outlook 2016 - meristem securities guide... · outlook 2016: nigerian economy & financial...

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Table of Content

Investment Précis

Section 1: Macro Indicators

Global Growth and Risk Exposures Global Economy Staggers on Growth Path

FDI into Africa, focus on Nigeria Still?

Domestic Macros Weak Oil Proceeds Drag Economic Growth

Potentials

Interest Rate Monetary Easing to Drive Creation and

Economic Growth

Inflation Structural, Circumstantial or both?

Section 2: Real Sector Investment

Electronic Commerce The New Face of Nigerian Trade

Power Sector On the Path of Revival

Section 3: Asset Classes

Equities Market Another Predominantly Bearish Year

Fixed Income Market Activities Characterized by Bouts of

Volatility

Real Estate Market Shareholders Remain Resilient

Section 4: Sectors

Financial Sector Banking: Adjusting to New Norms: Goodbye

Striking Growths?

Insurance: Resilient Despite Economic

Headwinds

Consumer Goods Weak economic macros depress sector growth

Industrial Goods Government Policy Thrusts Signals Positive

Outlook

Construction: Dwindling Economic macros

impacts growth

Healthcare Future Growth to be sustained by CAPEX

Investment

Oil and Gas Change in View?

Section 6: 2015 Investment Strategy

Favourably stacking the odds Fixed income Strategy

Equities Strategy

Real Estate Strategy

Glossary

Section 5: Stock Picks

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Analyst Coverage

Analysts

Adetutu Adegbayibi Ogunbanjo Gbadebo

[email protected] [email protected]

Industrial Goods, Services Intern

Ayodeji Olabisi Ogunsola Yusuff


Insurance, Fixed Income Intern

Babalola Opeyemi Oluwagbohunmi Ayokunle

[email protected] [email protected] Intern Consumer Goods

Chiamaka Nwobi Oluwapelumi Mosopefoluwa


Consumer Goods, Health Care, Real Estate Consumer Goods, Construction, Real Estate

Jolomi Odonghanro Oluwasegun Tunmbi

[email protected] [email protected] Banking & Fixed Income Oil & Gas, ICT, Real Estate

Saheed Bashir Oluwakemi Akinde, FRM


Head, Research Team Chief Economic Officer

Research Details Sulaiman Adedokun, CFA

Email: [email protected] [email protected]

Phone Number: 01-2953135 Director of Research

mailto:[email protected]













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Investment Précis

Macroeconomics

Global growth, in 2015, according to the International Monetary Fund (IMF),

is expected to come 0.3% lower than the 3.4% growth expansion recorded

in 2014. This expectation is hinged on anticipated lower growth numbers

from emerging markets and developing economies (EMDE) owing to macro

headwinds such as falling commodity prices and rising inflation levels, whilst

advanced economies such as the United States are projected to experience

sustained growth on the back of monetary policy supports and falling

unemployment rates.

Global crude oil prices remained unpredictably soft in 2015, as the Brent

settled at USD36.66pb (-36.05% YoY) due to the subsisting crude oil glut,

even as a sizeable number of oil producing countries had to release

substantial FX reserves to support their fast depreciating currencies.

On the back of these oil economics and politics, we align with the forecast

that the average crude oil price in 2016 will settle within the range of

USD30pb to USD40pb, even as we note that the recent decision of OPEC to

sustain current production levels (above 30MMbpd) will keep the global

crude oil market oversupplied in the near term, and as such keep the prices

of crude pressured.

While we anticipate a moderate growth in the global economy in 2016 (at

around 3.6% vs 3.1% in 2015), we posit that the extent of recovery will

largely depend on key factors such as direction of commodity prices,

China’s transition agenda and the impact of the US Fed rate lift-off which

we note will further worsen the predicament of EMDE as more funds are

expected to be exiled in 2016 in addition to the c.USD500bn that has been

pulled out of developing markets in 2015.

Amidst all these, Nigeria’s GDP moderated to 2.84% as at 9M2015 (vs

6.23% in 9M2014) following the persistent decline in government

revenues and spending in 2015, owing to the 36.05% plummet in global

oil prices during the period. As part of efforts at stimulating growth

despite weakening oil proceeds and the volatile exchange rate which

contributed to the outflow of foreign investments from Nigeria, the

federal government recently proposed an unprecedented inflationary

budget for 2016.

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Strategic emphases of the budget are to reflate growth drivers, support

infrastructure revamp and development as well as job creation, while

also guaranteeing conditional cash transfer (CCT) to poor and vulnerable

Nigerians through social welfare activities.

We are bullish on the renewed efforts at widening the country’s revenue

base through improved tax collection and administration, strict

implementation of Treasury Single Account (TSA) initiative and

repatriation of looted funds, which may form part of dividends from the

current government’s anti-corruption drive.

In the same vein, we expect the monetary policy committee (MPC) of the

CBN, in line with the federal government’s effort towards real sector

development, to pursue an accommodative monetary policy regime

centred on gradually driving the policy rate to one digit levels while also

creating an enabling environment for increased capital flows to micro,

small and medium enterprises (MSMEs).

Our outlook for the Nigerian economy remains positive given

expectations of increased public and private expenditures in 2016. We

however note that the sustained restrictions on FX transactions, may

continue to hinder foreign capital flows in and out of the country. We

expect this to consequently put a cap on the country’s growth

Table XX: Comparison of 2016 and 2015 CAPEX Budget & Priority Sectors

Priority Sector/Ministry 2016 Budget

Allocated (bn)

% of 2016 Total

CAPEX Budget

2015 Budget

Allocated (bn)

% of Total 2015

CAPEX Budget

Power, Energy, Works &

Housing 433.4 23.5% 26.6 3.8%

Agriculture 47.0 2.5% 8.8 1.3%

Health 35.7 1.9% 22.7 3.2%

Transportation 202.0 10.9% 5.1 0.7%

Education 37.8 2.0% 23.5 3.4%

Defence & Securities 237.6 12.9% 21.4 3.1%

Sub-total 993.4 53.8% 108.1 15.4%

others 852.0 46.2% 593.3 84.6%

Total CAPEX Budget 1,845.40 100.00% 701.42 100.00%

Exhibit1: Comparison of 2016 and 2015 CAPEX Budget & Priority Sectors

Source: FGN, meristem Research

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potential, as the economy is solely restricted to domestic savings and

investments.

Nigeria’s headline inflation sustained an upward trend, pegging at 9.4%

as at November 2015, up from 7.9% in FY2014. Even as its structural

challenges have existed hitherto with overbearing dependency on crude

oil, not just for revenues, but also as a major production input for most

productive ( heavy and light) industries of the economy (ranging from

auto, manufacturing, power and services). Hence, any unfavourable

distortion in supply or price, triggers an adverse effect on production

cost, which influences commodity prices

Despite the spread between FX rates in both markets (official and parallel),

the monetary authority signals its intention to sustain status quo on the

official FX market in 2016, riding on the FX rate assumption in the 2016 –

2018 Medium Term Expenditure Framework (MTEF). On the back of this, we

anticipate the CBN might take total control of financial trading activities in

both the official and parallel markets in order to reduce the spread in both

markets, while it maintains status quo on FX rate, even though trading rules

might be relaxed.

Real Sector Attractions The impact of e-commerce’s value chain on the domestic economy has been

tremendous, opening up new opportunities to existing businesses such as

advertising, financial services, Internet and logistics services, general

merchandise, etc. This burgeoning trend is expected to continue in the ICT

sector, as we anticipate the sector’s contribution to GDP in 2016 to surpass

2015, where it contributed an average of 11.17% as at 9M2015.

0

10

20

30

40

50

60

0.00

0.30

0.60

0.90

1.20

1.50

Jan-11 Jan-12 Jan-13 Jan-14 Jan-15

FX Reserve FX Rate Oil Price

0

4

8

12

16

20

0

2

4

6

8

10

12

2003 2005 2007 2009 2011 2013

Revenue Expenditure Inflation

Chart 1.1: Emerging trend of Oil Prices, FX rate and FX reserves Chart 1.2: Nigeria’s Total Revenue, Expenditure and Inflationary Trend

Source: Bloomberg, National Bureau of Statistics, Meristem Research

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The ever present shortfall between power generation and requirement

continues to call for investors’ attention, however regulatory bottlenecks,

capital intensity amongst other factors, impede participation. Also, the

complete revival of the Power Sector is still coated with some patches of

uncertainty with respect to the full implementation of the TEM; an integral part

of the power sector privatization process. We reiterate that Nigerian electricity

market is arguably “the next big thing” for investors across diverse segments to

behold.

Nigeria is ranked the 2nd largest producer of tomato in Africa and 13th in the

world, accounting for total production estimated at c1mn hectares of land

producing over 1.7mn tonnes annually with average of 20-30 tons/hectare. In

spite of these astonishing statistics, the country still spends about NGN12billion

(USD60mn) per annum on importation of processed tomato. Nigeria is the

largest importer of tomato paste from China and Italy. Sadly, same awful

statistics hold true for other agriculture produce such as pineapples and citrus

food, yam, sorghum and cassava. Nigeria has an average food and live

importation of 13.6% (2013-2015 YtD).

Generally, Nigeria’s agriculture sector lacks competitive advantage and

deliberate policy focus to cause desired shift in growth poles. Concerted focus

on and sustainable investments in processing and storage mechanism by both

private and public sectors is critical. Nevertheless, we remain optimistic about

increased emergence of value chain companies, considering the focus of current

administration.

Asset Classes

Real Estate Market Outlook

Activities within the real estate market slowed in 2015, reflected by delays in

delivery of some pipeline projects. This delay, could be credited to the initial

uncertainties that surrounded the general elections in 2015 and the

unimpressive economic performance. Rental rates/yields declined in the office

sub-market, while housing and retail sub-markets remained stable. We do not

expect a change from the current rental rate trend, though with increased

pressure on retail sub-market as pipeline projects are delivered. Also, we

anticipate more innovation within this space in 2016, just as pooled funds

participation is also expected to increase.

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Fixed Income Market Outlook

2015 was a far more tumultuous year in the fixed income market than was

expected. While the consternation regarding the general elections, and

weakening macroeconomic fundamentals were expected to pressure yields, the

direction of yields at the end of the year was unexpected. Even more so given

that major headwinds crystallized, with the exclusion of Nigeria from the JP

Morgan Government Bond Index for Emerging Markets (GBI-EM) and

subsequently the Barclays Local Currency Index for Emerging Markets (LCI-EM).

This came as subsisting market liquidity resulted in significant demand levels

which pressured yields downwards, while the downward revision of the

benchmark policy rate (MPR) was partly contributory.

We do not anticipate that rates will remain at the current levels for the whole of

2016, and in fact, we posit that rates will normalize by the end of 3M2016,

although not to previous levels.

Equities Market Expectations

Although predicted, the extended bearish mood in the stock market appeared

to have unsettled investors as sell sentiments pervaded activities on the

Nigerian bourse, with 31 stocks recording positive Year-on-Year (YoY) returns,

while 88 stocks diminished in value by 2015 year end. In line with this trend, the

NSE All Share Index, which measures the performance of the bourse, pegged at

28,642.25 points, representing a 17.36% decline from December 31st 2014.

Performance of the equities market was largely buoyed by weak corporate

earnings occasioned by major economic headwinds, weak demand, rising

insurgency & FX conundrum. Whilst we expect some respite in 2016, we

anticipate that the trends in equities market will be extended to at least

3M2016.

In predicting the equities market performance in 2016, it was important to

ascertain if the market had bottomed out, while also determining the factors

with potential for driving market sentiments and triggering a sustained price

rally in the forecast period. We complemented our traditional fundamental

forecasting approach with quantitative methodologies. Therefore, our

expected return for the equities market for 2016 is a weighted average of the

Fundamental Approach, Monte Carlo Simulation and Neural Networks.

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Based on our mix of methodologies, we arrived at a forecast 2016 index

level of 30,244pts, indicating a 5.59% potential market return by

December 31st 2016.

The Banking Sector (c.23% of total market cap) remained under pressure in

2015, as regulatory reforms and monetary policy measures triggered by

economic headwinds pressured operations of the deposit money banks

(DMBs). Nonetheless, the quarterly performance results recorded by the

DMBs were generally good, however, this did not translate to capital

appreciation for banking stocks as most stocks recorded YoY declines in

their prices. We anticipate that some of the 2015 headwinds which

pressured operations will probably have notable impact on operations in

2016. Notwithstanding, we expect generally positive performances from

DMBs in the year. Also, we anticipate that price performance may once

again be pressured as negative externalities pressure participation in the

equities market.

Despite travails in the Nigerian economy, the Insurance Sector (c.2% of

total market cap) launched an impressive financial performance in 2015.

The 9M2015 scorecards of twenty two (22) out of the twenty nine (29)

listed insurance companies which have released results, showed gross

premium earned (GPE) advanced by 13.58% YoY to NGN136bn, while PAT

also grew 13.26% YoY to NGN17.40bn. On the back of projected economic

revamp through government’s intentions to spur infrastructural

Chart 2.1: Equities Market Performance (NSEASI) Exhibit 2: Blended estimation of Equities market return for 2016

Estimated Index Level Weight

Fundamental Approach 30,141 35%

Monte Carlo Simulation 33,269 25%

Neural Networks 28,445 40%

Forecast 2016 Index Level 30,244 100%

2015 Index Level 28,642.25

Expected Return 5.59%

Source: NSE, Meristem Research

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development, employment and higher standards of living, we foresee a

positive outlook for the Nigerian insurance sector in 2016.

Our outlook for the Industrial Goods Sector (c.36% of total market cap) in

2016 is largely dependent on the successful implementation of the 2016

Budget which prioritises infrastructural development, job creation and real

sector growth. We are hopeful that the government’s policy thrusts will

help to drive demand for building materials through increased public and

private consumption as well as improved financing options to help bridge

the country’s housing deficit gap. We are therefore bullish on the outlook

for this sector in 2016.

The Consumer Goods Sector (c.27% of market cap) had a very tough year,

owing to the direct impact of unfavourable macroeconomic and policy

choices of government such as the unstable FX environment and the

dwindling consumer purchasing power on the component companies. In

2016, we anticipate that the economic diversification and prioritization

agenda into the agriculture sector amongst others, by the government, will

bode well for the consumer goods manufacturers. Government’s drives

towards self-sufficient in agricultural commodities is expected to reduce

foreign currency exposure in the medium to long term is pursued

religiously. In the equities market, we do not expect a total resurgence in

performance, but random spikes in some companies’ performance due to

relatively low prices.

Almost all the Health Sector players (c.1% of market cap) (pharmaceutical

manufacturing companies) in Nigeria are exposed to foreign exchange risk,

which stems from either importation of major raw material input (Active

Pharmaceutical Ingredient, API) from China and India for local

manufacturing or importation of finished pharmaceutical products. Given

the current restrictions on foreign exchange, and slim possibility of a short

term resolution, we imagine that pharmaceutical companies may be unable

to source sufficient FX to smoothly run their operations, while higher costs

occasioned by adverse movement in exchange rate pressures profitability

margins considerably downwards.

The Oil & Gas sector (c.8% of market cap) remained the focal point within

the domestic and global economy in 2015. On the domestic scene, with

issues such as the delayed payment of accrued subsidies on regulated

petroleum products and the growing burden of payments on government’s

expenditure taking center stage. We believe that the current government in

its drive for transparency and sustainable reforms in the sector will expedite

the unbundling of the PIB into smaller modules so as to speed up the

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actualization of the objectives of the bill. Also, with the 3 domestic

refineries netting an average capacity utilization of 5.18% in the first ten

months of 2015 compared to the 2014 average capacity utilization of

14.40%, we anticipate urgent and drastic measures in 2016 in the area of

domestic refining, given that petroleum products importation accounts for a

significant fraction of the country’s FX demand.

Favourably Stacking the Odds

What to Do In a Declining Equities Market

In a declining market, investors become very apprehensive and question why

they are in a declining market, investors become very apprehensive and

question why their advisors did not pre-inform them of the eventuality.

However, no one has a crystal ball to get such done but based on the current

events and our outlook on the key drivers/drags of the market, we present

below our advice to navigate the current equities market cycle.

We advise an overweight position on dividend aristocrats (companies

with proven consistent dividend payment culture) over growth

companies.

We advocate investors should take cover in defensive stocks as defined

Stocks with beta (maximum of 1 year) lower than one (1).

Stocks of companies with modest earnings growth outlook for 2016

even when stressed under the worst-case scenario.

Stocks with positive skewness over the last 6-months i.e. stocks

with frequent small losses and a few extreme gains having greater

chance of occurrence.

Stocks with low standard deviation of returns and much more lower

semi-deviation of returns. Stocks with less volatile distribution

around the expected values are considered safer than those with

wider distributions.

Reduce exposure to companies whose operations are highly correlated

with the factors dragging the market.

Stocks that are delights of foreign investors as there is no potent

demand to drive up prices.

Companies with huge FX exposure either through significant

imported inputs in their production or foreign currency loan

servicing.

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Companies in the upstream oil and gas sector.

If the value of the option to reduce exposure is higher, the higher the market

downside risk.

Steer clear of stocks whose 2015 performance are noise-driven as

they are typically neither very liquid nor fundamentally viable, and

as such, lack the drive to follow the market up the peak when it

eventually recovers.

Target companies that are well positioned to benefit from the new

drive and priority sectors of the current administration. Companies

in the construction and industrial sector are good picks.

Companies with FX earnings are also favourites and are poised to

report extra-ordinary income from FX gains which we think will

compensate for declining commodity prices in the international

market. Agricultural product exporting companies and aviation

companies are top picks.

Stocks with good corporate governance, transparent financial reporting system,

stable earnings

On the back of macro considerations, we crafted the 2016 investment approach

around a tripod strategy of key asset classes namely: Equity Strategy (High

return Portfolio, Foreign bias Portfolio, PFA portfolio and technical trading

portfolio). Fixed Income Strategy (Cash Flow strategy, Modified duration

strategy, and barbell strategy) and the Real Estate Strategy.

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High Return Portfolio

The High return portfolio closed the year in the negative zone as the index returned

-7.09% in 2015. We reviewed the stocks in our High-return portfolio in line with our

modest expectations for the equities market in 2016, coupled with potential

factors, such as persistent foreign capital flight, weak company performances and

generally frail market sentiment, which may ultimately drag market returns. We

however maintained our selection criteria which considers small company size

(Market capitalization <1% of total market cap), volatility (low beta) as well as

historical and forecasted earnings and expected returns for 2016.

Following this review, the number of stocks in the portfolio was increased to 5 from

4 stocks as at H2:2015 ranging from the industrial goods, financial services and

health sectors.

TICKER MKT CAP

BETA Rev 3-

5Yr CAGR

Earnings 3-5Yr CAGR

Av. 5yr -ROE

Av. 5yr -ROA C.

PRICE Target

Price Weight

2016 Expected

Return.

STOCK A 0.09% 0.56 3.26% 11.05% 9.16% 0.03 -- -- 7.1% 40.66%

STOCK B 0.37% 0.84 7.93% 15.07% 6.95% 0.01 -- -- 29.4% 40.83%

STOCK C 0.47% 1.12 11.24% 18.29% 7.09% 0.01 -- -- 37.3% 25.33%

STOCK D 0.29% 0.60 7.13% 9.25% 100.04% 0.42 -- -- 23.0% 12.31%

STOCK E 0.04% 0.63 11.06% 64.97% 5.74% 0.03 -- -- 3.2% 22.80%

0.0% 100.0% 27.90%

We expect the portfolio to return 27.90% by FY: 2016, driven by the selected

companies fundamental potentials as well as competitive edge in their respective

industries.

PFA Portfolio

Companies in this portfolio were selected primarily based on PENCOM’s

guidelines which are; companies are expected to have taxable profit in 3 out

of 5 years of operations, and must have paid cash or bonus dividend in 1 out

of the 5 years under consideration.

Also as a result of the current strain in economic fundamental caused by

dwindling global oil prices, and dwindling foreign reserves, which have led to an

unstable foreign exchange environment, we broadened our criteria to include;

level of exposure to foreign exchange risk, as well as; at least 4 years of

Turnover and Earnings growth should have been reported by the company,

consistent dividend payment history, high ROE and ROA, and attractive upside

potential for 2016 based on our Intrinsic value of stocks.

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We currently have nine (9) stocks which come from the Oil and Gas, Consumer

Goods (food and beverage and breweries sub-sector), Banking, Insurance, and

Industrial goods sectors. Based on the criteria mentioned above, we believe that

these companies have high return potentials, and should pay dividend in 2016.

Two (2) companies in Consumer Goods sector with substantial exposure to

foreign exchange were retained in the portfolio because we believe that the two

companies will remain resilient despite the threat posed by the current foreign

exchange system.

Foreign Preference Portfolio

This portfolio was constructed considering our outlook for the general market,

expectations regarding individual company performances, and our estimated

intrinsic value of the related equities given these factors.

Significant consideration was also given to companies with international

affiliation, good corporate governance records, business stability, and historical

foreign investors’ bias. Also, we considered stock beta, 5-yr average ROE and

ROA (vis-à-vis 5-yr historical performances), 5-yr revenue and earnings CAGR,

expected dividend yields, volatility and upside potentials in arriving at our

selections.

The portfolio comprises of five (5) stocks, from the Consumer Goods, Financial

Services and Industrial Goods (including Construction) sectors at a

proportionate weights of 17%, 53% and 31%.

Tickers HIST. Rev

Growth

Forecast Rev

Growth

Hist. Earnings Growth

Forecast Earnings Growth

Hist. Avrg ROE

Hist. Avrg ROA

Hist. AvrgDiv Payout

Forecast AvrgDiv Payout

PCLOSE TP Exp. Div.

Yield

Expected Return

2016

Total Return

Weight

STOCK A 6.77% 2.45% 3.15% 9.60% 39.43% 8.59% 74.04% 81.60% -- -- 6.70% 5% 11.67% 5.24%

STOCK B 1827.00% 5.07% 14.72% 3.21% 26.07% 3.92% 56.00% 48.50% -- -- 9.94% 9% 18.74% 8.41%

STOCK C 1312.00% 7.08% 16.97% 8.38% 17.00% 2.17% 60.33% 52.00% -- -- 12.81% 55% 67.33% 30.23%

STOCK D 15.97% 7.00% 17.84% 5.95% 66.70% 21.52% 75.86% 80.00% -- -- 2.91% -4% -0.64% -0.29%

STOCK E 10.16% 5.25% 8.78% 5.92% 47.50% 19.52% 67.25% 80.00% -- -- 3.21% -7% -3.55% -1.60%

STOCK F 35.19% 7.99% 52.74% 9.25% 22.12% 11.57% 35.60% 47.50% -- -- 3.21% 25% 28.65% 12.86%

STOCK G 18.21% 7.13% 37.28% 9.25% 100.04% 41.94% 80.40% 60.00% -- -- 3.39% 12% 15.70% 7.05%

STOCK H 16.03% 7.00% 28.63% 12.49% 15.81% 7.89% 37.11% 25.00% -- -- 3.78% 64% 67.44% 30.28%

STOCK I 23.66% 19.07% 28.94% 14.60% 9.66% 4.28% 56.00% 37.00% -- -- 4% 13% 17% 7.81%

Expected Return 24.75%

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TICKERS BETA

5YR AVERAGE ROE

5YR AVERAGE ROA

5YR REVENUE CAGR

5YR EARNINGS CAGR

UPSIDE POTENTIAL WEIGHT

STOCK A 0.79 15.14% 1.37% 5.43% 7.88% 27.38% 35.49%

STOCK B 1.04 29.98% 11.80% 5.68% 11.50% 15.20% 16.57%

STOCK C 0.60 40.76% 7.74% 6.72% 9.16% 14.83% 18.85%

STOCK D 0.56 9.66% 4.28% 19.07% 14.60% 13.38% 17.31%

STOCK E 0.89 22.12% 11.57% 7.99% 10.40% 3.36% 11.78%

Portfolio Average 0.77 23.53% 7.35% 8.98% 10.71% 14.83% 100.00%

We expect this portfolio to return 11.75% by 2016 year-end, with an average

upside and dividend yield expectation of 14.83% and 3.49% accordingly. This is

considering our intrinsic values of the individual stocks and the relatively low

current market prices, providing attractive entry prices.

However, we acknowledge that risk factors including oil price fluctuations, low

commodity prices and foreign exchange movement might result in the portfolio

not performing as forecast.

Technical Trading Portfolio

The portfolio is crafted based on the expected performance of counters in post-

election years, vis-à-vis falling oil prices and other headwinds forecasted to drag

the equities market performance in the year. A basket of stocks with positive

three-year average post-election returns was constituted, out of which three

(3) stocks made the technical trading portfolio.

The portfolio is fashioned to guide speculative trading decisions, and is

recommended to investors that actively follow prevailing market dynamics, given

the probable need to exit and re-position at the appropriate Relative Strength

Indices (RSIs), rather than maintain a position till year end. Criteria considerations

for the portfolio are noted below:

1. Have exhibited average positive price appreciation in the last three post-

election years (2004, 2008, and 2012).

2. Technical indicator (RSI) indicates oversold.

3. Must also meet at least one of the following; 2016 expected total return

greater than the ‘basket’ average, 5-year average historical ROE and ROA

greater than basket average, 5-year Revenue and Earnings forecast growth

greater than basket average.

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Modified Duration --- --- --- --- ---

Yields increase

by

0.25% ↑ 0.14% 0.28% 0.51% 0.67% 0.73%

0.50% ↑ 0.27% 0.57% 1.02% 1.34% 1.45%

0.75% ↑ 0.41% 0.85% 1.52% 2.00% 2.18%

1.00% ↑ 0.55% 1.13% 2.03% 2.67% 2.90%

1.50% ↑ 0.82% 1.70% 3.05% 4.01% 4.35%

Portfolio value reduces by

Bond

Modified

Duration

Yield (31-Dec-

15)

BOND A - -

BOND B - -

BOND C - -

BOND D - -

BOND E - -

TICKER

Post-Election Return

(3Yr Avg)

RSI_30D

CPRICE

Intrinsic

Price

2016 Expected

Return ROE ROA

Rev.

Growth

Earning

Growth Weight

STOCK A 23.85% 48.69 -- -- 40.04% 13.82% 2.05% 5.58% 7.97% 30.39%

STOCK B 24.98% 42.52 -- -- 12.31% 100.04% 41.94% 7.13% 9.25% 34.04%

STOCK C 3.87% 39.77 -- -- 55.07% 17.00% 2.71% 7.08% 8.38% 35.58%

Portfolio Average 35.81% 43.62% 15.57% 6.60% 8.53% 100.00%

Having factored the above criteria, we have created a portfolio of three stocks

(3), for which expected return is pegged at 35.81%. We however, note the

further uncertainties anticipated in the year, and as such point out that this

portfolio is recommended strictly for speculative investors.

Fixed Income Strategy

Historically, our strategies have always been based on capital preservation and

event-driven position taking. These will remain the foundation on which we

base our 2016 strategy. However, given our expectations of high volatility

during the year, we anticipate opportunities for significant capital appreciation.

Based on our assessment of the current yield environment and expectations for

same, we propose three (3) strategies which we expect to produce superior risk-

adjusted returns over 2016.

Modified Duration strategy;

Barbell Investment strategy;

Cash flow strategy;

Modified Duration Strategy

The strategy takes a look at instruments with modified duration lower than the

market average as the basis of selection. This strategy helps reduce the effect of

the expected rise in yield on the portfolio.

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Barbell Investment Strategy

With the strategy, we expect that investment in shorter term instruments, and

will serve as hedge against reinvestment risk and interest rate risk. There is a

risk of capital loss on the long-term bonds when rates rise if the bonds are sold

off before maturity, however, in the case of a flattening yield curve, proceeds

from matured short-term instruments can be re-invested into the then available

high-yielding short term bonds.

Cash flow Strategy

We re-introduced our cash flow strategy this year, aimed at investors with

sufficient investible funds that require consistent inflows from coupons. The

portfolio has an average a one year investment horizon. Reinvestment of

coupons is expected to provide the investor with higher total income, especially

given our expectations for the yield environment for most of 2016.

Apart from expected coupons from each bond, we have also highlighted likely

investment windows from which investors who do not need actual cash flows

can take advantage of higher yielding instruments in the year.

Bonds TTM Annual Coupon

per 100 par Price per 100 BOND A -- -- --

BOND B -- -- --

BOND C -- -- --

BOND D -- -- --

BOND E -- -- --

BOND F -- -- --

Description Coupon TTM (Years) YTM

BOND A - - -

BOND B - - -

BOND C - - -

BOND D - - -

BOND E - - -

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Real Estate Strategy

Positioning ahead of economic recovery

The widespread and resounding apathy towards the Nigerian Equities Market

(NSE) in the concluding year, as well as the lowering yield environment has re-

emphasized the need for portfolio diversification beyond the traditional asset

classes to the alternative investment.

Typically, participation in the Real Estate market is concentrated among

institutional investors, and the high net worth individuals either through private

development, pooled funds, and we do not expect these dynamics to change in

the near future. Our assertion is based on the dynamics of the investment class,

its capital intensive nature, lack of credible information, as well as lack of access

and the general perception of the Nigerian Real Estate Market as opaque.

However, it is noteworthy that the general market conditions have improved

significantly, further highlighted by the improvement in rank of Nigeria on the

JLL Transparency Index of 2014 released during the year, though the market

remains categorized as ‘Opaque’. This rides on efforts of state governments,

especially the Lagos state government, to attract foreign funds into the Nigerian

market given the need for sustainable developments.

Our strategy considered the peculiarity of the Nigerian market, the limited

information, the capital intensive nature, relatively low rental yields, land

regulations, and other general attributes of the asset class. We focused on the

Lagos state market, considering the above, and so we targeted institutional

clients (including high net worth individuals) with long gestation periods, as well

as an alternative for investors with higher liquidity needs for the medium term

horizon.

Forbearance positioning …the long term investor

We acknowledge ongoing works in Lagos State especially the four-pillar plans on

which the new governor contested; Economic Development, Infrastructural

development, Social development and security, and continuation of ongoing

projects. Considering the above, this strategy considers the typical real estate

investor with a long term investment horizon, relatively low cost of funds, and

familiarity with the capital intensive nature of the asset class.

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We believe this provides an attractive alternative for the Nigerian Treasury Bills

instruments which closed FY2015 at an average yield of 5.04% (secondary

market), while also considering our outlook on the yield environment in 2016.

The Collective …creating relative liquidity

We considered the illiquidity and capital requirement of real estate, especially in

Lagos, with the processes involved in transaction and document perfection

informing our “the Collective” strategy, which exploits the recent funds drive in

Nigeria and West Africa as a whole.

The just concluded year witnessed an increase in funds activities and

introduction of new partnership within the state from beyond the shores of the

country, as well as transfer of exiting interests and increased joint venture

partnerships. We anticipate a continuation and an increase of this trend during

this year, and thus highlight the opportunities of partnership especially to

diversify existing investment portfolio.

Investment Return

Capital Appreciation Rental Income

Property type

Type AType B

Type C

Location

Location A Location B

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Funds provide a more liquid and cheaper alternative to traditional real estate

investments, considering the lower capital requirement, opportunity to diversify

among property types and locations, and ease of investment exit without actual

sale of the property.

To view the full report or our comprehensive list of portfolio components, kindly

contact Meristem Research via e-mail at [email protected] or call

+234-(01)-2953135

Relative liquidity (better exit plan), diversified investment, lower individual capital requirement, flexible income plan (dividends/income), incpme value rentention (NGN/USD peg)

Investment Return

Pooled Fund - Private equity Rental Income

Property type

Property A Use A, Use B and Use C

Location

Lagos Location A, Location B, Location C


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