Still attractive case for investment – FBN Capital

Tightening next in the US, far off in the Eurozone: Trends in the developed economies have diverged. Tapering by the US Federal Reserve is scheduled for completion this month, and its forecasts point to a first hike in the Fed funds rate in Q2 2015. In contrast, policy will remain accommodative in the Eurozone and Japan for at least two years, sustaining the carry trade.

Hikes in banks’ CRR on the agenda: The CBN governor pledged that there would be no rate cuts before the elections in February. Tightening via the CRR is likely, starting next month for private-sector deposits, as the MPC loses patience with the banks. We have penciled in a token rate cut of 50bps next year after the elections as a forward statement of intent.

Limited pick-up in inflation on deregulation: We expect another attempt at fuel subsidy removal after the elections, which would push headline inflation briefly into double digits. Successful or not, there would be fiscal gains.

Focus on the exchange rate, as before: Monetary policy rests upon the attainment of exchange-rate stability and we feel the CBN will be able to hold the line, subject to a small adjustment to the corridor mid-point in 2015.

Positive landscape for investors: We see naira stability, a tight monetary stance and relative fiscal discipline through the polls to end-2015. The risks lie in tightening in the US and, notably, further contraction of oil revenues.

Recommendation for investors: The direction for market rates in the present cycle in our view is flattish/slightly higher. The FGN bond curve has flattened, so we would suggest exposure at the shorter end. Investors should always be alert to potential external shocks.