Monthly Economic News and Views

Lagos Business School

Executive Breakfast Meeting

Presented by B.J. Rewane Financial Derivatives Company Limited

April 6, 2016

Squandering a Golden Economic Opportunity

2

Outline

March in Review

Global & Regional Context

Outlook for April/May

Policy Direction & the IMF Article IV Review

Business Proxies & Stock Market

Political Risk Analysis

3

The Squandering of a Golden Economic Opportunity

“There is a tide in the affairs of men.

Which, taken at the flood, leads on to fortune;

Omitted, all the voyage of their life

Is bound in shallows and in miseries.

On such a full sea are we now afloat,

And we must take the current when it serves,

Or lose our ventures”

-Brutus, Julius Caesar, Act 4

If an opportunity is omitted, you will find yourself

stranded in miserable shallows

March Highlights

5

Macro-Economic Scorecard

S/N Indicator March 2015 March 2016 Percentage Change

1 Spot price (avg $’pb) 57.09 39.75 (-30.37)

2 Oil production (mbpd) 1.82 1.75 (-6.42 )

3 Treasury Bill Rates (%) 15.15 5.99 (-916bps)

4 MPR (%) 13 12 (-100bps)

5 Inflation (%) 8.5 11.4 2.90

6 External Reserves (US$’Bn) 29.79 27.87 (-6.45)

7 Exchange Rate (N/$) Interbank 199.16 198.55 (0.31)

Parallel 220 322 (-31.68)

Source: NBS, OPEC, CBN, NSE, FDC Research

6

Macro-Economic Scorecard S/N Indicator Position as at March 29, 2015 Position as at March, 2016 Percentage Change

1 Market Capitalization (N’ Bn) 10,720 8, 690 (-18.94)

2 FAAC (N’bn) 435 345 (-6.76)

3 M2 (N’trn) 19.14 20.49 (Feb) 7.05

4 CBN PMI 48.9 45.5 (-6.95)

5 Vacancy Factor - Residential (%) 25 11.4 (-13.60)

6 Vacancy Factor - Commercial (%) 20.33 33.33 (-13.00)

7 Power grid (MW) 4,044.6 2,030 (-49.8)

8 Misery Index (%) 16 21.8 5.8

9 NIBSS Transaction(N’bn)

Cheques 548 501.17 (-8.55)

PoS

30 46.14 53.8

In 12 months there have been a general deterioration in macroeconomic conditions

Source: NBS, OPEC, CBN, NSE, FDC Research

7

Scarcity Bites and the Budget Languishes

Nigerian economy slides into a double dip slowdown

Economy expected to contract for the second consecutive

quarter to 2% in Q1‟16

2015 growth now estimated at 2.79%

First time in decades when Nigeria has underperformed SSA

average

8

Scarcity Bites and the Budget Languishes

Contraction of economic activity has its genesis in a misaligned

exchange rate

A consequence of sharply lower oil prices: 68.1% and

deteriorating terms of trade

Compounded by chronic shortages of inputs of power, fuel and

forex

9

Scarcity Bites and the Budget Languishes

Economic imbalances exacerbated by:

A dogmatic obsession with exchange rate rigidity

A convoluted rationing of forex being abused by operators and regulatory

arbitrage

Price control contradictions in the downstream petroleum sector

Chronic underinvestment in the power sector

Strategic acts of economic sabotage by vested interest groups

Aided by collusion with insiders and policy making collaborators

10

Q4 Data Output

Expanding Sectors Contracting Sectors

Sector (Y-o-Y) Q3’15 Q4’15

Trade 4.4% 4.69%

Agriculture 3.46% 3.48

Manufacturing -1.75% 0.38%

Arts, Entertainment,

Recreation

6.39% 6.54%

Accommodation & Food

Services

-5.42% -3.55%

Sector (Y-o-Y) Q3’15 Q4’15

Oil 1.18% -8.28%

Real Estate 2.06% 0.79%

Financial Services 6.56% 6.41%

Construction -0.1% -0.35%

Transport and Storage 4.86% 4.39%

Source: NBS Source: NBS

11

Scarcity Bites and the Budget Languishes

Factors curtailing growth include:

Trade credit evaporation

Shrinking supplier credit and bills for collection

Cold feet by export credit agencies

Import restrictions

Astronomical cost of forex plus smuggling

Power failure from the grid

12

PMI Up in March

PMI data from both FBN and CBN increased

in March

FBN up from 50.6 to 54

CBN up from 45.5 to 45.9

Mainly due to inventory build up

Hiring headcount is down

Suggesting that inventory build up is defensive and

speculative as a hedge against possible currency

devaluation

52.6

54.4 54.2

44.6

50.6

54

49.2

51.2 51.2

47.2

45.5 45.9

40

42

44

46

48

50

52

54

56

Oct'15 Nov'15 Dec'15 Jan'16 Feb'16 Mar'16

FBN CBN Threshold

Source: CBN, FBN Quest

13

Power Down Sharply in March

Power output from grid down sharply to 2,030MW in March

from 2,695MW

System collapsed for a few hours to zero output

First time this century

High temperatures averaged 33ºC and humidity of 80%-85%

Sweltering heat and massive use of air conditioning are tasking

the grid

14

Headline Inflation Spikes and will rise again

Headline inflation reached a 34-month high of 11.4%

Spurred by forex and petrol shortage

Nigeria among the 12 most expensive countries in Africa

5.00

7.00

9.00

11.00

13.00

Oct'15 Nov'15 Dec'15 Jan'16 Feb'16

Monthly (YoY) Inflation Rate vs. MPR

Headline Inflation All items less farm produce Food Inflation MPR

Source: NBS

15

Propelled by a Combination of Factors

Low

Low

Low

Seasonality

Tomatoes

N6,000 (1Basket)

Pepper

N4,500 (1 Basket)

Yam

N500 (1 medium tuber)

Price Elasticity

16

Low

Cost Push/ Smuggling

Moderate

High

Low

Transport fares up

200%

Manufactured finished

goods up 20%

Palm Oil

N9,600 (30L)

Noodles

N1,800 (1 carton)

Propelled by a Combination of Factors

Price Elasticity

17

High

Moderate

Moderate

Moderate

M2 Propelled

Forex shortage

Cement

N1,700 (50kg)

Diesel

N130 (1liter)

Sugar

N9,000 (50kg)

Flour

N8,800 (50kg)

Propelled by a Combination of Factors

Price Elasticity

18

Unemployment and Underemployment Up Sharply

A lagging indicator of falling corporate profitability, sales and margins

Nominal figures are more startling when analysed demographically

Unemployment is higher at the lower age bracket

Q3’15 Q4’15

15-24 years 25-34years 15-24 years 25-34years

Unemployment 17.8% 10.8% 19% 11.4%

Underemployment 31.8% 18.5% 34.5% 19.9%

Source: NBS

19

Misery Index Up

The Misery index analysis confirms a sense of national desperation and

anger

Unemployment + Inflation = Misery Index

10.4% + 11.4% = 21.8%

When it increases in 2 consecutive quarters it results in electoral

defeat or a sharp rise in disapproval ratings

Nigeria‟s ranking among miserable states is 6th

20

Monetary Conditions

Money supply grew marginally in February

Shrank in March after the CRR and MPR increase

Average long opening position in march was N306bn

608,969.19

817,519.18

566,659.97 542,564.00

306,481.65

-

100,000.00

200,000.00

300,000.00

400,000.00

500,000.00

600,000.00

700,000.00

800,000.00

900,000.00

Nov'15 Dec'15 Jan'16 Feb'16 Mar'16

Average opening position (N'm)

21

FAAC Down

The FAAC allocation (revenue shared by the states) has been sliding

since 2015

In spite of improved revenue collection

0

50

100

150

200

250

300

350

400

450

500

Sept'15 Oct' 15 Nov' 15 Dec'15 Jan'16 Feb'16 Mar'16*

FAAC (N/bn)

22

Stock Market

FY‟15 corporate revenue up 3.18%, at par with GDP growth

FY‟15 PBT down by 3.83%

Stock market scott-free lost 17.17% in Q1‟16

Volatility up 19.99%

One year dollar adjusted return (-32.94%)

Average P/E up to 8.26x

AVDT down by 17.86% to N2.29bn

23

External Reserves Accretion

External reserves accretion of $40m in March to $27.86bn

Imports and payment cover of 4.51 months

Total forex sold by CBN up to $921bn in March

Highest monthly volume in recent times

Backlog of payments reduced marginally

Airline unremitted funds now in excess of $600m

Parallel market stable at N320-N324/$

Global & Regional Economics

26

US Economy Resilient

The U.S economy showing strength in spite of election

distractions

Real GDP growth up to 1.4% in Q4‟15

Initial estimates were for a growth of 1%

242,000 jobs were added in February

Unemployment ticked up by 0.1% to 5%

27

US Economy Resilient

Fed held interest rates steady at 0.25%-0.5% p.a.

Janet Yellen says US interest rate increases will be slower

Alluding to the fact that global economic growth will be weaker in

2016

Inflation eased to 1% in February from 1.4% in January

Next Fed open markets committee meeting is on April 26/27

Interest rates are likely to be unchanged and dovish stance maintained

28

Euro Zone

Caught between the Brussels bomb blasts and immigration

problems

The EU is trying hard to avoid a deflationary spiral

The ECB reduced its benchmark interest rate to 0%

Deposit facility rate was cut by 10bps to (-0.4%)

Lending facility was lowered by 5bps to 0.25%

29

China: Slowing Growth, Rising Debt

Chinese GDP growth rate of 6.9% in 2015 is the slowest pace in

25 years

2nd largest economy in the world and SSA‟s largest investor

Growth target of 6.5% - 7% in 2016

China increased its debt to GDP rate projection to 3% in 2016

from 2.3% in 2015

30

China: Slowing Growth, Rising Debt

Devalued its currency over 4 times between 2015 and 2016

Has external reserves of $3.2trn

The Chinese currency will now join the four other Reserve

currencies in the Special Drawing Right (SDR)

US dollar, British pound, Euro and Japanese yen

31

Currency Markets

Dollar depreciated 1.33% against the basket of currencies since the

March FOMC meeting

The Euro gained 4.24% against the dollar to $1.1218

Canadian dollar appreciated by 5.26% to $0.76/CAD

Highest level since March 23

32

Implications

The US remains a major trading partner of Nigeria

China is the leading supplier of finished goods

Nigerian terms of trade improved marginally in Q1from 29.1

Price of exports increased relative to imports

Buhari and economic team are visiting China next week

To raise additional funding to finance capital projects

33 Top Trading Partners

INDIA:17.3% NETHERLANDS: 9.5% SPAIN: 9.5

CHINA: 25.6% USA: 9.9%

EXPORTS

IMPORTS

BRAZIL: 11.5%

INDIA:4.8%

Three factors affecting trade:

Forex restrictions, currency weakness, declining disposable income

34

SSA- Nigeria Comparison

2016 SSA Nigeria

Population (m) 978 187

GDP ($’bn) 1,395.2 458

GDP per head ($) 1,427 2,448

Real GDP growth (%) 2.9 2.7

Inflation (%) 8.2 11.4

% of SSA

19.1

32.8

71.5% above SSA

-0.2% below SSA

3.2% above SSA

35

SSA- Q1’16 Review

3 countries (Ghana, Uganda and Kenya) have reported lower

inflation in March

While Nigeria & South Africa are reporting a spike in inflation

In Q1, four SSA countries increased interest rates to defend their

currencies

In Angola and Ghana, Central Bank Chiefs shown the door

Most emerging market currencies gained from higher commodity

prices

36

Ghana

Abdul-Nashiru Issahku is the new governor of the Bank of Ghana

After former Governor Kofi Wampah retired early

Issahku has been deputy governor since July 2013

Worked previously at the World Bank, African Development bank

and Export Development and Agricultural Investment Fund

37

SSA: Economic Outlook

Growth in the East African Community will be boosted by

regional integration

Economic growth in Central and West Africa is forecast to slow

from 3% in 2015 to 2.9% in 2016

Ghana‟s economy to soften to 3.7% in 2016, due to election

related tensions and high inflation

Growth in Cameroon will moderate slightly to 4.7% in 2016

from 5.2% in 2015

38

SSA 2016 Outlook

Real GDP growth in SSA will slow to 2.9% in 2016 from 3.2%

African Oil producing countries are bracing themselves up for

weaker fiscal revenues and increased pressure to cut spending in

2016

Major challenge: maintaining a policy stance that supports economic

growth while combating weaker commodity prices and global

uncertainty

Commodities

41

Commodity Prices in March

Average oil prices may increase to as high as $42pb in April

April 17 oil producers meeting unlikely to achieve any

meaningful agreement

Iran and Saudi Arabia already bickering

42

Commodity Prices in March – Grain Prices Bearish

Weak outlook for grain prices in April

Large stockpiles and prospects of a bumper harvest

Increased production driven by lower costs and weaker currencies

Cocoa prices to moderate as weather conditions improve in top

growing region in West Africa – Ivory Coast

Expectation of a shortfall in production will support sugar prices

Policy Changes

44 IMF Article IV Consultation – Nigeria to Work Harder

Growth in 2016 is expected to decline further to 2.3%

Non-oil growth projected to slow to 3.1% in 2016

Oil growth to remain negative at (-4.8%)

IMF expects Nigerian Bonny Light to average $36.1pb in 2016

Inflation expected to remain in the double digit region at 12%

45

IMF Article IV Consultation

Directors encouraged implementation of an independent price-

setting mechanism to address petroleum subsidy

Welcomed tightening of monetary policies and recommended

targeting price stability

Urged gradual increase in VAT and expanding tax base

Stressed the need for structural reforms to enhance

competitiveness and support investment

46

IMF Article IV Consultation

Key risks to the Outlook

Lower oil prices,

Shortfalls in non-oil revenues,

Further deterioration in finances of state and local Governments,

Deepening disruptions in private sector activity due to constraints

on access to foreign exchange

Resurgence in security concerns

Budget 2016 Passed at Last – Buhari Set to Sign

Exchange rate: N197/$.

Fiscal deficit: N2.2trn

Benchmark price of $38pb .

Production of 2.2mbpd

Senate has passed the 2016 budget of N6.06trn

0.33% below proposed budget of N6.08trn

Left the key assumptions unchanged

47

48

Challenges

FUEL SHORTAGE

POWER SHORTAGE FOREX SHORTAGE

Government is faced with three major challenges

Funding the Fiscal Gap

Is N6.06trn reflationary or balanced against

2015?

Depends on the exchange rate used

President and Finance Minister to

source for international loans

Chinese EX-IM≈ $3bn 2016: N6.06trn÷N300= $20.2bn

2016: N6.06trn÷N197= $30.76bn

World Bank≈$2bn

AfDB≈$1bn

2015: N4.49trn÷N190= $23.63bn

2015: N4.49trn÷N220= $20.41bn

Parallel Market

Interbank Market

-1.04%

30.17%

% Change

49

50

S&P Cuts Outlook to Negative

S&P cuts Nigeria‟s outlook to negative, rating remains at B+

Due to exchange rate pressures

Factors that could lead to a downgrade

Deterioration of Nigeria‟s fiscal or external accounts

Increased stress in the financial sector than currently expected

Possibility of a credit downgrade would make it more difficult to

access international funds

51 MPC Tightens Policy Stance

MPC resumes tightening after three months of accommodative

monetary stance

MPR up 100bps to 12% p.a.

CRR up 250bps to 22.5%

Asymmetric corridor narrowed to +2/-5%

52

MPC Tightens Policy Stance

MPC empowered to formulate forex policy

Meaning that exchange rate changes can be made in between

meetings

After the

World Bank spring meeting

Meeting with potential lenders

Exchange rate policy review may take place in May

53

Policy

Government is targeting aggregate revenues of $12.5bn in 2016

The new N50 per transaction stamp duty is a major earner

A new communications tax on voice, data and Pay TV will fetch

$100m per month

New vehicle registration tax based on the value (price of car) to

be introduced

Business Proxies

FAAC Allocation to Remain Low

FAAC allocation likely to increase in March to N360bn

Average oil prices in March were 15% higher compared to February

Oil production down due to outages in the Forcados pipeline

Source: FMF, FDC Research 55

442.6 389.9

473.83

369.88 387.77 370.4 345 360

0

100

200

300

400

500

Aug-15 Sep-15 Oct-15 Nov-15 Dec-15 Jan-16 Feb-16 Mar-16

FAAC (N'bn)

55

56

Volume & Value of Transactions to increase in April/May

Transactions volume and value to increase after budget approval by

President

Source: NIBSS

0

500

1000

1500

2000

2500

3000

3500

4000

4500

PoS Cheque Neft

Dec-15

Jan-16

Feb-16

Volume (‘000)

0

200

400

600

800

1000

1200

PoS Cheque Neft

Dec-15

Jan-16

Feb-16

Value(N’bn)

Ships Awaiting Berth Down Sharply

Ships awaiting berth will hover around 25

Below 2014‟s average of 70 and 2013‟s average of 94

Lower profit margins and shift in consumption patterns will continue to hurt

imports

May increase in April due to an increase in orders for goods such as petrol

Source: NPA, FDC Research 57

28

0

100

200

300

400

0

20

40

60

80

Ships Awaiting Berth

Parallel Rate (N/$)

57

Rig Count will Remain Flat in Q2

Nigeria‟s rig count in March is 3, down from 6

Sharply lower levels than the U.S and other producers

PIB and new fiscal incentives must change before new investments and rigs

Source: Baker Hughes, FDC Research

1543 394

050100150200250300350400450

0200400600800

10001200140016001800

US

Canada

Nigeria

58

Power Generation to Improve Slightly

Power output from the national grid

at 2500MW

Approximately 50% lower than the 12-

month high

Bombing of the Forcados pipeline

disrupting gas supplies

Hydro power is improving because

of the rainy season

Source: Nigeria Power Reform

0

500

1000

1500

2000

2500

3000

3500

4000

4500

5000

Power Generation (Average) MW

59

Retail Industry

62

Retail Industry

Customer traffic to the shopping malls lower due to fuel shortage

Retail prices for groceries, weekly and monthly needs are up

approximately 15%

Consumers continue to down trade by patronising value brands –

buying cheaper goods

Prices are reflecting the parallel market exchange rate and shortages

Replacement cost pricing is being used for inventory valuation

63

Retail Industry

Wholesalers hoarding in anticipation of price increases has

reduced

Inventory levels of cheaper goods growing

Price volatility will increase as interest rates spike making carrying

costs high and prohibitive

Importers of products now sourcing goods from countries with

weak currencies and quality products

South Africa, Brazil, Argentina, Turkey etc

64

Domestic Retail Industry

Stability in the forex market will reflect in retail price level in April

Cost pressures will persist with fuel scarcity, forex scarcity and naira

weakness

Shift in consumer demand towards necessities and price inelastic

goods

Brand variety of goods offered will shrink

Inventory levels of cheaper goods will increase

65

Retail Industry

Prices of some goods increased slightly while others declined or remained flat

constant

Item January’16 February’16 March’16 Feb-Mar % Change

Rice (50kg) N9,000 N13,500

N13,500

-

Milo Sardine (125g) N150 N140 N175 25%

Heinz Baked Beans

(200g)

N199 N210 N180 -18%

Samsung Galaxy A5

(A500)

N61,000 N86,000 N80,000

-7%

Samsung Galaxy A8

(A800)

N90,000 N127,000 N142,000

12%

Peak Milk (900g) N2,000

N2,140 N2,140 -

Carton of Indomie

(Small)

N1,300 N1,800 N1,800 -

Source: FDC Research

Real Estate Industry Vacancy factor in Lagos – Flat in March,

to be higher in April

67

Lagos Vacancy Factor Index

We are introducing the FDC/Lagos Vacancy Factor Index

It measures the vacancy levels in (Residential, Commercial & Office

accommodation) in the Ikoyi, VI & Lekki axis

High brow neighbourhood vacancy factor is a lagging economic

indicator

An increase happens after a change in the level of economic activity

For example, following an expansion, vacancy factor will decline

More tenants than properties available

68

Lagos Vacancy Factor Index (LVFI) – Flat in March

Index flat in March‟16 relative to February‟16

Compared to base year of January 2015, it increased by 76.9%

Commercial VFI lower due to the small pool of alternatives available

in the short run

Month/year Residential Index Commercial Index

January 2015 100 100

February 2015 92.3 96

March 2015 96.2 91

January 2016 169.2 148

February 2016 176.9 148

March 2016 176.9 148

69

Lagos Vacancy Factor Index (LVFI) – to increase in April

Factors influencing LVFI

Banning dollarization of rents

Reduction in the number of visiting expatriates & oil industry workers

Investor confidence sharply lower

Inflationary pressures & disposable income erosion

Higher interest rates making mortgages less attractive

70

To Let/For Sale ratio

To let/for sale ratio in March was 2.3:1

Properties up for lease were 2.3 times more than properties that were

put for sale

Economic downturn not as severe as depicted

If so, more properties would be on sale

Economic downturn reducing cash flow

Hence, landlord‟s have decided to hedge this risk by letting properties

and spreading rents over a longer time span

71 Outlook

LVFI to increase pending a shift in Nigeria‟s economic cycle

Pace of increase in residential index to remain above

commercial

To let/ for sale ratio expected to increase as macroeconomic

headwinds shrink cash flow

However, budget approval expected to have a positive impact on

LVFI in Q2‟16

Aviation Update Nigerian aviation suffering from airline

blocked funds

74 Global Aviation

Global industry passenger load factor increased to 80.8% in

January 2016

Industry loads are elevated while breakeven loads have declined

This combination has supported the strong financial results of

airlines in 2015

Average global fares in US$ terms fell 12% in 2015

75 Global Aviation

Strong appreciation of the US dollar

There has been downward trend in exchange rate adjusted fares

Recessions in Brazil & Russia caused declines in air travel demand

Naira weakness threatens aviation in Nigeria

Load factors in March through April were anaemic

76 Global Aviation

Easter spike but long term averages sharply lower

Airlines suffering from remittance backlog and possible devaluation

jitters

Average load factors by cabin

Class Ave. Load Factors

First 30%

Club 45%

Premium Economy 60%

Economy 40%

77 Global Aviation

Most carriers have increased their published fares

Many have restrictions on non-gateway destinations

(Heathrow, JFK, Frankfurt, etc)

Some airlines are taking advantage of the situation

Keeping fares flat and offering promos

e.g. Emirates, Turkish, United & Kenya Airways

Passengers are spending an average of 23 hours from Lagos to the

US

78 Published fares are reflecting the forex backlog

British Airways Virgin Atlantic

First Class N2,668,686.00 ----

Business Class N1,946,916.00 N1,718,436.00

Premium Class N939,756.00 N903,006.00

Economy Class N834,976.00 N801,796.00

LOS – LON – LOS

British Airways Virgin Atlantic

First Class N3,061,350.00 ----

Business Class N2,065,320.00 N2,091,990.00

Premium Class N1,170,720.00 N1,194,240.00

Economy Class N989,490.00 N949,590.00

LOS – LON – NYC – LON - LOS

79 Aviation

Emirates have increased the London-Dubai frequency to 10 daily

Putting B/A under pressure

The backlog of airline remittances are at staggering levels

CBN is claiming that airlines are receiving significant levels of

forex

Stock Market

81

Equity Markets – Tepid investor sentiment

The equity market has been mostly negative in 2016

Scott-free index year to date return is now -17.17%

The Scott-free Blue chip 30 index returned -1.89%

Blue Chip Index in USD terms returned -1.87% and in euros -

6.46%

82

Asset Mix – Investor’s sentiment moves in this direction

Asset Classes 15-Dec 16-Mar

N'bn % N'bn %

Equity 500.34 9.46% 449.08 8.15%

Money Market 586.75 11.09% 607.08 11.02%

FGN Bonds 3,009.19 56.88% 3,407.67 61.86%

Treasury bills 822.28 15.54% 611.05 11.09%

Mutual funds 28.69 0.54% 32.60 0.59%

State bonds 172.01 3.25% 169.85 3.08%

Supra-National Bonds 1.30 0.02% 1.31 0.02%

CORPORATE BONDS 125.40 2.37% 139.08 2.52%

Real estate 23.81 0.45% 24.30 0.44%

Cash & Others 20.61 0.39% 66.65 0.00%

TOTAL 5,290.38 5,508.67

Allocation to equities declined from 9.46% in December 2015 to

8.15% in March 2016

Due to the general decline in equities prices for the period

83

State bond allocation declined to 3.08% in March from 3.25% in

December 2015

Due to possible state governments default

Preference for FGN Bonds and Treasury Bills

A marked pickup in average yields in 91-day T-bill, NIBOR and 10-yr

FGN bond respectively

Q4‟15: 5.3%, 1.7% and 12.2%

Q1‟16: 5.9%, 7.27% and 12.35%

Analysis of Asset Mix

84

Corporate earnings dictated equity market

returns during the month

NSEASI extends rally by 2.99% from February‟s

gain of 2.74%

Bringing YTD return of the index to (11.65%)

Market capitalization increased by 2.99% to

N8.7trn

The average daily volume of trade

increased by 31.57% to N791.89mn

Average market PE ratio increased to 8.26x

from 7.75x

NSEASI March 2016 - Extends Gains

90,000,000

1,140,000,000

2,190,000,000

3,240,000,000

4,290,000,000

5,340,000,000

6,390,000,000

7,440,000,000

24,000.00

24,500.00

25,000.00

25,500.00

26,000.00

26,500.00

NSE ASI March 2016

Daily Volume Traded

85 ScottFree Index

Total market capitalization for the SFNG Total Share Index increased

by 3.04% to N8.66trn

SFNG Total Share Index (representing 99.5% of the Nigerian equity market)

Free-float market capitalization for the index decreased by 0.53%

from N2.98trn (Feb) to N2.96trn (Mar)

86 ScottFree Index

8 companies in the SFNG Total Share Index paid dividends in March

compared to the one paid in February

Dividend yield for the index increasing from 3.63% in February to 4.13% in March

Negative returns over the month of March

Exception to Mid Cap 40 Index returning 0.95%

87

ScottFree Index

BC30 index lost 1.68% in March

30 day volatility of 19.99%

Sharpe ratio of 0.91

1 year return of -32.94%

Trailing P/E 5.31

Market volatility, economic policy

direction and bank balance sheets

concerns have taken their toll on

businesses

ScottFree BC 30

Data released from NBS during the month points to increased

investor uncertainty

Unemployment Q3‟15: 9.9% vs Q4‟15: 10.4%

Weak growth and high inflation

CBN resumes tightening cycle, citing inflationary pressure

Markets were shocked

There was a kneejerk reaction following the CBN's announcement

1.09% loss was recorded in the trading day

Soft Patch Forcing a Policy Reversal 88

2015 full year earnings season commenced

Results were in-line with market expectation

Systematic Important Bank „SIBs‟ released encouraging results

Exception to FBNH and ETI who had earlier released profit warning

2015 Pre-Tax Profit down by 3.83% from N869.04bn, Earnings up

by 3.18% from N4.25trn

2015 Earnings 89

90

Global Market Review

Stock exchanges across the globe had a great

month with exception to GGSECI

MSCI Emerging market index & CASE 30 with the

highest return of 13.03% & 22.42% respectively

S&P 500 & FTSE 100 are rebounding back to

January‟s index of 2058.9 & 6242.32 respectively

Backdrop of supportive liquidity environment of

Fed and oil price recovery

YTD return of (0.041%) and (1.09%) respectively 2.99%

11.75%

1.13%

5.92%

13.03%

1.28%

6.60%

5.74%

-3.05%

3.10%

22.42%

-4% 0% 4% 8% 12%16%20%24%

NSE ASI

SHCOMP

MSCI Frontiers

MSCI Europe

MSCI Emerging Markets

FTSE 100

S&P 500

JALSH

GGSECI

KNSMIDX

CASE 30

Global Indices March 2016

91

Sectoral Performance - March 2016

The NSE Industrial Index up by 5.63%

Led by gains of DANGCEM and CAP Plc 18.45 and 7.6%

respectively

Positive earnings result of DANGCEM

Year-to-date returns is in the negative territory of 9.49%

The NSE banking index declined by 6.28%

In spite of positive gross earnings of 10.89% and PBT of

6.63% respectively

Earning results of Diamond Bank, ETI, FBNH, Unity Bank and

Stanbic IBTC are yet to be released

Concerns still boarder around bank’s asset quality and

macroeconomic conditions

2.99%

0.97%

0.12%

-6.28%

-8.15%

1.90%

5.63%

-9% -5% -1% 3% 7%

NSEASI

NSE 30

Insurance

Banking

Oil & Gas

Consumer Goods

Industrial Goods

Sectoral Performance

Banking Sector Earnings - FY’15

Tier 1 banks remain resilient in spite of macroeconomic headwinds

Extraordinary items pushed up earnings

Impairments are also up

Average gross earning up by 17.64% from N1.38trn

Average PBT growth was 29.59% from N332.29bn

UBA and Access Bank were outliers with PBT growth of 21.8% and

87.99% respectively

92

Banking Sector Earnings - FY’15

Banks like UBA and GTBank benefitted from Pan-African strategy

Rising loan loss provision is worrisome

2015: N55.42bn vs 2014: N42.38bn

93

Banks

24.26% of total banking assets

Risk weighted assets of N2.63trn

23.12% of total banking deposits

Sound risk management with NPL of

2.2%

Efficiency ratio of 54.63%

Well capitalized with CAR of 21%

ROE of 18.42%

Dividend yield -14.12%

Strong and profitable retail banking

segment

15.29% of total banking assets

Risk assets of N1.83trn

14.79% of total banking deposits

Sound risk management with NPL of

3.21%

Efficiency ratio of 42.01%

Well capitalized with CAR of 17.96%

ROE of 25.76%

Dividend yield – 10.64%

ZENITH GTBank 94

95

Beyond the Banks - FY’15 Corporate Earnings

Company Revenue

(N’bn)

% PBT (N’bn) % Finance Cost (N’bn) %

Forte Oil 124.62 (73.2%) 7.01 16.8% 5.15 22.29%

Ashaka Cement 17.41 (17.6%) 3.21 (38.88%) - -

Dangote Cement 491.73 10.3% 188.29 (11.3%) 54.35 43.7%

Lafarge Africa 267.23 2.46% 29.27 (27.46%) 11.21 (0.48%)

Nestle 151.27 5.45% 29.32 19.95% 4.86 (8.24%)

Champion Brewery 3.5 6.04% 0.21 119.6% - -

NB 293.91 10.3% 54.51 (11.3%) 7.71 43.7%

GSK 30.63 0.37% 1.15 (57.94%) 0.037 (27.61%)

Dangote Sugar 101.06 6.54% 16.54 8.35% 0.664 524.64%

Cement - Stark Contrasting Results

Revenue growth due to Africa expansion

Pan-African expansion of 47.8MT pa still on

track

Revenue up 25.56% to N491.73bn

Market share of 63%

Gross Margins declined from 63.4% in 2014 to

58.96% in 2015

Pioneer tax ups PAT by 13.68% to N181bn

Operating profit of N207.82bn

42.3% of sales

PE ratio of 15.77x

Dividend Yield – 4.68%

FY2016 Target Price of N160

Revenue up by 2.46% to N267.23

Group consolidation costs pare profits

PBT down 27.46% to N29.27bn

Gross Margins at 30.8%

Operating profit of N45.5bn

17.06% of sales

Forward integration strategy and reduction

in expensive fuel dependency to translate

to improve margins

PE ratio of 7.64x

Dividend Yield – 3.92%

FY2015 Target Price of N92

DANGCEM Lafarge Holicum Africa

96

FMCG - Same Sector Different Outcome

Revenue up by 6.22% to N59.2bn

Cost of sale ratio marginally

increased to 64.45% in 2015 as against

63.8%

Finance cost rose by 65.99% to

N3.17bn

ROA declined from 5.27% to 2.37%

in 2015

Revenue edged up by 6% to

N151.27bn

Cost of sale ratio marginally

decreased to 55.48% from 57.3%

Finance cost down 8.24%to N4.86bn

ROA declined slightly from 20.96%

to 19.9%

Unilever Nestle

97

98

Outlook - Stay diversified and focus on the long-term

Notwithstanding the 2016 budget passage, near-term headwinds to

persist as imbalances (unrealistic key assumptions) likely to intensify

Currency misalignment remains a tail risk

Valuations are relatively cheap but weak growth and challenged

banking system continues to affect investors sentiment

Market sell off to begin after earnings‟ result announcement on lack

of other market catalyst

Tightening financial conditions and lower oil prices to weigh on the

markets

Political Risk Analysis

101 Political Risks – Economic backlash intensifies

The Federal Government is suffering from an economic backlash

Poor economic performance is eating into the favorability ratings

of the Buhari administration

Inflation up, unemployment high and growth down

The public is silently groaning and kicking

102 Political Risk – Tough Political Challenges

Misery Index has increased in 4 consecutive quarters to 21.8%

The contentious re-run election in Rivers state was a proxy war

(APC vs the economy)

If the economy is not reinvigorated

Edo State and Ondo State may be difficult for the APC

103 Political Risks – PDP is not credible

The PDP is in complete disarray and is uncompetitive

The real opposition will be within the APC

Buhari needs to fill board seats with APC members

The APC is split between the party machine and those in

government

i.e Politicians, Vs Technocrats plus Conservatives

104

Its the Economy Stupid – Bill Clinton

Buhari runs the government but not the party or NASS

The administrative apparatus of the government is still under a

veiled PDP machine

Buhari needs to double down and focus on the economy

An economic re-orientation is now critical

105 Political Risks

The SW wing of the APC is struggling to consolidate

The SE, mainly PDP, is hoping to back a splinter Northern

candidate in 2019

Will try to carry along the disgruntled South-South

And galvanize the economically marginalized

18% of GDP is wholesale and retail trade

These are exchange rate dependent and will vote in favor of

economic prosperity

106 Political Risks

The message here is that Buhari must fix the economy urgently and

big time

The political sands are shifting

Analysts believe that Buhari will change economic direction in Q2

He will make major changes to the apparatus of government

And will lean more on professionals who can make things happen

Outlook For April

108

Outlook April/May

Buhari will go to China and get $3bn to $4bn of project-specific

funding commitments

Time between commitment and cash flow will be long

This will not alleviate the current forex shortages

Rationing of forex and abuse will become a source of political

backlash

The CBN will move from a rigid to a dual exchange rate policy

109

Outlook April/May

Intensify exchange controls and increase transparency of the rationing

process

Thus reducing the current abuse

This will provide mild forex relief but not enough

The post-budget expenditure pressure on the reserves will force a

major rethink

The pre-conditions for external borrowing will be the game changer

110

Outlook April/May

Headline inflation will breach 12% for the first time in 5 years

Fuel scarcity will continue into the 2nd half of April especially

outside Lagos and Abuja

Effective average price of petrol will be N120 per liter

Stock market to stay flat and dip approximately 2 – 3% in April

Foreign Portfolio investors will shun the Nigerian market

111

Outlook April/May

Until a clear path to an exchange rate policy emerges

Interest rates will edge up as the level of T/Bills on issue increases

The Buhari team will align itself with the transition Committee report

The transition committee report have more solutions to the current

problem

No need to reinvent the wheel

They say it is better late than never

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

Lagos, Nigeria 01-7739889

© 2016. “This publication is for private circulation only. Any other use or publication without the prior express consent of Financial Derivatives Company Limited is prohibited.”