Monthly Economic News and Views at Lagos Business ... raises $3.3bn to fund Africa’s largest oil refinery with 400,000bpd capacity Defining Factors in August 7 Financial Derivatives

Monthly Economic News and Views at Lagos Business School

Executive Breakfast Meeting

September 11th, 2013

Presented by B.J. Rewane Financial Derivatives Company Limited

Financial Derivatives Company Limited 2

Defining Factors

Global Update

Domestic Economic Performance

Markets and Business Proxies

Political Risk Review

Outlook

Defining Factors in August


Nigeria

Weaker Naira- Blood

before sharks

Interest Rates spike

PDP Crisis-

Game over?

Stocks slide into bear market



GDP shrinks to 6.18% in Q2 down from 6.56% in Q1

Inter bank interest rates spike to 15%p.a and stays choppy

Naira comes under attack of currency sharks, losing

2.52% to N165/$

Stock market declines into bear territory losing 4.39%

and N510.5bn of market capitalisation

Oil price increases to $117pb, a boost to Nigerian export

revenues

Oil production disruption reduced marginally in August

Production was 1.88mbpd



Power assets sold off to private entities, but output

remains poor at 2700MW

Assets to be transferred in October

Inflation declines in July projected to stay flat at 8.64% in

August

Dangote raises $3.3bn to fund Africa’s largest oil refinery

with 400,000bpd capacity



PDP, a party in crisis

Is it being dissected by dissidents or hijacked??

The PDP old guard are under attack by the aggressive

new boys on the block

Many states have exceeded the debt ceiling under the

fiscal responsibility act

The FGN is within shouting distance of the 40% of total

debt to GDP limit

Fiscal dominance in the economy is being threatened

Global Update - US Economy to Soar in 2014


Business forecasts are optimistic about 2014

Growth projected at 3% in Q2’14

Low inflation and improving employment

Top economists believe there is an 80% probability of a

growth surge

May force the Fed to trim its $85bn purchasing of T/Bills

and bonds next year or earlier

The forecasts for Q3 GDP is down to 2.3% annualized

after reaching 2.5% in Q2’13


Economists see weaker business investment across the

board

Payrolls in the US climbed less than projected in August at

169,000

Meaning that the economic expansion is struggling to gain

momentum

Unemployment fell to 7.3% - the lowest since 2008 as

workers left the labour force

…but weaker Q3

The next Fed Chairman- Style more than

substance

Janet Yellen and Larry Summers are the two leading candidates

Both are highly regarded academic economists

Whereas Yellen is a dove, Summers is more of a hawk

Janet Yellen has secured the backing of U.S. labor leaders

Her support for full employment makes her a favorite

If she succeeds, she will be the first female Fed Chief in 100yrs

Summers appears to be favored by the US President

Summers was a principal economic adviser to Obama 2008-2010

Was Treasury Secretary under Bill Clinton

11 Financial Derivatives Company Limited

Global Competitiveness Index- Switzerland

remains No 1


The global competitiveness index has just been released

Improvement in the global economy impacted the index

Switzerland ranks most competitive country in the world

5th year in a row

Followed by Singapore, Finland, Germany and US

3 African countries were at the bottom of the148 countries surveyed

Burundi, Guinea and Chad

Optimism that global economy is stabilising

Concerns include possible EU disintegration

And fears of a US fiscal crisis

Global Competitiveness


Country GCI- 2012/2013

GCI- 2013/2014

Movement

Singapore 1st 1st Flat

US 7th 5th Up 2 places

UK 8th 10th Down 2 places

Qatar 11th 13th Down 2 places

South Africa 52nd 53rd Down 1 place

Nigeria 115th 120th Down 5 places

Source: WEF

Nigeria dropped 5 spots to 120th rank

US rose up the ranks, for the first time in 4years to 5th position

Emerging Markets in Turmoil


Partly due to expectations of US tapering of Quantitative Easing (QE)

Approximately $44bn of hedge fund investments exodus

in 2013

20-most traded emerging markets’ currencies have weakened by an average of 8% in 2013- Bloomberg

Currency % Depreciation/ $ (Jul-Aug)

Brazilian Real 4.78%

Russian Ruble 0.87%

Indian Rupee 8.83%

Chinese Yuan 0.25%

South African Rand 4.08%

Nigerian Naira 1.63%

Source: Bloomberg, FDC Research


50% of Emerging markets’ GDP in 2013 is accounted for by services compared to 76.5% in the industrialized world- FT

India’s economy slowed sharply in Q2, expanding only 4.4% compared to 5.5% in Q2’12

The rupee has plunged 11%, stock market down 4.7% for Asia’s 3rd largest economy

Nigerian exports to India are 8.9% of the total exports

($95bn)

Nigerian imports from India in 2012 is 5.5%

Leading destination for medical tourism

Indian Economy under siege

Volatile Commodity Prices


Oil and gold prices have spiked sharply due to the unpredictable consequences of a likely US military action against Syria

Pushed oil prices to a 6-month high of $117pb

Bonny Light is now down to $113pb after the likely detente

Other oil producing countries are experiencing supply disruptions

Oil thefts in Nigeria increases discounted oil supply into the black market

Nigeria will benefit temporarily from higher oil prices

SSA

Ghana - The Cedi Weakens


Inflation in Ghana increased to 11.8% in July from 11.6% in June

Imported inflation due to weaker cedi

Higher prices for clothing, transportation

Government contemplating a complete removal of fuel subsidy

This will push CPI beyond 8.9% target of the Bank of Ghana

Fiscal deficit will reduce sharply and reduce inflation

Cedi weakened by 11.6% against the dollar YTD One of the worst performing currency after the South African rand and Kenyan Shilling

Benchmark interest rate held at 16% p.a. to curb currency depreciation

Kenya to join Oil Exporters


Tullow Oil Plc has discovered an estimate of 300mbpd of

oil in Kenya

Government plans to start oil shipments in 2016

Kenya has offered its 46 newly-discovered oil blocs to

interested Nigerian investors

Kenya imports all its fuel

Approximately 80,000 bpd at a daily cost of over $8m

South Africa - Sluggish Growth and

Weaker Rand

South Africa’s GDP grew by 3% in Q2’13

Slower pace than predicted due to a slump in mining and

farming output

Business confidence index declined to 90.5 in August

From 90.7 in July

Strikes and weak consumer confidence may limit GDP

growth in H2’13

Inflation increased to 6.3% in July from 5.5% in June


Benchmark interest kept at 5% p.a as an inflation targeting

measure

South African rand has lost 17% against the dollar in 2013

The worst performer among 16 major currencies tracked by

Bloomberg

The upside- weaker rand improves the global

competitiveness of locally manufactured goods


South Africa - Sluggish Growth and

Weaker Rand

Indicators June’13 July’13 August’13 Jul/Aug (%)

Oil Market

Spot price ( end of month) 106.00 110.10 115.21 4.64

Spot price (avg $’pb) 106.12 110.63 110.48 0.14

Production (mbpd) 1.87 1.87 1.88 0.53

Money Market (End Period)

OBB (%)p.a 10.25 10.58 11.25 67bps

Overnight (%)p.a 10.46 10.92 11.67 75bps

MPR (%)p.a 12.00 12.00 12.00 -

CPI ( %) 8.40 8.7 *8.64(+/-0.13) 0.06

External Reserves ($’bn) 48.04 47.03 46.85 0.38

Exchange rate (End Period)

Official (N/$) 155.75 155.76 155.76 -

Inter-bank (N/$) 161.86 160.50 163.11 1.63

Parallel (N/$) 162.5 163.00 164.00 0.61


Oil prices surged in August by $7pb

Brent strengthened to a 6-month high of $115.21pb

Oil production increased marginally to 1.88mpbd

From 1.87mbpd in July

Interest rates surged to 21%p.a (initial impact of 50% CRR

on public deposits)

Stabilized at an average of 14-15% p.a. after FAAC funds

Stock market declined 4.39% approaching fair value


NBS reported a slower economic growth rate of 6.18% in Q2’13

Down from 6.56% in the preceding quarter

Decline attributed to drop in oil production

Oil sector growth down to 1.15% in Q2’13 from 0.54% in Q1’13

According to NBS, total oil output shrank to 2.11mbpd from 2.29mbpd in Q1’13

Increased oil theft and production shut-in

Oil sector’s contribution to GDP declined to 12.9% from 14.75% in Q1’13


Non-oil sector growth also slowed to 7.36% from 7.89% in

Q1’13

Remains major driver of GDP growth

Agriculture, airlines, hotels & restaurants were major contributors

Building and construction also increased

NBS projects 6.6% growth in

Q3’13


-4

-2

0

2

4

6

8

10

Q1'12 Q2'12 Q1'13 Q2'13

RGDP(%) Oil Sector (%) Non-oil Sector (%)

Source: NBS

Real GDP & Sectoral Growth

Growth Likely to Increase


Agriculture will be a positive contributor- harvest of palm

oil, cocoa and maize

FDC estimates 6.34% growth in Q3’13

Projects 6.53% in Q4’13

Slight improvement in power supply

Increased productivity arising from efficiency in payment

system

Naira lost 1.63% to trade at N163.11/$ at the inter-bank market

Lowest value in 15 months

Speculation that the CBN will devalue the naira is fuelling excessive demand

CBN has resumed intervention, selling directly to the market

Total forex sold was $2.17bn; 34.24% less than July’s $3.3bn

External Reserves depletion down to $46.6bn, still covers 10months of imports and 7 months of all payments


FDC forecasts August inflation

to remain relatively unchanged

at 8.64%

Food basket mainly unchanged

Harvest season base effect

Money supply still restrained and

limited transmission into price

level

Imported inflation due to

weaker naira not yet impacting

prices

8.64%

8.0%

8.2%

8.4%

8.6%

8.8%

9.0%

9.2%

9.4%

9.6%

9.8%

Jan-17 Feb-17 Mar-17 Apr-17 May-17 Jun-17 Jul-17 Aug-17


Source: NBS, FDC Research

Inflation Rate (%)

FDC’s Urban inflation rate was

flat at 11.57% in August

Influenced by a 1.73% decline in

food index

Eggs, pepper, cereals and beans

Supply of newly harvested crop

Non-food index increased

marginally by 0.09%

Due to higher cost: toiletries, anti-

malaria drugs and cooking gas.

-50%

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

60%

Egg

s

Pepper

Cer

eals

Yam

Flo

ur

Guin

ea C

orn

Bea

ns

Pla

nta

in B

unch

Veg

etab

les

Ric

e

Mel

lon S

eeds

Ker

osi

ne

Cem

ent

Dom

estic

Air

Far

es

Toile

trie

s

Anti-M

alar

ia D

rugs

Cooki

ng

Gas


Source: FDC Research

FDC Food & Non-Food Basket

Headline inflation rose to 8.7% in July

8.64% estimated in August

Wage pressure mainly from Health workers and ASUU

Health workers demand met

ASUU strike still ongoing

NLC prepares to protest Senate decision to put minimum wage

under state legislation


Initial impact on the market:

Money Market: Average NIBOR spiked to 21%p.a. in

response to the Cash Reserve Ratio (CRR) debit

Forex market: Before CRR, the Naira traded at an average

of N159/$ at the interbank market due to increased forex

supply

Reduction in WDAS funding by the CBN

Slowdown in external reserves depletion pushing reserves

back up to $47bn after the CRR debit

Monetary Policy - CRR Impact

Dust yet to Settle


Stock market: ASI declined by 1% to 38,038.79 points and

Market Capitalization lost N121bn

Institution investors and banks reduced their demand for

shares

Channeled funds into money market where rates were high at

21%

Post-CRR Effect:

Interbank interest rates stabilized to an average of 15%

Naira weakened sharply to a 20 month low of N163/$ at

the inter-bank market

Monetary Policy - CRR Impact

Dust yet to Settle


Fuelled by increased demand for dollars by corporates

Withdrawal of funds from emerging markets in response to the

proposed tapering of US bonds

Approximately $40bn has been withdrawn from emerging

markets within H1’13

Reserves currently at $46.6bn due to renewed pressure

on the exchange rate

…Monetary Policy


Impact of CRR expected to wear off completely by Q3’13

Monetary policy stance is expected to remain contractionary in September when the MPC meets

No going back for Sanusi in his resolve to maintain the value of the naira

Resisting the urge to devalue the naira despite exchange rate trading outside the CBN’s target band of N150/$- N160/$

Monetary Policy to be a major subject of discussion as Sanusi leaves in 2014

Central Bank was highly independent and autonomous under Sanusi’s regime

Monetary Policy - Outlook


FAAC down to a 12 Month-Low

Federation allocation disbursed remained relatively unchanged at N715bn

N240bn was sterilized due to the CRR debit

This implies only N478bn was actually shared amongst the 3 tiers

Money supply declined to N14.81trn in July

5% lower than the N15.59trn recorded in June

Lowest level this year

Decline attributed to the 1.2% and10% decline in net foreign assets and net domestic credit respectively

Source: CBN, FMF, FDC Research

41

14.40

14.60

14.80

15.00

15.20

15.40

15.60

15.80

15.17

15.56 15.59 15.62

15.42

15.59

14.81

Money Supply (N'trn)

575

888.4

519 531.33 620.25

718.1 715

FAAC (N' bn)

Financial Derivatives Company Limited

Value of Cheques down by 10%

Value of cheques cleared in

Lagos declined by 10.33% to

N2.17trn in August

From N2.42trn recorded in July

This is a proxy for business

activity level

CBN’s N150,000 restriction on

third party cheques beginning

to have an impact

We expect further decline in

coming months

42

Source: CBN, FDC Research

0.00

500.00

1,000.00

1,500.00

2,000.00

2,500.00

1,845.31

1,665.53

1,727.33

1,883.25

2,037.66

2,312.81

2,423.66

2,168.42

Value of Cheques (N’bn)


Ships Awaiting Berth Rises but Rig

Count Falls Number of ships awaiting berth rose to 105 in August

35% higher than the 78 ships recorded in June

Highest level since this year

Implies an increase in imports and congestion at the ports

Rig count declined to 17 in July from 20 in May (Baker Hughes)

Producers pulled out from less active rigs

Rig count expected to increase as producers boost production

In order to enjoy the current rise in crude oil prices

92

71

89 91 104

78

105

0

20

40

60

80

100

120

Feb-1

7

Mar

-17

Apr-

17

May

-17

Jun-1

7

Jul-17

Aug-

17

No of Ships Awaiting Berth

43

Source: NPA, Baker Hughes, FDC Research

0

5

10

15

20

25 19 18

15

22 22 20

17

Baker Hughes Rig count


Retail Industry

Retail - Ramadan boost

5% increase in retail trade driven by white products and

FMCG sales

Food category supported by the Ramadan celebrations

Short lull period a week after Ramadan after which

business stabilized

Sales during the period also supported by ‘back to school’

shopping

In general, daily needs remained the same during the

period but weekend purchases increased


Retail- Competition leading to Lower Prices

No significant change in prices of commodities in our

sample basket

14% increase in inventory levels

Increased threat of competition

Many retailers lowering prices and doing promos in order to

increase sales

Cash-based transactions represent 83% of total sales

Card-based transactions remained relatively unchanged at 17%

30% increase in traffic during the Ramadan celebrations


47

Ministry of Industry, Trade and Investment formally

launched the Nigeria Trade Hub (NTH)

A web-based solution for facilitating cross-border

commerce

Simplifies procedures and provides information concerning

trade at a fast and cost effective manner

Expected to boost Nigeria’s ranking in the ‘ease of doing

business’ index

Expected to enhance Nigeria’s competitiveness

Web-Based Solution to improve

Cross-Border Trade


48

Nigerian Beer Market declined by 11% in 2013

Compared to 2012, the beer market has shrank sharply

A decline of 7.4% was recorded in 2012

The biggest casualty was in the high end brands mainly

imports- Becks, Carlsberg, etc

The malt market declined by 6%, as consumers shift to

low sugar products- Amstel and Malta Guinness

Beer Market Shrinks Sharply


49

Johnnie Walker, a brand of scotch whisky owned by

Diageo launched its Gold label brand in Nigeria

Johnnie Walker is known to be the world’s best selling whisky

Diageo has been operating in Nigeria since 1962 through

its subsidiary Guinness Nigeria

Popular brands include Smirnoff Ice, Malta Guinness, Guinness

Extra smooth

The Gold label is dubbed ‘the celebration blend’

Expected to be a compelling option during celebrations/parties

Available in 70cl and 1 litre bottles

Spirits Expands with Johnnie Walker

launch


Data usage in Africa set to increase due to increased

smartphone penetration (Bharti Airtel)

Airtel’s African data subscriber number rose by 65% to

15m customers

Data usage rose by 150%

Tremendous growth already experienced in Tanzania,

Nigeria, Uganda and Burkina Faso

Unconfirmed sources say that Samsung is to set up an

assembly plant in Nigeria

Surge in Data Demand in Telecom

Space


Retail Industry- Outlook

September sales to be boosted by ‘back to school

shopping’

Further drop in prices and growth in smartphone sales

expected

Basic feature phones will be hard to sell in about 5-10 years

Network challenges need to be addressed to further improve

electronic transactions


Global Aviation IATA Reports Robust Growth

Reports growth in global passenger traffic and airline

capacity for the month of June

Overall demand rose by 6% compared to June 2012

Growth is measured in revenue passenger kilometres (RPK)

Capacity expanded by 5.6% in the same period

Total market load factor came to 81.7%

Implying that airlines are efficiently meeting increasing demand

for travel

Delta shares jumped 9% after being included in the S&P

500 index 54 Financial Derivatives Company Limited

IATA Reports Robust Growth

The growth trend was reflected in all regions with Asia-

Pacific airlines recording half of the increase

North American airlines grew 3.4%

Latin American airlines recorded growth of 8.7%

European carriers reported a second consecutive month of

solid growth with 4.8%

Due to relative stability in the Eurozone


IATA Reports Robust Growth

Emerging markets benefitted from strong domestic economic

growth in key markets such as Ghana, Nigeria, Ethiopia and the

DRC, to record a growth of 11.2%

Middle East carriers posted a growth of 11.0%

Passenger growth in the (BRICS) economies is slowing

Brazil, Russia, India, China and South Africa

In response to shrinking economic output


Global Aviation- Load Factors

Load factors to all sectors are up in August through

September

Lagos-London, Frankfurt, Paris etc running at 98%

British Airways (BA) are approximately 100% load factor

Lufthansa 98%

Delta 95% Lagos-Atlanta

Due to holidays, family travels

Apart from seasonality there is evidence of approximately

15% growth in international passenger traffic in Nigeria


Global Aviation- Popular Travel Destinations

5 World’s Most Popular Destinations Bangkok London Paris Singapore New York

Traffic to Bangkok was up 18% this year to 15.9 Million

arrivals It is expected to grow another 10% in 2014 The city ranks number 4 in Cross Border spending International visitors spent $14.4bn this year Main attraction are Buddhist temples, delicious street food


Ethiopian Airline flights out of Enugu-Addis Ababa

reporting 40% load factor

Mainly trader traffic

Cannibalising Emirates, Qatar and Etihad

Also eating into the domestic carriers traffic: Enugu-Lagos

and Enugu-Abuja

Regional Aviation – Enugu International

Airport Update


Nairobi Airport Resumes Operations

Nairobi’s Jomo Kenyatta International Airport has

reopened for flights

The airport is a major hub for East Africa

Was badly damaged by a fire in early August

Both international and local passengers continue to experience

delays as authorities try to restore normal operating

conditions


Domestic Aviation - National Carrier in 2013

Back to the dark ages

Governments are divesting from airline business globally

National carrier to be officially unveiled to the public on

October 1st

Will comprise airlines indebted to the government via AMCON

Aero Contractors and Air Nigeria

To be funded via a private sector IPO of about N200bn ($1.24bn)

Government will retain a 25% stake

75% will be controlled by yet to be disclosed private investors


FGN will like to believe that the carrier will increase

Nigeria’s participation in the aviation space

Currently dominated by international carriers

Whose remittances are estimated to exceed $2-3bn in 2013

The last national carrier was Nigeria Airways

Plagued by mismanagement, corruption, and overstaffing

Nigeria Airways ceased operations in 2003


Domestic Aviation - National Carrier in 2013

Lekki-Ikoyi Link Bridge boosts

Property Values

Value of properties in Lekki positively affected by the

Lekki-Ikoyi link bridge

Admiralty Way and Suburban Lekki

Approx. 30% appreciation in property value since the opening

of the bridge

Residents living on major roads likely to move out due

to mixed development- residential and commercial

E.g. Alexandra, Bourdillon, Gerrard


Vacancy Factor down, Rents Stabilize

Real estate prices/rents are inching up

Prices crashed to about 230-240% during the 2007/2008

crisis

In Lekki, land per plot now sells between N80m- N120m

Up 80% from 2011

Rents up in Lekki

Semi-detached house: N4m

Serviced flats: N3m


Vacancy Factor declines in Ikoyi

Increase in demand for residential properties in Ikoyi

Supported by increased demand by expatriates

Average residential and commercial vacancy factor is low

at 17.4% and 13.6% respectively

Vacancy factor for residential properties in V.I is high due

to increasing number of abandoned properties

Residential vacancy factor - 46%

Commercial vacancy factor - 29.2%


67

No. of Flats Flats Vacancy Factor No. of Houses

Houses Vacancy Factor

Average Residential

Vacancy FactorCommercial Vacancy Factor

Cooper 40 6.2% 39 1.7%

Probyn 33 3.0% 26 0.3%

Raymond Njoku 200 3.2% 92 1.0% 2.0%

Cameron 390 0.9% 45 6.1% 3.4%

Lugard 75 1.2% 38 0.7% 0.7%

Glover 42 7.3% 55 3.1% 7.5%

Bishop Oluwole 12 22.4% 70 2.8% 18.0%

Elsie Femi Pearce 15 6.6% 20 4.5%

Karimu kotun 20 10.5% 25

Akinolugbade 15 9.2% 22 0.6% 5.6%

Saka Jojo 21 1.1%

Olosa 8 20% 20 20%

The vacancy factor for flats in V.I. reflects the increasing number of abandoned buildings





Vacancy Factor -Flats

Vacancy Factor -House

Average Vacancy Factor

Ikoyi

August 46.20% 12.39% 29.30%

September 21.8% 12.9% 17.4%

V. Island

August 55.19% 10.03% 32.61%

September 68.7% 23.4% 46%



Intercontinental Hotel intensifies

Competition

69

Increased traffic in Kofo Abayomi since the opening of

Intercontinental Hotel

The street is now mainly commercial

Goodies, Reddington Hospital, Porsche Centre, etc

Price competition and service quality should improve

Improve training for customer service and hospitality to

be a unique selling point


Lekki-Epe Concession Repurchased

Lagos State Government is to buy back its concession

rights on the Lekki-Epe expressway

Current operator is the Lekki Concession Company (LCC)

Government to issue bonds worth N87.5bn

Impact on Lagos state govt. Revenues

Assuming 85,000 cars pass through the toll gate daily,

with a revenue of N11.05m


71

Hotel Survey conducted by Hogg Robinson Group reveals

that Lagos is the 2nd most expensive city for travellers

With an average hotel room rate of £117 (N28,241.46)

Moscow is the most expensive

Lagos enjoys high occupancy factor due to increased

demand

Supported by the presence of oil & gas businesses and

multinational companies

Lagos, the Second Most Expensive

City


Real Estate - Outlook

Kofo Abayomi to be one-way from Idowu Martins

junction from Oct. 4

We expect increased foreign investments in Lagos

Security is a determining factor


Financial Derivatives Company Ltd.

Bears are dominant in August

ASI shed 1,666.05bps in August 2013, declining by 4.39% to

36,248bpsfrom 37,914bps

35,000.00

35,500.00

36,000.00

36,500.00

37,000.00

37,500.00

38,000.00

38,500.00

39,000.00

20000

20500

21000

21500

22000

22500

23000

23500

24000

AS

I A

UG

US

T 2

013

AS

I A

UG

US

T 2

012

All Share Index

Aug-12 Aug-13 Source: FDC Research


Bear Market in August

Market capitalization declined by 4.25% to N11.49trn from N12trn

Market closed in the negative in 14 out of 20 trading days

Total value of stocks traded for the month declined 9.45% to N67.82bn from N75bn

The average daily turnover was N3.39bn, a 4.13% increase

The P/E ratio of the market came down to 25.16 from 29.28

Banking stocks were biggest casualties declining by 8.72%

Sectors that were most affected were healthcare, industrial goods, oil and gas

YTD return down to 29.28% from 35.03% 76 Financial Derivatives Company Limited

Propelled by…

Quarantine of 50% public sector deposits from banks by

CBN

Lending rates increase by about 2% - 4% as GT Bank set the

pace

Fixed income market buoyed as money market rates spike,

increased initially by 800bps

Investors favour fixed income over equities

Overpriced assets – signs existed since Q1

H1’13 corporate earnings increased by 21.8%

Share prices increased by 36.2% on the average


Propelled by…

H1’13 profits of banks grew by an average of 33.2%

Share prices of banks spiked by over 37.56% as of June 2013

H1’13 results

Released results show mixed corporate performance

Access Bank, FBNH and Oando announce unimpressive

performance

Interim dividend of Access and GTB unable to impress

investors


Exogenous Variables

Commodity prices resurge, S & P GSCI rise by 3.4%

Gold and Cocoa price rise by 5.29% and 6.00% respectively

Crude oil price rise on fears of western strike on Syria

Wheat and Sugar remain weak, decline 1.98% and 2.74%

United States…Q2’13 GDP growth beats estimate

Anticipation of US Federal Reserve taper on QE unsettles global

market

Capital outflows witnessed in emerging markets

Brazil and India most hit as currency depreciates


Exogenous Variables

China….slowdown

Concerns mount despite growth in July manufacturing figures

Morgan Stanley Strategist, Ruchir Sharma forecast a slowdown in Chinese growth to about 5% - 6%

Commodity-exporting economies threatened

Euro zone….good news amidst vulnerability as GDP rises 0.3% in Q2

Exports rose 3% in June from a decline of 2.6% in May

UK economy beats forecast, grows by 0.7% in Q2

German economy grew 0.75% in Q2


Nigeria not alone in the dog house

Source: Bloomberg, FT, FDC Research

Country Index Return

United States DOW JONES -4.45%

United States S & P 500 -3.13%

United Kingdom FTSE -2.84%

Japan NIKKEI -2.04%

Brazil IBOVESPA 3.68%

India CNX NIFTY -4.71%

China SHANGAI SE 5.25%

Indonesia JCI -9.01%

South Africa JSE 2.27%

Kenya NSE -1.88%

Ghana GSE 2.75%

Egypt EGX 30 -1.07%

Nigeria NSE ASI -4.39%


H1’13 Corporate Earnings…Mixed

Performance

Descriptor PAT Growth Sector

ACCESS (20.22%) Banking

FBNH 0.94% Banking

GUARANTY 7.60% Banking

ZENITH 7.09% Banking

DANGFLOUR (395.40%) Consumer

PZ 109.59% Consumer

CONOIL 254.70% Oil & Gas

MRS 44.07% Oil & Gas

OANDO (35.30%) Oil & Gas Source: NSE, FDC Research


Share Price Performance

Any Synergy with H1’13 Performance?

Descriptor July 31 Price

Aug 30 Price Change % Change

ACCESS 11.05 10.8 (0.25) (2.26)

FBNH 16.92 16 (0.92) (5.44)

GUARANTY 25.30 24.53 (0.77) (3.04)

ZENITH 19.75 19.71 (0.04) (0.26)

DANGFLOUR 9.50 9.01 (0.49) (5.16)

PZ 45.98 37.8 (8.18) (17.79)

CONOIL 33.67 29.8 (3.87) (11.49)

MRS 36.14 36.14 0.00 0.00

OANDO 12.50 11.2 (1.3) (10.40)

Bell Weathers – How they fared

Descriptor % Change

Dangote Cement 2.42%

NB 4.23%

Nestle 5.58%

Flourmills 2.92%

Guinness 4.08%

Source: NSE, FDC Research

Poor growth of earnings also a variable for poor share price performance- Access, Oando, FBNH


NSE Sector Performance

Consumer goods performance driven by brewers – Guinness, Jos Int’l and Champion


-8.00%

-6.00%

-4.00%

-2.00%

0.00%

2.00%

4.00%

6.00%

Agric

Ase

m

Co

nglo

mera

tes

Co

nstru

ctio

n

Co

nsu

mer

Fin

an

cia

l

Health

care

Info

.Co

m.T

ech

Ind

ustria

l

Natu

ral re

sou

rces

Oil &

Gas

Serv

ices R

etu

rn (

%)


NSE Sector Performance

Possible drivers of NSE

Syrian and Arab region unrest

Commodity prices

Increased finance cost

Weak naira

Resurgence of developed markets

Emerging markets volatility

Politics of 2015 – increased govt spending

Policy change – MPC meeting, tight stance to continue

Market floor – hunt for good bargain

NSE Outlook… September in View


Impact on Sectors…

Sectors Financial Services Consumer Goods Agriculture Conglomerates

High interest rate

• Squeeze on margins • Risk of rise in NPL • Profits to decline

• Increased finance cost • Reduced revenues and profit

• Increased finance cost • Reduced growth

• Increased finance cost

Weakened Naira

• Rise in interest payment on foreign debt capital • More NPL’s on forex denominated loans

• Gains on export sales • Increased cost of imports

• Increased revenues on exports

• No significant and direct impact

Commodity prices

• No direct impact • High cocoa prices bad for confectionaries • Low wheat & sugar prices good for bakers & beverages

• Threat to sales due to cheaper imports

• No significant and direct impact

Increased Govt spend

• Increased regulator clampdown

• Increased consumer spending will aid sales growth

• Increased circulation of cash to aid sales growth

• Increased sales morelikely



NSE Outlook…

ASI may fluctuate between 36,000 – 36,500 points in

September

Possible rally expected but will be short lived due to

profit taking

Rates not expected to significantly decrease below pre-

CRR levels of Average NIBOR at 13.98%

September 3 snapshot of Average NIBOR at 14.50%

Funds expected to remain in favour of fixed income


NSE Outlook…

Increased finance cost to impact Q3’13 results negatively

Q4 will witness slight pick up in appetite for equities

largely due to attractive prices

Weaker naira means increased COGS and margin

pressure

2% decline in currency value will magnify into a 10%

increase in COGS and profitability squeeze

Banking sector profitability will be eroded by at least 30%

due to public sector subsidy erosion


NSE Outlook…

Banking stocks will be volatile – Attractive prices vs. Profit

taking

Consumer goods, Agriculture, Construction and

Conglomerates are sectors expected to perform

positively in the month

NSE ASI may decline by 2% in September, bottoming at

36,000 points


PDP Dissection or Inflection

The PDP mini-convention turned into a circus

With 7 governors and former V.P. staging a dramatic walkout

Team Jonathan was caught completely unawares by an astute Northern political machine

It was clear that the PDP mainstream had no plan B

It underestimated the political opposition and was complacent

Forgetting the basic principles of Nigerian political power calculus

Easy to get to power, difficult to stay in power


PDP- The Journey so far

The Presidency in a knee-jerk reaction fired 9 ministers

All with links and nominated by the renegade governors

The Presidency hopes to use the vacant slots as carrots

for hungry northern politicians

In 2011, Jonathan enjoyed the benefit of doubt

Was an underdog and a possible breath of fresh air


As an academic, he was expected to bring intelligence,

analytical rigour and a new dimension to politics

There has since been a crisis of false expectations

In 2015, Jonathan will be running as an incumbent

Hoping to use a track record on economic performance

and security

Also a platform that has united the diverse people of

Nigeria


PDP- The Journey so far


The political calculus of Nigeria power play shows Jonathan consolidating

The political structure is a synthetic hybrid



Levers of Control


Levers Jonathan’s

score Total Possible

Score

10

15

5

2

3

3

2

5

7

52

To stay in power you need to control some or all of the following


Jonathan Score: 52%

A Consensual leader but vulnerable to strong opposition

PDP crisis is a proxy war between the Governors and the

Presidency

PDP Convention has always been controlled by the

governors

The 7 mavericks and colleagues want to retain control

Apart from Obasanjo, only governors have the resources

to become President or and Vice President



Atiku was an elected governor before joining Obasanjo

The strategy of the Jonathan team to disrupt the

Governors’ Forum, worked

The strategy of the governors to disrupt the PDP and

make the party impotent has also worked

It is now down to theory of MAD- mutually assured

destruction as against SAD- solitary assured destruction

The use of security agents and law enforcement to harass

opponents is no longer a workable strategy


Possible Outcomes

A

PDP will be embattled, tied down with court orders and

will be immobilized for election 2015

The state primaries will be controversial and difficult

Jonathan will be the consensus candidate and the party

splits down the middle

The South West will not go with the PDP

The South/South will be split down the middle

The South East will go with the PDP


Possible Outcomes

B

New PDP digs in the North

Prevents the PDP from ever winning 25% in any of the

core Northern states

APC fields a Northern candidates with a South West running mate

No candidate wins in the first round in general election

Presidential race goes with a run-off

All bets are off


Flash Points to Watch

Anambra election – if Andy Uba gets the court ruling as

candidate

It will be a race between APGA and PDP

APC chances have been eroded by the politicization of

the relocation of Igbo destitutes

Ngige could still give a good fight but chances are slim

Labour party could pull a surprise


Outlook for September

September Outlook


Interest rates remain high and volatile

MPC to keep all rates and variables unchanged

Stock market to continue sliding

Naira will weaken to N165/$ in the interbank market

External Reserves will decline to $44bn

CBN continues defending the Naira

Oil price will decline again to $107pb

PDP will continue in its effort at reconciliation

Jonathan will remain in driver’s seat in a messy situation

Corporate Humour


Opportunity may knock once, but temptation leans on the bell.

A clear conscience is usually the sign of a bad memory.

- Unknown Author

Discipline is the training that makes punishment necessary.

- Unknown Author

- Robert Lee

Corporate Humour


In politics if you want something said ask a man. If you want something done ask a woman.

The water downstream cannot be clear, if the water upstream is muddy.

The optimist is the kind of person who believes a housefly is looking for a way out.

- Maggie Thatcher

- Korean Proverb

- George Jean Nathan

Corporate Humour


The man who cannot dance thinks that the band is no good.

Do not remove a fly from your friend’s forehead with a hatchet.

Retirement is when you stop living at work and start working at living.

- Chinese Proverb

- Unknown Author

- Polish Proverb

Corporate Humour


Being defeated is a temporary condition, giving up is what makes it permanent.

The dictionary is the only place where success comes before work.

What does a broker get when he gives bad advice? A Commission

- Arthur Brisbane

- Quick & Reilly

- Marilyn Vos Savant


Bismarck J. Rewane, MD/CEO Financial Derivatives Company Ltd.

Lagos, Nigeria 01-7739889

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