Vetiva expects GDP growth to be driven by industry sector H2

Vetiva’s economist, Adedayo Idowu, estimates 2014 real GDP growth rate of the Nigerian economy at 6 percent, ahead of the 5.49 percent recorded in 2013. While highlighting the political risks ahead of the 2015 general elections, Vetiva expects GDP growth to be driven largely by the industry sector (25% of GDP), as current government focus on economy diversification creates an upside for growth.

Going on to other economic indicators, Vetiva notes inflation and exchange rate performance would be the main determinants of monetary policy in the months ahead. The base case seems to suggest no further monetary tightening, with the Monetary Policy Rate (MPR) unchanged at 12 percent over H2’14; although in the scenario risks to prices materialise, the MPR could be increased by as much as 100bps.

With respect to capital market performance, Pabina Yinkere, head research, Vetiva, remained cautiously optimistic about equities in the second half of the year. Noting the main drivers of mild returns in the first half of 2014, Pabina mentioned that consolidation news within the Consumer Goods and Industrial Goods space, assets acquisitions in the oil and gas space, as well as the re-weighting of the MSCI Frontier market index provided some support to the market, amid tepid earnings release. Although stock specific news may continue to propel specific names in the market, the run up to the 2015 general elections poses a threat to returns as broader market sentiments remain cautious. Consequently, Vetiva estimates 2014 return would be at best 5 percent. Investors are however likely to move to safer asset classes. Having already recorded a year to date (YTD) return of 12.7 percent, Vetiva anticipates modest gains for bonds on the back of increased local demand, particularly from the Pension Funds.

Coming off the weak performance posted in H1’14, financials analyst Olalekan Olabode sees a brighter H2’14 for banks despite the current sticky yield environment. Top-line performance is likely to be supported by loan growth and the recent reversal of ATM charges, although AMCON charges would continue to be significant, accounting for an average of about 10 percent of operating expenses for Vetiva’s coverage banks. Olalekan also added that “whilst the sector lagged behind the market in H1’14, largely due to unimpressive results, market should anticipate better results in H2’14 as the liquidity support from capital raising boosts loan growth and also supports Capital Adequacy Ratio (CAR)”. On the contrary, Consumer Goods Analyst, Efemena Esalomi said that optimism for volume and earnings growth in the Consumer Goods space has been tainted by numerous and sustained challenges to consumer demand and cost management. Notwithstanding, Vetiva expects investors would rebalance their portfolios to more defensive stocks even as they predict strong earnings in the period.

Discussing the changing dynamics in the Industrial Goods sector, Pabina opined that the strategic consolidation of Lafarge holdings across its Nigeria and South African businesses to become Lafarge Africa would have several implications for the competitive landscape of the cement industry. He said “using estimated installed capacity share as a proxy for the level of competition, we are likely to see a situation where the market is dominated by two big players in 2018 – DANGCEM (59%) and LAFARGE AFRICA (40%). When asked about stock recommendations in the Oil and Gas sector, Vetiva noted that driven by stock specific developments, it favored Exploration & Production exposures over Downstream plays in H2.

Vetiva Capital Management Limited is a Pan-African Financial Services Company incorporated in Nigeria and duly regulated and registered by the Securities & Exchange Commission and the Nigerian Stock Exchange to carry on business as an Issuing House. Through its subsidiaries, Vetiva Trustees Limited, Vetiva Securities Limited and Vetiva Fund Managers Limited, it is also licensed to carry out the business of Trusteeship, Stockbroking/Market Making and Fund Management respectively.