CardinalStone Research: H2’14 outlook – Navigating the haze

Global economy: stronger growth still uneven

Recovery is expected to continue in advanced economies given their improved growth trajectory, increased spending (slow – down in fiscal consolidation) and normalisation of monetary policy.

Global growth is projected at 3.6 percent by the International Monetary Fund (IMF), a 0.1 percent scale-down from a previous 3.7 percent estimate in January.

While growth forecast for advanced economies was maintained at 2.2 percent, growth for emerging markets was reviewed lower to 4.9 percent (5.1% in January). Despite the changing dynamics, emerging markets have continued to contribute more than two-thirds of global growth in 2014.

Nigeria – Growing from a larger base – is the 7% growth feasible?

As a fall out of the successful rebasing exercise last May, Nigeria’s GDP now covers 46 activity sectors, an increase from 33 sectors under the former GDP methodology. However, the final estimate for Nigeria’s average real GDP growth from 2010 to 2013 is 5 percent, lower than the previous estimate of 6.38 percent.

Given the larger base, it will be difficult for Nigeria to muster a 7 percent in the short to medium term. However, with the unfolding opportunities in agriculture, power and services sectors, a 7 percent growth is attainable in the longer term.

Equities – Selective opportunism

Despite the lacklustre performance of the equities market in H1, we retain our 10 percent target return for the ASI by 2014 year end, as we see opportunities for out-performance in some counters with high volatility. In the short term, the restrictive monetary policy will continue to help the financial system avoid an overrun of liquidity, but be positioned adequately in the medium term to take advantage of the shift to an expansionary regime. In fixed income, we anticipate a gradual switch to the long end of the curve to position ahead of a possible reduction in yields. However, in the immediate we expect trading focus to still be tilted towards the short end.

Our top picks – spots for out-performance

We maintain a 10 percent growth rate for the equity market for 2014, but see potential for out-performance from a handful of stocks. In the Financial Services sector, we see value in banking counters such as DIAMONDBNK, FCMB and CUSTODYINS. Transcorp also excites us, given the immense opportunities from its adventure into power, while we remain bullish on Seplat.