira market experienced mild volatility in 1Q,

34 MONEY MARKET HIGHLIGHTS Market Activity Highlights Total OMO aggregate issuance for 1Q, 2015 stood at N2.06tr, 38% and 101% higher than volumes issued in 4Q, 2014 and the corresponding period of 2014 which stood at N1.48tr and N1.02tr respectively This portrays that the CBN s has resorted to the use of Open Market Operations (OMO) as the appropriate monetary policy tool in regulating system liquidity as the effect of CRR in performing this role seems to have watered-down As at end of March 2015, OBB and O/N rates averaged 18.22% & 19.19%, peaked at 88.33% & 95.00% and bottomed at 6.08% & 6.50% respectively. The CBN MPC maintained MPR, CRR on private & public sector deposits and Liquidity Ratio (LR) at 13%, 20%, 75% & 30% respectively at its March 2015 meeting. 34

35 TREASURY BILLS MARKET DUNN LOREN MERRIFIELD 35

36 BENCHMARK TREASURY BILLS YIELDS Fig 11: Treasury Bills Benchmark Yields M 3M 6M 12M The upward trend in yields continued in the 1Q 2015 due to sustained sell-off on the back of weak economic fundamentals and political risk associated with elections 9.00 % Jan'14 Feb Mar Apr May June Jul Aug Sep Oct Nov Dec Jan'15 Feb Mar Source: DLM Research Comments The market opened the year 2015 bearish on the back of increased selling activities and consequent rise in yields across all maturities. The sell bias was as a result of economic risk (declining crude oil prices, depletion of external reserve and Naira depreciation) and political risk (elections and change in government) With the prevalent attractive yields and single-digit inflation rate, the T.bill market continued to enjoy sustained patronage from investors as real Return-on-Investment (ROI) remains positive. 36

37 91D 182D 364D 91D 182D 364D 91D 182D 364D 91D 182D 364D 91D 182D 364D 91D 182D 364D 91D 182D 364D 91D 182D 364D 91D 182D 364D 91D 182D 364D 91D 182D 364D 91D 182D 364D 91D 182D 364D TREASURY BILLS AUCTIONS Fig 12: T.bills Primary Market Auctions Nbn 1, Amount on Offer Amount Subscribed Amount Sold Average Marginal Rates We witnessed volatility in marginal rates in 1Q 15 in response to the prevailing demand and supply conditions in the market % Mar'14 Apr'14 May'14 Jun'14 Jul'14 Aug'14 Sep'14 Oct'14 Nov'14 Dec'14 Jan'15 Feb'15 Mar'15 Source: DLM Research Comments: In 1Q, 2015, subscription levels rose to N2.85tr, which is 158% and 59% higher than the preceding and corresponding quarter in 2014 which stood at N1.11tr and N1.80tr respectively. This indicates renew interest and improved confidence in the Nigerian fixed income space especially by domestic investors who continued to invest in government securities despite prevalent economic and political risk. With positive Rate of Return (ROR) as yields surpassed inflation which by and large, is still at single digit, the T.bill market still remains attractive to interested investors 37

38 OPEN MARKET OPERATIONS (OMO) Fig 13 : OMO Volume ( bn) Comments The CBN intensified its OMO activities in the first quarter of 2015 in managing system liquidity as other monetary policy tools has been kept constant in the last two consecutive MPC meetings Source: Central Bank of Nigeria, DLM Research Aggregate issuance 1Q 2015 stood at N2.06tr, which was 37% and 96% higher than volumes recorded in preceding and corresponding quarters in 2014 which stood at N1.51tr and N1.05tr respectively 38

39 T-BILLS MARKET HIGHLIGHTS Highlights Market Activities Total T.bills issuance at the Primary Market Auction (PMA) for 1Q, 2015 rose to N1.24tr, which was 45% and 8% higher than 4Q 2014 and corresponding period of 2014 which stood at N857.15bn and N1.14tr respectively Average marginal rates for 91D, 182D and 364D benchmarks in 1Q 2015 stood at 10.94%, 14.26% and 14.98% respectively, compared to average rates of 10.75%, 11.43% and 11.72% recorded in corresponding period of 2013 Treasury bills turnover in 1Q 2015 rose to N8.44tr which was 103% and 145% higher than 4Q 2014 and corresponding period of 2014 which stood at N8.22tr and N5.83tr respectively 39

40 T-BILLS MARKET OUTLOOK We project that T.bills yields may drop slightly in 2Q 2015 on the back of expected liquidity in the market, the renewed interests in the government securities by the institutional investors as well as the political stability in the country. Hence, participation and subscription levels at the auctions is expected to be higher than preceding quarter In our opinion, the various threats identified by Fitch Ratings on the Nigerian economy had been factored into the pricing of the domestic fixed income instruments by both local and foreign investors. Thus, we do not expect any further price correction from the downgrade of the Nigeria s credit rating 40

41 BOND MARKET DUNN LOREN MERRIFIELD 41

42 DEBT MARKET SIZING AS AT MAR 31, 2015 Fig 14 : Debt Market Profile Total Debt Securities N10,337.64bn Supranational: N24.95bn Agency Bonds N322.38bn Corporate Bonds N162.73bn *Corporate Eurobond bn Sub-national Bonds N454.33bn Sovereign Debt Securities N8,435.53bn IFC N12.00bn AfDB N12.95bn FMBN N26.96bn LCRM N295.42bn Domestic N8,140.03bn **FGN Foreign N295.50bn T.Bills N2,801.51bn Bonds N5,023.13bn T. Bonds N315.39bn Legend AfDB: African Development Bank FMBN: Federal Mortgage Bank of Nigeria IFC: International Finance Corporation LCRM: Local Contractors Receivables Management Ltd. Note T.bills exclude OMO bills issued by the CBN *Corporate Eurobond totaled $4.76bn as at March 2015 **Foreign Debt includes $1.50bn Eurobond Average Exchange Rate $/N

43 OUTSTANDING BONDS IN NIGERIA Fig 15 : Bond Composition Mar 31, 2014 Mar 31, 2015 Comments: The maturity of AMCON bonds has resized the Nigerian Outstanding Bonds Pie 9% 3% 5% 8% 3% FGN bonds still constitute the largest volume at 84% whilst State and corporate issuance contribute about 11% (combined) to the whole Pie. 21% Source: DLM Research 67% FGN State 84% FGN Agency Bonds Corporate The recent trend of foreign debt listing by way of Eurobonds may have robbed the Pie of more volumes from the Corporate segment A total of N239.50bn worth of FGN has been issued in 1Q 2015, which is 132% higher than Q figure (N182.11bn) but 9.6% lower than corresponding period in 2014 (N265.00bn) Between N155.00bn N245.00bn is expected to be issued in 2Q

44 Jan/14 Feb/14 Mar/14 Apr/14 May/14 Jun/14 Jul/14 Aug/14 Sep/14 Oct/14 Nov/14 Dec/14 Jan/15 Feb/15 Mar/15 FGN BOND MARKET ANALYSIS Fig 16: FGN OTC Bond Market Analysis 6, , , , , , , , , , , Mkt. Cap. bn Outstanding bn Mkt. Turnover bn 1, , Source: FMDQ, DLM, Research Comments In 1Q 2015, the FGN bond market witnessed renewed patronage from investors (especially domestic portfolio managers) on the back of attractive yields as global crude oil prices began a gradual upward trend. Total turnover in the OTC market for 1Q 2015 stood 1.96tr as against 2.90tr and 1.41tr recorded in the 4Q 2014 and corresponding period in 2014 Currently, only seven (7) maturities are actively traded at the OTC market: Aug-16, Apr-2017, Jul-30, Jun-19, Mar-2024, Jan-22 and Jul

45 FGN BOND YIELD CURVE 30 ST MAR, 2015 Fig 17: FGN Bond Yield Curve Mar Mar Mar Mar Mar M 3M 6M 1Y 2Y 3Y 5Y 7Y 10Y 20Y Source: DLM Research Comments Yields of trading FGN bonds rose higher in the first quarter of 2015 due to sell-offs by local and offshore investors on the back of heightened economic and political risk, weak economic fundamentals i.e. foreign reserve depletion and Naira depreciation as well as political instability associated with the election period Market has however since corrected itself with the yield curve climbing towards longer tenors 45

46 SUB-NATIONAL BOND PROFILE, 31-MAR-2015 Issuer Issue Size Original TTM/ Rating Maturity (N bn) Tenor Av. Life Coupon (%) Mid-Price Yield (%) Ebonyi# A- Sep Benue# BBB+ Jun Imo# Jun Kaduna 8.50 A Aug Bayelsa# Jun Delta# Sep Ekiti# /A- Dec Lagos-1(S2) A+/ Apr Gombe# BBB+/A- Oct Ondo# /A- Feb Osun (S1)# BBB-/A- Dec Edo Dec Osun-Sukuk ( S2)# BBB- Oct Nasarawa # 5.00 A- Jan Niger (S1) 9.00 Oct Lagos-2 (S1)# Aa-/ Nov Lagos-2 (S2) Aa-/ Nov Ekiti (S2) # Dec Kogi 5.00 A-/BBB+ Dec Niger (S2) # Dec LEGEND # : Amortizing bonds; Av.: Average; * : Floating rate bonds; S : Series; Tr. : Tranche NOTE: (i) Prices and yields on Sub-National Bonds are indicative; (ii) For amortising bonds, average life is used in place Term-To-Maturity (TTM) 46

47 CORPORATE BOND PROFILE, 31-MAR-2015 Issuer Issue Size (N bn) Rating Maturity Original Tenor TTM/ Av. Life Coupon (%) Mid-Price Yield (%) UPDC# Aug Flourmills# BBB- Dec Chellarams# 1.50 BB Jan *Dana# 8.01 Nil Apr *Tower (S1Tr. A)# 3.63 A-/B+ Sep *Tower (S1 Tr. B)# 1.00 AAA/A Sep Laa Casera 3.00 Bbb+/BBB+ Oct NAHCO (S1) 2.15 A+/A- Sep UBA (S1) A/A Sep *Chellarams (S2) # 0.54 BBB+/BB Feb FSDH 5.53 A- Oct C&I Leasing# 0.94 BBB- Oct UBA (S2) A/A Sep NAHCO (S2) 2.05 A+/A- Nov Stanbic IBTC A Sep LEGEND # : Amortizing bonds; Av.: Average; * : Floating rate bonds; S : Series; Tr. : Tranche NOTE: (i) Prices and yields on Sub-National Bonds are indicative; (ii) For amortising bonds, average life is used in place Term-To-Maturity (TTM) 47

48 AGENCY BOND PROFILE, 31-MAR-2015 Issuer Issue Size (N bn) Rating Maturity Original Tenor TTM/ Av. Life Coupon (%) Mid-Price Yield (%) FMBN (S2) 6.00 AAA Apr FMBN (S3) AAA May Note: No Agency bond currently trades on OTC LCRM: Local Contractors Receivables Management Limited FMBN: Federal Mortgage Bank of Nigeria **Credit Risk Premium is the additional yield over government securities (government spread) that compensates for the risk of default on the corporate bond LEGEND # : Amortizing bonds; Av.: Average; * : Floating rate bonds; S : Series; Tr. : Tranche NOTE: (i) Prices and yields on Sub-National Bonds are indicative; (ii) For amortising bonds, average life is used in place Term-To-Maturity (TTM) 48

49 SUPRANATIONAL BOND PROFILE, 31-MAR-2015 Issuer Issue Size (N bn) Rating Note: IFC: International Finance Corporation AfDB: African Development Bank Maturity Original Tenor TTM/ Av. Life Coupon (%) Mid-Price Yield (%) IFC AAA/Aaa Feb AfDB AAA/Aaa Feb LEGEND # : Amortizing bonds; Av.: Average; * : Floating rate bonds; S : Series; Tr. : Tranche NOTE: (i) Prices and yields on Sub-National Bonds are indicative; (ii) For amortising bonds, average life is used in place Term-To-Maturity (TTM) 49

50 NIGERIA EUROBOND PROFILE, 31-MAR-2015 Issuer Description Rating Issue Size ($ mm) Tenor (Yrs) Issue Date Maturity Date Coupon (%) Price (%) Yield (%) FGN 5.13 Jul 12, 2018 BB Jul-13 Jul FGN 6.75 Jan 28, 2021 BB Oct-11 Jan FGN 6.38 Jul 12, 2023 BB Jul-13 Jul Source: DLM Research; Bloomberg 50

51 CORPORATE EUROBOND PROFILE, 31-MAR-2015 Issuer Description Rating Issue Size ($ mm) Tenor (Yrs) Issue Date Maturity Date Coupon (%) Price (%) Yield (%) Afren (S1) Feb 01, 2016 B Feb Feb GT Bank 7.50 May 19, 2016 B May May Access Bank 7.25 Jul 25, 2017 B Jul Jul Fidelity Bank 6.88 May 09, 2018 B May May GT Bank 6.00 Nov 08,2018 B Nov Nov Afren (S2) Apr 08, 2019 B Apr Apr Diamond Bank 8.75 May 21, 2019 B May May First Bank 8.25 Aug 07, 2020 B Aug Aug Zenith Bank 6.25 Apr 22, 2019 B Apr Apr Afren (S3) 6.63 Dec 09, 2020 B Dec Dec Access Bank 9.25/6M USD LIBOR Jun 24, 2021 B Jun Jun First Bank 8.00/2Y USD SWAP Jul Source: DLM Research; em.cbonds.info B Jul Jul Ecobank 8.75 Aug 14, 2021 B Aug Aug

52 1M 3M 6M 12M 2Y 3Y 5Y 7Y 10Y 20Y FIXED INCOME YIELD V INFLATION Fig 18: Average Fixed Income Yields vs Inflation (Mar 2015) % Real Rate Inflation Average Yield Source: DLM Research Comment The fixed income market will continue to enjoy good patronage from both local and foreign investors as real return on investment has remained positive with inflation trending lower than yields across various tenors along the yield curve 52

53 FIXED INCOME MARKET OUTLOOK We project that yields on fixed income securities may decrease slightly in 2Q 2015 on the back of anticipated increase in system liquidity, renewed interests in the government securities by the institutional investors (domestic and foreign) as well as the prevailing political stability in the country. Against these backdrops, participation at the auctions is expected to be higher than preceding quarter 53

54 FOREIGN EXCHANGE MARKET DUNN LOREN MERRIFIELD 54

55 NIGERIAN FX MARKET SNAPSHOT Foreign exchange $/ market snapshot 11-May-15 Exchange Rates ($/ ) Y Start Offer C Bid C Offer C v Y Start (%) CBN INTER-BANK BDC STREET Note: CBN Central bank of Nigeria, BDC Bureau de Change, 55

56 FOREIGN RESERVE SOUTHWARD DIRECTION As Nigeria s external reserves continue to decline As at 31st March 2014, Nigeria s external reserves stood at c.$29.79billion, down by 13.63% from the c.$34.49billion recorded at the beginning of the year. We express our concern on the decline in external reserves as we re-iterate the need to rebuild the nation s fiscal buffers particularly in view of lower oil prices and its attendant economic implications. Fig 8: External Reserves, $billion 56

57 FX SUPPLY & DEMAND TRENDS Fig 19: rdas Supply & Demand vs Exchange Rate $'bn Demand Supply Average Exchange Rate (Official) N Q1'13 Q2'13 Q3'13 Q4'13 Q1'14 Q2'14 Q3'14 Q4' Source: Central Bank of Nigeria, DLM Research Comments Foreign exchange demand by the authorized dealers in the review quarter was estimated at $14.86bn, indicating increase of 34.2% and 23.9% above the levels in the preceding quarter and the corresponding quarter of 2013, respectively. The development, relative to the preceding quarter was attributed to arbitrage activities occasioned by the falling price of crude oil especially towards the end of the review quarter. The sum of $12.46bn was sold by the CBN during the review quarter, indicating increase of 22.6% and 36.9% above the levels in the preceding quarter and the corresponding quarter of 2013, respectively 57

58 US$/ OFFICIAL RATE V INTER-BANK & STREET RATES Fig 20: CBN/Interbank & Parallel Market Exchange Rates Official Rate Interbank BDC Mar-14 Apr-14 The local currency continues to depreciate in all segments of the FX market on the back of funds repatriation by foreign investors due to economic & political risks, heightened FX demand by importers as well as supply shortage from autonomous sources May-14 Jun-14 Jul-14 Aug-14 Source: DLM Research, Central Bank of Nigeria (CBN) Sep-14 Oct-14 Nov-14 Dec-14 Jan-15 Feb-15 Mar-15 Comments The official exchange rate has recently been devalued at the CBN window due to its steady decline, now at N with a bandwidth between ±-3 to ±-5 per cent. The naira depreciated in Q12015 by c.7.56% to close March at N199.10/$1 in the inter-bank market from N185.10/$1 at the beginning of the quarter Rates at the inter-bank and BDC market have continually been on a rise due to high levels of repatriation by FPIs and high demand mostly from importers in recent times. 58

59 SECTORAL UTILIZATION OF FOREIGN EXCHANGE Fig 21 : FX utilization by Sectors 2.10% 0.80% 15.00% 48.20% 16.00% 17.60% Invisible Industrial Mineral&Oil Manufacturing&food Transport Agricultural Comments In 4Q, 2014, available data indicated that the invisible sector accounted for the bulk (48.2%) of total foreign exchange disbursed in the fourth quarter of 2014, followed by industrial sector (17.6%). Other beneficiary sectors, in a descending order included: mineral and oil sector (16.0%), manufactured products (7.9%), food products (7.1%), transport sector (2.4%) and agricultural products (0.8%) Source: DLM Research, Central Bank of Nigeria (CBN) 59

60 FOREIGN EXCHANGE FLOWS Fig 22: Foreign Exchange Flows Through the CBN (US$bn) Inflow Outflow Netflow Q1'13 Q2'13 Q3'13 Q4'13 Q1'14 Q2'14 Q3'14 Q4' Source: DLM Research; Central Bank of Nigeria (CBN) Comments Foreign exchange inflow through the CBN in Q4 14 amounted to US$10.36bn, representing a decrease of 20.9% than the preceding quarter but 9.4% above the levels in the corresponding quarter of This development was attributed largely to the decline in receipts from crude oil sales and inflow through autonomous sources Foreign exchange outflow amounted to $14.21bn, showing an increase of 20.4% and 31.7% above the levels in the preceding quarter and the corresponding quarter of The increase, relative to the preceding quarter, was accounted for, mainly by rise in rdas utilization and other official payments, especially NNPC/JVC cash calls. 60

61 CURRENCY COMPOSITION & HOLDINGS OF EXTERNAL RESERVES Fig 23: Currency Composition of Foreign Reserves Fig 24: Holdings of Foreign Reserves 5.90% 2.10% 2.10% 6.00% 9.20% 9.70% 83.90% 77.40% USD Euro SDR Chinese Yuan GBP CBN Federation FGN Source: Central Bank of Nigeria (CBN), DLM Research Comments Available data indicated that the US Dollar holding of foreign reserves constituted 83.9% at $35.94bn as at 3Q Other currencies in the basket and their shares include Euro - $2.53bn (5.9%), SDR units $2.58bn (6.0%), Chinese Yuan $0.90bn (2.1%), and GB Pounds $0.89bn (2.1%) Source: Central Bank of Nigeria (CBN), DLM Research Comments A breakdown of the reserves showed that CBN reserves stood at US$27.79bn (81.1%), Federation reserves, US$3.32bn (9.7%) and the Federal Government reserves, US$3.14bn (9.2%) 61

62 FX HIGHLIGHTS Developments Jan 21, 2015: The CBN reviewed Net Foreign Exchange trading positions upwards from 0.1% to 0.5% of shareholders funds, unimpaired by losses Jan 21, 2015: rdas and inter-bank funds should no longer be sold to BDCs Feb 6, 2014: Introduction of Authorised Dealers RDAS Account to be funded via RTGS by close of business on Thursdays for Monday auctions, and on Mondays for Wednesday auctions Feb 18, 2015: The Retail Dutch Auction System (rdas) window of the foreign exchange market was closed New Requirements for the operation of BDCs in Nigeria (June 2014) BDCs Financial Requirements S/N Criteria Previous Guideline New Guideline 1. Minimum paid-up share capital N10.00mm N35.00mm 2. Application Fee N10, N100, Licensing Fee N100, N1.00mm 4. Annual Renewal Fee N10, N250, ABCON Membership Compulsory Not compulsory 6. Mandatory Cautionary Deposit N1.00mm N35.00mm 7. Investment of Mandatory Cautionary Deposit by the CBN Permissible Not Permissible Source: Central Bank of Nigeria (CBN), DLM Research 62

63 FX HIGHLIGHTS 2 OLD STRUCTURE NEW STRUCTURE RATIONALE 1 2 CLOSURE OF THE RDAS/WDAS FOREIGN EXCHANGE WINDOW AT THE CBN ALL DEMAND NOW CHANNELLED TO THE INTERBANK FOREIGN EXCHANGE MARKET. The overall aim was directed towards preventing the emergence of a multiple exchange rate regime which presents a widening margin between the various windows, thus serving as an incentive for round-tripping, speculative demand, rentseeking, spurious demand, and inefficient use of scarce foreign exchange resources. The CBN maintained that it will continue to intervene in the interbank foreign exchange market to meet legitimate demands. Though this represented an implicit devaluation of the domestic currency, we are of the view that it was a step in the right direction as it offered some respite to the financial markets and significantly slows down the rate of depletion of reserves. 63

64 FX MARKET OUTLOOK The wide divergence between the interbank and the bureau-de-change exchange rates may provide an avenue for arbitrage and speculative activities in the market in the short to medium term. More so, the phenomenon of currency substitution and partial dollarization in the economy may significantly fuel high demand for foreign exchange. In the light of this, the monetary authority is therefore advised to take all possible measures to address these developments Due to the adverse developments in international oil prices which had affected government revenues, reserves accretion and impacted negatively on capital flows, the CBN is expected to direct banks to take all necessary measures to improve the resilience of the financial system as well as the overall economic environment and functioning of the financial markets. The CBN is expected to continue to fine-tune demand management measures as well as implement appropriate supply-enhancing strategies to ensure effective demand and utilization of foreign exchange in the country 64

65 EQUITY MARKET DUNN LOREN MERRIFIELD 65

66 EQUITY MARKET PERFORMANCE Q 2015 Index Low (points) 19, , , , , Index High (points) 27, , , , , Year Begin Index (points) 24, , , , , Year Close Index (points) 20, , , , , Index Return (%) (16.31) (16.14) (8.38) Mkt. Cap Low ( /tr) Mkt. Cap High ( /tr) Year Begin Mkt. Cap ( /tr) Year Close Mkt. Cap ( /tr) Mkt. Cap Change (%) (17.42) (13.22) (6.62) Total Volume 82.30bn 89.15bn bn bn 25.94bn Source: Nigerian Stock Exchange 66

67 TREND IN ASI & MARKET CAPITALIZATION Fig 27: Total value vs. NSE ASI (YTD) 60,000,000 Value ASI index 50, , ,000,000 40, ,000,000 35, , ,000,000 25, ,000,000 20, , ,000,000 10, , Jan Mar May Jul Sep Nov Jan Mar Source: The Nigerian Stock Exchange Comments Whilst investor sentiment seemed cautiously enthusiastic late in the quarter, to date, 2015 has been marked by a fairly pronounced shift toward value style investment relative to growth, and renewed appetite for yield oriented equities. By our assessment, the 2015 general election, coupled with near term outlook of the domestic economic, monetary policy, exchange and interest rates environment no doubt remains a key driver of investor sentiment. However, the broad market turnover rose to bn ($1.42bn), up by 3.65% with an average daily turnover of 4.5 billion ($22.85million) Market capitalization for all listed equities on the Main Board and the Alternative Securities Market (ASeM) declined by 6.62% or billion to 10.71trillion from trillion, quarter on quarter. 67

68 MARKET CAP/GDP AND NSE INDICES RETURNS Fig 28: Market cap/gdp (Jan Dec.2014) Fig 29: 1Q 15 Returns of NSE indices Source: The Nigerian Stock Exchange Comments Based on current level, Nigerian stocks are extremely undervalued vs. emerging market. This is backed by the low Nigeria s Market Cap/GDP ratio which has been hovering between 40-55%. The last time it rose above 66% was January 2014-when it peaked at 66% before declining to a record low of 39% in December Regardless, Nigeria s Market Cap/GDP Ratio is expected to increase over the first quarter of Q 2015 fizzled on profit taking and weak investors' appetite. Hence, most of NSE sectoral indices declined. Stocks from consumer and industrial goods spaces came under pressure with their respective indices declining by 10.96% and 9.82% respectively. Decline in these sectors particularly pressured ASI to post negative return. 68

69 ANALYSIS OF COMPANY RETURNS FOR 1Q 2015 Fig 30: Top Gainers Source: Nigerian Stock Exchange Fig 31: Top Losers Source: Nigerian Stock Exchange Comments: The review period recorded a high degree of investment rotation across various sectors. Having started the year poorly, major rally was particularly seen during the last part of the quarter. The quarter was also marked by a fairly pronounced shift toward speculative value style investment, occasioned by renewed appetite for yield oriented equities. The broad market recorded a relatively weak performance in January, recording a negative return of %: Feb, 1.83%: March, 5.48%). The most apparent shifts was seen in sensitive sector, i.e. banking sector (NSE-banking; +3.63%) which is the best performance for the quarter outperforming the broad market index. Oil & gas stocks also saw renewed interest due primarily to dividend declaration Small and mid cap stocks outperformed large caps as investors took advantage of the valuation gap between large-caps and mid-caps A total of thirty one (31) stocks led by Total oil Nigeria Plc (+26.32%) recorded price appreciation whilst sixty two (62) stocks led by Julius Berger Nigeria Plc (-27.88%) declined in the period under review. 69

70 ANALYSIS OF FOREIGN V DOMESTIC TRANSACTIONS 1Q 15. Fig 32: Foreign vs Domestic Transactions (%) Fig 33: Foreign vs Domestic transactions ( bn) 39.81% 60.19% Foreign Domestic Source: NSE Comments During the first quarter of the year, value of transactions by foreign investors on the domestic equity market outweighed value attributable to domestic investors. Total transaction for the quarter was bn. Foreign investors recorded average of 60.19% of the total transaction whilst domestic transaction recorded 39.81%. Overall, domestic transactions declined from 90.61billion (foreign: 99.11bn) in January to 50.44billion (foreign: bn) in February. However, notable improvement was seen in March as domestic participation improved and bolster domestic transactions by 61.18% to 81.46billion (foreign: bn). 70

71 ANALYSIS OF FOREIGN V DOMESTIC TRANSACTIONS 1Q 15. Fig 33: Foreign inflow vs Foreign outflow ( bn) Net Foreign investment/outflow Fig 33: Foreign inflow vs Foreign outflow ( bn) Jan'14 Feb'14 Mar'14 Oct'14 Nov'14 Dec'14 Jan'15 Feb'15 Mar'15 Source: NSE Comments Overall, the market recorded net capital outflow of 34.56billion in the period under review. This is 66.08% and 66.01% below the billion and billion net outflow recorded in the first quarter of 2014 and the last quarter of 2014 respectively. In all, the negative net capital position revealed some degree of FPI exit and selloff from the domestic equity market. This amongst other this dampened the overall market liquidity in the first quarter. Notably, the highest net outflow in the quarter, 29.25billion was recorded in February (Feb 2014: 70.78bn, down 58.7%%). However, net outflow for January and March was relatively low at 3.05billion, (Jan 2014: 10.61bn, down 71.25%), While March net outflow came in at 2.26billion, (March 2014: 20.29bn, down 88.86%)

72 EQUITY MARKET REGULATORY HIGHLIGHTS IPO Major Highlights While the market is still lacking liquidity and most investors exited on geopolitical risk and uncertainty about near term market direction, IPOs appears to have lost some of its attraction. The market for IPOs and new equity listings was flat. Hence, the Nigerian Stock Exchange failed to provide a single initial public offering (IPO) to the market in the first quarter of However, the risks for IPOs have clearly diminished following the success of Transcorp Hotels IPO in 2014 which recorded subscription rate of 52.3%. New Listing Transcorp Hotels Plc Notice of Delisting The Nigerian Stock Exchange delisted Oasis Insurance Plc from its daily official list following the acquisition of the company by FBN Insurance Limited. Cappa & D Alberto Nigeria Plc Afprint Nigerian Plc 72

73 EQUITY MARKET OUTLOOK Although the bearish trend in the domestic equity market is poised to continue for the near term and policy uncertainty from the next administration is a key risk to the domestic equity outlook. We believe it is probable that interest rates will remain unchanged for the medium term and this will allow businesses to function smoothly in the quarters ahead but a further depreciation of the naira would impact earnings quality. The ASI traded around 9x 13x earnings during much of the first quarter and with companies multiples far from record highs, most tradable and liquid large cap stocks are valued with an average 25x estimates for 2015 Against general expectation, 1Q 15 earnings showed some acceleration especially in the banking sector, and if this trend continues for the remaining quarters of the year, equity price gains may very well be in store. While valuations remained on the low side compared with 2013 and some part of 2014, they are reasonable and not out of line in our view. Overall, 1Q 15 numbers remain firmly supportive of EPS double-digit growth. However, on the average, we expect H1 15 earnings to improve across board given the impressive 1Q 15 earnings. Given the above, we maintain a positive outlook for the equity market in 2015 with the NSE- ASI closing the year positive, albeit at a moderate level. 73

74 OVERALL OUTLOOK DUNN LOREN MERRIFIELD 74

75 OUTLOOK: GLOBAL Global growth: Global growth in is projected at 3.5% and 3.7%, downward revisions of 0.3%. The revisions reflect a reassessment of prospects in China, Russia, the euro area, and Japan as well as weaker activity in some major oil exporters because of the sharp drop in oil prices. The United States is the only major economy for which growth projections have been raised. Risks distribution to global growth: The main upside risk is a greater boost from lower oil prices, although there is uncertainty about the persistence of the oil supply shock. Downside risks relate to shifts in sentiment and volatility in global financial markets, especially in emerging market economies, where lower oil prices have introduced external and balance sheet vulnerabilities in oil exporters. Stagnation and low inflation are still concerns in the euro area and in Japan Growth in advanced economies expected to strengthen to 2.40% in 2015 while growth in emerging market and developing economies is projected to continue on its downward trend; albeit marginally to 4.30% in Source: IMF World Economic Outlook (WEO), January

76 OUTLOOK: NIGERIA The Nigerian economy continues to show resilience regardless of the slow albeit steady recovery of the global economy as seen in the growth recorded in However, we believe that the full impact of the global oil price decline will fully set in during Against the backdrop of the aforementioned, we project an average growth rate of c % for the 2015 fiscal year. We highlight that dwindling oil prices coupled with lower oil production volumes and its attendant impact on macro-economic indicators remain significant risk to growth in the near term. To ensure growth sustainability, we believe that there is a need for Nigeria to successfully develop its non-oil sector and generate revenues from alternative sources particular in view of the country's vulnerability to oil shocks. 76

77 DUNN LOREN MERRIFIELD ASSET MANAGEMENT & RESEARCH CO. LTD. Elephant House 214 Broad Street Lagos DUNN LOREN MERRIFIELD 77