Month: July 2016

My wife and I had plans of dedicating the first year of our marriage to each other. No children yet, we said, just us. But nature had other plans. Barely two months into the marriage, she got pregnant. Though unprepared, we were elated, especially when we later discovered we would be having twins. Our boys came, bouncing with life and always eager to eat. Soon, I realised just how big a commitment fatherhood is.  The list never ends – baby food and diapers, walkers and new clothes that speedy growth soon render useless – I  provided them all with joy.

Before long, it was time for school.  Knowing the value of foundations, we embarked on a quest to find our kids the best school around. It was then the real shocker came. The fees were outrageous. After demanding tuition of about N60, 000, we were still expected to pay for uniforms, books, music lessons and swimming. Music lessons and swimming? For 1 year olds that could hardly talk! I was stunned. All my attempts at bargaining with the head teacher failed, it was either I coughed out N90, 000 per child or took my children to another school. Other schools were only mildly cheaper and a little farther from home – our hands were tied.

Returning home, we strategized. School fees have to be paid three times a year, about 3 months apart. We also had to factor in the fact that school fees will most likely increase as our children progress. Combining our financial muscles, we could afford to pay the fees but what happens in years to come when the demand increases? Of course, we hoped to have one or two more children in later years who will also attend good schools. Would we be able to cope? What if something happened and one of us had to stop working? We needed a sustainable plan.

Opting to seek counsel from older couples who must have crossed this bridge at some point, we spoke with Efe, my wife’s cousin. He was fortunate to have had his two kids at two years interval. He revealed that he had an education savings plan with an insurance company, one that enabled him save a substantial sum monthly towards his children’s education. He said the plan worked better than saving in a traditional savings account because the insurance company hold you accountable, monitoring your deposits and paying interests periodically. After a stipulated number of years, you are paid a lump sum. He explained that he plans it such that the lump sum comes in at the point where his kids are about to make major academic advancements like primary school to secondary school. The benefits are endless, he said, should anything happen to the parent, it serves as a cover for the continued education of the children left behind..

His words soothed us like rain after three days of hot Lagos sun, we were relieved and reassured. Since we had proof that his plan worked, we decided to use the same plan so we spoke with his contact at ARM Life.

Three years have gone by, my boys welcome me home every day with nursery rhymes and ‘A for Apple’ and it’s the highpoint of my day. Updates from my insurance company come in periodically, intimating me on the growth of the fund and  assuring me that no matter how expensive education gets or whatever happens to me, I will still be able to provide the best for my boys and the little girl due to arrive in a few months.

In keeping with their commitment to exceeding clients’ expectations, ARM securities recently introduced ARM Stocktrade, a self-service online trading portal that enables clients execute trades, real-time, on the Nigerian Stock Exchange. The portal is also enabled to provide access to stock broking accounts and gainful insight from quality research resources enabling clients to make informed stock trade decisions.

Clients who log into the portal will enjoy the ease and convenience of placing trade orders online, backed by relevant reliable information and timely updates. Speaking on the development, Mrs Kemi Oluwashina, a Director of ARM Securities explained that the portal was born out of the company’s desire to continually add value to its clients; that’s why the live market feed and research pages on ARM Stocktrade portal were specially tailored to meet the growing need for relevant information on the go.

Also reacting to the portal, Mr. Taiwo Adeleye, the Head of Marketing and Corporate Communications at Asset &Resource Management Company Limited (ARM) further stated that one of the things ARM Stocktrade has going for it is its adaptability to any mobile device. Clients will be able to place orders online from their phones and receive contract notes on the same day. He mentioned that this is one of the ways ARM keeps its promise of empowering its clients to realise their ambitions. Existing clients of ARM Securities Limited can log into the system immediately while new clients need only complete the simple online account opening form and upload required documents at www.armstocktrade.com to start trading.

ARM Securities Limited (ARM Securities) is an independent subsidiary of the Traditional Asset Management arm of ARM – a leading, reputable asset management firm with a very successful track record of protecting and growing investments for private investors and institutions for over two decades. ARM Securities started operations in 2008 as a full service brokerage house offering brokerage services to local as well as foreign private and institutional investors. The company is a dealing member of the Nigerian Stock Exchange (NSE) and is regulated by Securities and Exchange Commission (SEC).

Pass this to my children!

Like most fathers, I would like to leave a good inheritance to my children. Something that can give them a good start in life by which they can remember me long after I’m gone. Some fathers are affluent enough to buy their children houses and even replace such houses when the child is not satisfied. But I hardly have anything, save for this house we live in and another plot of land in the village.

When my friend spoke about setting up a will, I laughed as I asked him what assets we have to set up a will on. Feeling smug, I told him of my age long plan; upon my retirement, I will call my children and give each child 10 % of my pension fund.  This would surely give them a head start in life and I would still have 60% to fall back on in old age. Maybe I would start a small business thereafter to keep me busy.   ‘What will become of your house and your land in the village?’ my friend asked. ‘My children can do whatever they like with them when I’m gone’, I told him.

Nodding, my friend agreed. ‘It’s not a bad plan, your pension is a substantial asset’, he said. ‘But what if the unfortunate happens before you retire, what will happen to your pension?’  Pausing to think, I answered assuredly. ‘Well, it will amount to almost the same thing; the pension will still go to my children’. ‘Ken, these things are not automatic o, if you want your pension to go to your children, you need to set up a Will for your pensions account, naming your children as your beneficiaries,’ he explained, opening my eyes to a reality I had not considered.

Many of us have plans for our pension funds. Plans to reinvest it; live on it or even pass it on to our children. Most of us however do not consider setting up a plan that will ensure our pension fund is distributed based on our wishes in case of unforeseen circumstances. A Retirement Savings Account Will (RSA Will) is a legal document set up by an individual stating clearly what should happen to his/her pension fund upon demise. This document allows you to state beneficiaries to the funds and what portion they receive.

In the case where a person passes on without setting up an RSA Will, his pension funds cannot be given to anyone, not even his next of kin. The law requires that for any other person to be able to claim the deceased’s pension, he/she must provide an RSA Will or a letter of administration obtained from the court. Obtaining a letter of administration is a tedious and time consuming process; more exhausting than the process of obtaining letter of administration is the strife and bitterness that may emanate among family members over such unallocated funds.

Setting up an RSA Will is easy and affordable; the wise thing to do is to set up an RSA Will today.

Preparing for the future does not mean you are inviting loss. On the contrary, the assurance that your future is secure enables you enjoy life more. Let us walk you through setting up an RSA Will, call ARM Trustees today.

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ECONOMIC AND FINANCIAL REVIEW

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The impact of low oil prices continued to drive weakness in the Nigerian economy in Q1 2016.
The NBS released a worrisome combination of macroeconomic data in which Q4 15 real GDP figures slowed to +2.11% YoY and February inflation jumped 180bps to 11.4% YoY. The GDP numbers reflected the combined impact of an 8.1% YoY decline in oil-GDP and flatness in non-oil, while the inflation figures were linked to the ongoing fuel shortages, costlier imports, and the rise in utility tariffs.

The data presented a stagflationary backdrop to the most recent Monetary Policy Committee (MPC) meeting where the Central Bank tightened MPR 100bps to 12%, raised CRR 250bps to 22.5%, and narrowed its asymmetric corridor to +200bps and -500bps; surprising analysts by its hawkishness in a time of macroeconomic distress. From the MPC minutes, the Governor highlighted the weak foreign portfolio investment flows (FPI)
and the need to curtail inflation as reasons for the switch in stance. This was all puzzling for two reasons: First, the bank had hitherto been at pains to emphasize that, in contrast to the previous regime, FPI was not a major factor in its decisionmaking. Secondly, the Governor admitted, in his speech, that inflation was driven by “structural problems” outside the ambit of monetary policy. It is not clear then how a tightening stance addresses the issue.

Nevertheless, while it was clear that currency concerns remained at the forefront of the MPC minutes, no clear policy was set forth. Over Q1 16 as the CBN’s reserves continue to decline (-4.07% to $27.88 bn) even as oil prices recovered from a decade low of $28.71/bbl in February. Nevertheless, the Q1 16 average price of $35.20/bbl is still about 34% less than the 2015 average—Brent closed the quarter at $39.6/bbl. For the moment, the CBN continues to defend the currency at the N197-N199/$ range but it is evident from widening parallel market premiums that the real economy continues to face major headwinds from currency woes. Ask prices at the parallel widened 22% more to N320/$ over the quarter.
On the positive side, after two failed attempts, the FG finally got its 2016 budget through the senate, though at N6.06 trillion, the budget is substantially lower than the N6.6 trillion initially proposed. Progress with budget comes as positive news because in the face of unpredictable monetary policy, the lack of fiscal spending continues to squeeze the real economy.

Equities 

Weakness in the macroeconomic environment continued to reflect in equity markets as the NSEASI closed 9.6% lower at the end of the quarter. The Banking sector (-13.93%) was driven lower as largely positive FY 15 performances were marred by poor Q4 15 numbers. Other noteworthy sectoral underperformers were Brewers (-11.67%), Consumers (-15.33%), Personal Care (-22.58%) and Oil & Gas (-12.15%)–all of which were driven in main by the sustained weakening of the consumer’s purchasing power and bearish oil prices performance. Incidentally, the best performing sectors were Construction (-0.85%) and Cement (-5.17%), both which are expected to be direct beneficiaries of increased capital government expenditure.

Fixed Income 

73bps and 383bps below the corresponding reading in Q3 15 and Q4 14 respectively 

High levels of market liquidity in Q4 2015 drove rates lower across the yield curve; in which, in combination with duration risk at the longer end of the curve, caused a pronounced steepening. In Q1 15, the CBN returned to the market in an attempt to mop of the excess liquidity from the previous quarter, providing some support for yields. Average yields trended higher following the latest MPR hike, pushing T-bills and Bonds yields 200bps and 170 bps respectively at the end of Q1.

[/vc_column_text][/vc_column_inner][/vc_row_inner][vc_row_inner][vc_column_inner column_padding=”padding-2-percent” column_padding_position=”all” background_color=”#cbc0b7″ background_color_opacity=”1″ centered_text=”true” width=”1/1″][vc_column_text]Figure **: Yields and Market Liquidity[/vc_column_text][image_with_animation image_url=”7090″ alignment=”” animation=”Fade In”][/vc_column_inner][/vc_row_inner][vc_row_inner][vc_column_inner column_padding=”no-extra-padding” column_padding_position=”all” background_color_opacity=”1″ width=”1/1″][vc_column_text]

Q2 16 Outlook & Strategy

Our expectations for global oil prices remain bearish, and while the 2016 budget proposal is suggestive of some growth stimulus, the acceleration of inflation undercuts optimism for any incremental real benefits to the consumer. In addition, monetary policy inconsistency doesn’t leave much promise for the economy. However, the CBN did promise currency market reform at the last MPC meeting, which may alleviate pressure on FX and its knock-on effects on businesses and the real economy, but until it provides further clarity, we can expect that parallel market premiums will continue to widen.

Our expectations for equities for Q2 16 are slightly bearish given our prognosis for oil prices and consumer weakness.
Nevertheless, year-long market declines have brought valuations to multi-year lows with the high quality equities trading cheaper than they have been in years. Our strategy continues to focus on selecting names in preferred sectors wherein we see long term fundamental value e.g. Banking (GTBank and Zenith), Consumers (Nestle, Presco), Cement (DangCem) etc.
We expect these, which form the core of our portfolio holdings, to outperform their peers in the short to medium term.

Our fixed income strategy has shifted slightly from Q1 16. We expect the CBN intensify efforts to rein in liquidity levels as persistent currency weakness apparently drives a change of strategy at the apex bank in its recent volte face to attracting foreign capital to the financial markets. We also believe that the impact of the MPR hike has not fully reflected in yields and expect longer term yields to trend higher in the near to medium term. In addition, we expect investors to steepen their pricing of future risk in consideration of erratic policy and incipient inflation, as well as continued uncertainty in the local currency, all of which will act to undermine longer term investment. On this basis, while we maintain interest in the 1 – 3 year range where yields remain most attractive, we will likely expand trading activity to take advantage of a probable increase in debt market volatility in longer tenured securities.

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WHY IT SHOULD BE
GOAL BASED

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In recent years, ARM Investment Managers has sought to build a platform for working with our esteemed clients to develop a robust investment programme via our complimentary Financial Planning Service. This service seeks to optimize outcomes for our investors based on the principle of Goal-Based Investing; an approach which we believe has been validated by recent economic and sociopolitical developments in Nigeria.

Goal based investing wasn’t always considered mainstream or entirely consistent with the key theoretical pillars of modern finance, but as market globalization spurred pronounced asset class volatility and the preponderance of downside risks, progressively invalidating prevailing investment paradigms,
recent evidence, beginning at the turn of the century and accelerating since the last global financial crisis, has mounted in its favour as a more realistic and robust approach to building an investment programme.

Goal-based investing invites investors to identify their primary goals, understand the threats and vulnerabilities economic and market uncertainties impose on achieving these goals and design a tailored investment programme that mitigate these and optimally interact with match market opportunities (as
articulated via astute asset allocation and risk management) in the context of these vulnerabilities.

To bring this discussion home, we take, as an example, of one of our more popular offerings: the education plan. With the panicked monetary policy response to macro-economic dislocations and currency pressures from the onset of a rapid collapse of oil prices many parents and guardians suddenly find themselves challenged in funding the foreign currency expenditure of their wards, and many well laid plans, either for their ongoing or prospective education may very well be endangered. However, having identified this as a key life goal, much of this uncertainty may have been contained by an education plan which specifically seeks to address the risks around this goal—which after all are not entirely new, Nigerian having gone through several bouts of devaluation in the past.
The next section explains the working of the various strands of education plans we have developed for clients.

The Education Plan
Few things are as important as a child’s education; it is an investment with potential for exponential returns, and a necessity in the competitive race of life. Unfortunately, the best education often comes at a high but often unpredictable costs. At ARM, a dedicated team of highly trained professionals who have personal understanding of the challenges, and are equipped with the array of tools and skillsets necessary to making your child’s education financially secure. For financial advice, feel free to send us your contact details and an ARM Relationship Manager will contact you.

How much will it cost?
Over the last 10 years, education inflation in Nigeria has averaged 11%. This means that by 2026 the cost of the average four-year undergraduate degree tuition at a Nigerian University could be around N7 million – just for tuition. Adding the cost of accommodation, upkeep, books and other associated expenditure, the price tag for a good education is likely to accelerate as growing demand from a youth bulge continues to outstrip sluggish supply of school placements.

How much will it cost?
Over the last 10 years, education inflation in Nigeria has averaged 11%. This means that by 2026 the cost of the average four-year undergraduate degree tuition at a Nigerian University could be around N7 million – just for tuition. Adding the cost of accommodation, upkeep, books and other associated expenditure, the price tag for a good education is likely to accelerate as growing demand from a youth bulge continues to outstrip sluggish supply of school placements.

[/vc_column_text][/vc_column_inner][/vc_row_inner][vc_row_inner][vc_column_inner column_padding=”no-extra-padding” column_padding_position=”all” background_color_opacity=”1″ width=”1/1″][vc_column_text]Figure 1: Expected Cost of Nigerian Private Undergraduate Education (N mil)[/vc_column_text][image_with_animation image_url=”7093″ alignment=”” animation=”Fade In”][vc_column_text]Downside risk refers to a permanent diminution in asset value (relative to target in a given period) as opposed to volatility which is more akin to value fluctuation and uncertainty in timing.[/vc_column_text][/vc_column_inner][/vc_row_inner][vc_row_inner][vc_column_inner column_padding=”no-extra-padding” column_padding_position=”all” background_color_opacity=”1″ width=”1/1″][vc_column_text]

How much do you want to save?
The great thing about ARM’s approach to education planning is that it is designed to be flexible enough to respond to client’s changing circumstances and always save them money in the long run. For instance, a client may favour lower annual contributions, and in this case benefit by starting the plan earlier, whereas a client who prefers making fewer contributions could benefit both from starting early and contribution more.

Clients can choose how the structure their contributions e.g. bullet payments or lump sums, they can also decide on the specific number of years for which they would like to contribute.

Relying on market research to tailor our solutions our clients’ circumstances, our plans can offer unparalleled stability and
reliability.
How can ARM help you?
At ARM we have created propriety models for helping our clients save for their children’s education. We develop investment plans designed to suit the specific needs of clients. For example:
Tope is 9 years old and currently in her final year of Primary school. She is bright and has a passion for sciences. Tope has made clear her ambition to be a Mechanical Engineer. To insure their child’s dreams, Tope’s parents wish to save enough money using an ARM education plan to fund her education at a prestigious private Nigerian University. ARM prepares the following plan;

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Bespoke plans for your specific needs…
As a fully integrated financial services firm, ARM has access to global capital markets. Leveraging this with our grounding in comprehensive research and financial tools, we can possess the capacity and infrastructure to cater to clients that wish to fund plans in US Dollar and Pound Sterling.

Taking into account the future impact such variables as FX movements, education inflation and expected market returns, our plans emphasize value preservation and offer a versatile tool which enables clients fulfill their wishes to educate their children anywhere in the world come what may.

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DIVIDEND INVESTING

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he fall in global commodity prices set in motion a series of adverse reactions in the Nigerian economy and a policy response that, so far, leaves much to be desired. These events have also accentuated phenomena that have pockmarked the Nigerian investment scene over the past few years: Uncertainty, devaluation and inflation. While these features may appear highly undesirable on the surface, they have very significant and potentially beneficial implications for an investor’s asset allocation plans, particularly in the context of goal based investing. We take these in turn.

This is why crises periods are sometimes an astute investor’s best friend, since the uncertainties they engender in markets invariably lead to mispricing of varying degrees of severity, as a majority of market participants succumb to fear.

Devaluation and inflation: The collapse of Nigeria’s fiscal revenues and import earnings has also driven currency devaluation and inflation. This is highly significant from an asset allocation perspective because due to a common psychological phenomenon termed “money illusion ” the effects of these important factors become more insidious, but no less destructive. Consequently, investors will often react to bouts of market uncertainty with an ostensible “flight to safety” which in this context often means the “predictability” offered by fixed income. But safety and predictability usually do not coincide, especially in this particular context, since fixed income is more susceptible than virtually any other asset class to the immense combined value eroding effects of devaluation and inflation over. An optimal allocation in this case must include assets that have the tendency to preserve real value, i.e. to so called real assets (e.g. real estate) and equities. Both classes of assets have very different characteristics which apply to a variety of investor circumstances, but are similar in the one feature where they historically demonstrate a strong propensity to preserve real value over time.

We have seen this many times before. The chart below makes an example of the performance of T-bills vs equities in the Nigerian market in real terms over the 25 years since 1990—a period within which period the Nigerian economy witnessed significant bouts of both currency devaluation and inflation.
For comparison we also include the performance of USD purchased in 1990 and held across the period in real naira terms. Equities were clearly the most volatile over the period and the past few years were particularly unkind but they generally retained real value best. In contrast, despite high yields averaging 13% over the 25-year period, investment in T-bills would have lost an investor nearly 70% of their value in real terms.

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The second chart shows inflation adjusted performance of some prominent value stocks (with steady dividends) relative to T-bills since the turn of the century. The performance of these equities is clearly superior and have all preserved and even improved value over the period despite significant market movements.

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Tying all of this back to the foregoing discussion on market uncertainty, we take it for granted that for a vast majority of individuals and most life contexts, even an uncertain success is to be preferred to sure failure to meet one’s goals. On the back of financial results and market performance in Q1 we are now asking to clients with longer term goals to shift their perspective.
We recommend a dividend focused strategy recognizing the following important points:

Valuations are very attractive: Indeed, one of the reasons why dividend yields have risen sharply for some good quality stocks is because the rapid drop in prices has put many equities at historical valuation lows, setting the stage for potentially very strong medium term performance.

Dividends are a good proxy for quality under current economic conditions: The very fact that some companies are able to declare attractive dividends comparable to long term bond yields despite the tight fiscal environment is an indicator of the underlying robustness and sustainability of their business across the cycle; the second key quality in a successful long term
equity strategy.

Dividends provide income even as capital gains recover value: The one area where fixed income excels in an asset allocation programme is in the provision of steady, predictable income. This in itself is a valid investment goal, but in the context of our earlier discussion, it is easy to see where exclusive focus on this goal can lead to problems, especially for investors facing long term horizons. In brief, it is rarely a good strategy to rely on fixed income to provide income in markets and economies that are defined by macro-instability as Nigeria doubtless is.

It turns out that high dividend stocks are a more effective near substitute that not only provides the required income (near) certainty but also preserves purchasing power over the long term. Incidentally, what makes a stock high dividend rarely has to do with the dividend it pays itself—the only requirement
here being that the payout levels are relatively stable—but the price at which the security was bought originally. This is another area where opportunities presented by market crises to buy high quality companies on the cheap become invaluable. Good companies tend to pay stable, increasing dividends, and where they are bough at low valuations, these payouts can rival and even outperform fixed income instruments over the long term as income generators, whilst resetting value with economic cycles (unlike fixed income) to preserve purchasing power.

Equities preserve liquidity and allocative flexibility:
Attractively priced real assets typically provide better value preservation than equities in general, however their income streams are usually more uncertain in an economic down-cycle and it is usually several orders of magnitude more difficult to make an emergency exit the investment under adverse market conditions—at least without compromising the value preservation feature. Thus real assets are appropriate only to investors with minimal interim liquidity needs and a much larger diversified asset base. Equities with stable dividends are the next best thing when it comes to value preservation and are therefore a much more appropriate vehicle for most investors.

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ECONOMIC AND FINANCIAL

REVIEW & STRATEGY[/vc_column_text][vc_column_text]

The macroeconomic environment deteriorated further in H1 16, with fuel scarcity in the first quarter of the year and oil price disruptions in the Niger-Delta further complicating an already precarious climate, while a rebound in oil price during Q2 has yet to have a meaningful impact on Nigeria’s economic fundamentals.
Even as the CBN aggressively tightened policy in Q2 in a bid to fight inflation, CPI skyrocketed in May (+15.6% YoY) on the back of scarcity of domestic farm produce and the impact of currency woes on imported goods prices; forex reserves dipped -10.8% YoY to $26.9bn as dollar demand continued to drain reserves, while the Petroleum Product Pricing Regulatory Agency (PPPRA) hiked the retail price of PMS ~67% to N145.
The CBN eventually caved to persistent currency pressures, introducing a new FX trading structure aimed at floating the naira in a bid to improve market liquidity. It added Dynamic Secondary Market Intervention Mechanisms (DSMIS) auctions in a bid to ensure transparency and moved to promote trading on the FMDQ platform led by market participants.
However, despite a 42% devaluation, the market has yet to achieve meaningful traction as forex sellers have stayed away amidst suspicion that the apex bank continues to tele-guide trading within an effective peg.

CAPITAL MARKET REVIEW
Tracking global trends, Nigerian equities opened to the worst start to a year since 2009 (-16.5% MoM), on bearish sentiments following a drop in Brent crude to thirteen-year lows of $27.9/bbl. While subsequent recovery in crude prices in the months which followed (+76% to $49/bbl), provided scope for positive sentiment towards NSEASI, it was the perceived adoption of pro-market policies in May (PMS pricing) and June (FX floatation) that helped unwind the negative start leading to a positive close to H1 16 (+3.3%).
Markets fell 11.7% in Q1 as lower crude price and unclear domestic policy (delayed budget, FX market). However, as recovery in Brent prices recovered in Q2 16, the implementation of greater flexibility in PMS pricing in early May and CBN’s adoption of flexible exchange rate system in June underpinned the 17% jump in Q2 16–highest quarterly return in thirteen quarters. Significantly, Q2 16’s recovery emerged amidst a barrage of negative macro-economic data, contraction in GDP, fresh attacks on oil production and soaring inflation.

Indeed, even with the dampening impact of the Brexit turmoil in late June, the NSEASI was on track for its best quarter since Q1 2010, as investors appeared to overlook these issues.

Interestingly, the strong market rebound occurred without foreign participation, with a net short foreign positions of N32 billion for domestic equities.

In the fixed income space, after a gradual uptrend in yields in Q1 16, markets were jolted in March by the MPC’s unexpected hike (100bps) in MPR to 12% along with a 250bps increase in cash reserve ratios (CRR). The MPC also narrowed the asymmetric corridor to +200/-500bps (vs. 200/-700bps previously), which effectively increased base rates, setting yields on a definitive upwards trajectory. The Committee cited the need to curtail inflation and encourage foreign portfolio investments as justification while market yields adjusted accordingly, lifted by further remarks from the apex bank on the need to raise real interest rates. Yields maintained this trajectory in Q2 16–even after the CBN flooded the market with $1 billion in June, causing a temporary drop in yields– as the apex bank continued to intervene in the open market, significantly boosting OMO sales during the period.

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In line with our expectations the DMO has increased bond issuance to plug the bulging FG budget deficit. It sold N641 billion worth of bonds in H1 16 which is ~43% higher YoY and 9% above the proposed issuance. On the other hand, though demand was fairly robust with bid-cover ratio in excess of 2x in each quarter, investors began to price-in inflation expectations into bid rates. Upper bid rates climbed 2.4pps QoQ to 18% on average in Q2 16, forcing the DMO to sell over 40% on a non-competitive basis at the April auction and reject nearly half of the N100 billion on offer at the May auction. However, with subsisting fiscal pressures, the DMO sold the entire N120 billion at the June at highest marginal rate (14.53%) in 10 months.
The steepness we highlighted in our last report remains, but the biggest impact was in medium tenors even as the entire curve shifted substantially higher.

Significantly, the CBN policy shifts introduces a new dimension into outlook in the form of heightened uncertainty for monetary policy direction.

[/vc_column_text][/vc_column_inner][/vc_row_inner][vc_row_inner][vc_column_inner column_padding=”no-extra-padding” column_padding_position=”all” background_color_opacity=”1″ width=”1/1″][image_with_animation image_url=”7075″ alignment=”” animation=”Fade In”][/vc_column_inner][/vc_row_inner][vc_row_inner][vc_column_inner column_padding=”no-extra-padding” column_padding_position=”all” background_color_opacity=”1″ width=”1/1″][vc_column_text]H2 16 OUTLOOK[/vc_column_text][vc_column_text]

For H2 2016, our expectation for the economy is hinged on the sustained recovery in oil prices; the FG’s success in curtailing the pipeline vandalism and the success of the new FX structure.
Oil prices have rebounded since the January 20, 2016 low of $27.88/b. However, while crude has seemly found support at the $45-$50 levels, recent recovery in the rig counts suggest a future pull back in prices.
While the dynamics of the new FX structure are still unclear, inflation is expected to remain high for the remainder of the year and we expect GDP to remain in negative territory in H2 16. Positive policy shifts seem to be taking hold, but are very unlikely to provide fundamental support in the short term.
Finally, as earlier mentioned, the outlook for yields is murky given the CBN’s wavering policy positions.
Consequently, we remain cautious in our outlook and investment strategy. On the one hand, there is a case for further tightening in H2 16 given the substantial advances in inflation, and to counteract the impact of the Naira depreciation. On the other hand, weaker growth and the government’s substantial borrowing needs may put a collar on the MPC’s ability to act aggressively. In general, we expect the recent equity market rally to be short-lived and see further market turbulence in H2 2016, as a weakening naira continues to spook foreign investors and domestic economic and policy woes dampen local investor appetites.

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IDEA FOR

THE TIMES

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At the end of yet another quarter, we find new validation for a paradigm we have been canvassing these past few years. Situating the discussion in the context of the prevailing domestic and global economic uncertainty our last newsletter made a strong case for investment in risk assets taking advantage of historic valuation lows.
Nigerian equities had endured a long period of adverse sentiment leading to in marked discounts on their value. Our prescription was fairly straightforward: given the great importance of beginning period valuations to long term investment success, we saw this circumstance as an opportunity for investors to gain a head-start on the markets on the journey to their life goals. However, we also highlighted certain prerequisites that conduce to a successful trip, ultimately crafting our advice around arguments that identified high quality, dividend paying stocks—purchased at the right price—as robust vehicles for wealth preservations and growth.
The markets seemingly got the memo. As if on cue, the NSE All Share Index promptly jumped 17% over Q2 2016, the second best performing quarter in nearly a decade; which is all the more remarkable coming from a cumulative 24% dip in the three preceding quarters of consecutive losses. As anticipated in our previous newsletter, the rebound was led by the high
quality (dividend paying stocks) with the stocks in banking, brewery and food sectors—which dominated dividend yield rankings—returning 35%, 24% and 17% respectively on average during the period.
While not entirely unexpected, we did marvel at the strength of the recovery in Q2 2016 given that the underlying economic weaknesses are still very much with us. Nigeria likely entered its first recession in two decades during Q2 2016; government policy was no clearer at the end of the quarter than it was at the time of our earlier newsletter and the dual pressures of high inflation and currency weakness which featured heavily in the arguments we presented therein show no signs of abating.
It would seem that the immediate drivers of equity recovery during the period was the anticipation—and subsequent announcement—of the CBN’s new currency framework that
was widely expected to relieve the capital markets of a profound overhang of uncertainty, the materialization of which we still await. Thus, unless we see a marked change in fortunes, we are under no illusions about the current bullishness in the markets and how long it can hold out.
Nevertheless, in an ironic sort of sense, this was precisely the point: markets invariably overreact; correction in either direction is really only a matter of time; and astute investors make their success of knowing how to time this to advantage.
However, that is by no means the end of the story. There is certainly much more to investing than buying dividend paying stocks, and at this point we return to our paradigm of investment goal setting and financial plans as cues to building a more comprehensive picture.
No longer at ease Before we go on, some charts would be helpful:
The first is one we presented at the client forum in the not too distant past. It shows the performance of UK stocks segregated in to buckets of similar “seasoning”, which refers to the average post-listing longevity of stocks in each category. The original idea that Credit Suisse was presenting in this analysis was that companies that had spent long years weathering the storm (i.e. established companies) tended to be surer bets for investors. Incidentally, considering that these categories of stocks tend to coincide with the quality-dividend spectrum we underscored in the earlier newsletter, this is yet another nod in the direction of that particular argument.

However, our intention here is slightly different. We were trying to highlight the two distinct regimes that could be inferred from the chart, which incidentally cuts across all the stock categories. One remarks that in the period 1980-2000, equities were marked by a rather smooth upward drift which definitely paid off handsomely for the investors. The next 15 or so years was no less rewarding, however it was accompanied by a distinct shift in behavior, with all categories showing a much more pronounced degree of raggedness in their ascent.
For investors who either mistimed their investment and/or didn’t stay the course, this was clearly a much more gruelling journey, with many tears along the way.

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As we discussed previously, equities are important because they can move in leaps and bounds, giving the investor a fighting chance of nullifying the damaging effects of inflation (and currency depreciation) on long term living standards in a way that fixed income investments never could. However, equities also have an unfortunate propensity for moving in the adverse direction at very inopportune times. As can be seen, increasingly frequent episodes of substantial draw-downs in the equity curve can be much more deleterious in eroding investment returns and jeopardizing savers’ goals than the factors (currency depreciation and inflation) we focused on in Q1.

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The basic idea behind a buy and hold strategy is to wait out the slumps in the hope of coming out on top eventually. While this apparently sensible strategy worked well in the calmer regimes of yesteryears, this approach may not be entirely satisfactory in today’s market environment given the much higher orders of magnitude in draw-downs. Clearly, a different line of action is required which incorporates the idea of portfolio insurance to provides investors with safety nets that limit the impact of market downturns, while preserving the intermittent gains that come from rallies. Incidentally, with the rapid evolution over the past two decades, markets now offer a plethora of tools that can help investors better control outcomes. It is within this context that we situate our financial goal setting and planning paradigm, within which all these factors (inflation, currency risk, drawdowns etc.) can be systematically managed to give investors the best chance of meeting their short or long term goals.
Our solution is to offer clients structured investments, which expertly selects a suitable asset allocation to match the investor’s goals, ensconced within a carefully constructed set of defenses against adverse movements, using a wide variety of goal-appropriate tools. The objective is to carefully control downside risk by putting a floor to the worst-case, whilst leaving the investor unconstrained in taking advantage of the massive opportunities on the upside, especially available to less predictable (but potentially much more rewarding) variable income securities (e.g. equities).
Every client’s circumstance is different, as will be the most appropriate plan devised by our advisors and portfolio managers, but the objective is absolutely the same: to help our clients fulfil their biggest ambitions by giving them access to the best the global markets have to offer.

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