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Fund Manager's Report


In Q1, 2017, the United States’ manufacturing sector further expanded as the Institute of Supply Management(ISM) Purchasing Managers Index (PMI) recorded 57.2 which is significantly above the 50 expansion threshold, this was 2.5 points above the 54.7 recorded in Q4, 2016 reiterating positive economic activity in the manufacturing sector.

In the Eurozone, the manufacturing sector ended Q1, 2017 on an expansionary note to record an overall Eurozone manufacturing PMI of 56.2, 1.3 points up from 54.9 in Q4, 2016. Activity in the manufacturing sector increased to a six-year high as this marks the highest reading since April 2011.

In China, manufacturing companies signaled a decline in the health of China’s manufacturing sector as the PMI came in at 51.2 in Q1 2017, down 0.7 points from 51.9 recorded in Q4 2016. Overall, while the Chinese manufacturing economy continued to improve as the PMI is still above the expansion threshold of 50.0, but signs of weakening have started to emerge ahead of the second quarter. In Japan, The Nikkei Flash Manufacturing Purchasing Managers’ Index (PMI) remained stable as it recorded a comfortable 52.40 in Q1 2017, from the same level of 52.40 recorded in Q4, 2016. This reading is consistent with solid growth as it is still above the 50.0 expansion threshold confirming an increasing trend for the eighth successive month. In Africa, oil dependent economies are beginning to witness growth albeit very little due to improvement in global demand and recovery in commodity prices. However, inflation in the region still increased in the period under review and this was spurred by widespread scarcity of U.S. dollars, weaker currencies across the region and general loose fiscal stance.

The National Bureau of Statistics released the Full Year 2016 GDP report as GDP contracted by -1.51% from a 2015 GDP growth of 2.79%. In the Fourth quarter of 2016, the nation’s Gross Domestic Product (GDP) contracted by -1.30% (year-on-year) in real terms.

The slowdown in economic momentum which became evident in Q1’16 was as a result of weaker inflation-induced consumption demand, an increase in pipeline vandalism, significantly reduced foreign reserves, concomitantly weaker currency and problems in the energy sector such as fuel shortages and lower electricity generation. The Nigerian Bureau of Statistics (NBS) released the inflation figure for February, 2017 as measured by the Consumer Price Index (CPI) at 17.78% with a 12-month average of 17.00% - measured Year-on-Year (Y-o-Y) when compared with 18.55% in December 2016. The decrease in inflation represented effects of slower rises in food and non-food prices and favourable base effects over 2016 prices.

In the period under review, Monetary Policy Committee (MPC) met and decided to leave the Monetary Policy Rate (MPR) unchanged. Key issues considered were weaker economic performance, a worsening domestic outlook as well as sustained pressure in the foreign exchange market. The Committee's decision to leave the MPR unchanged as opposed to arguments in favour of an interest rate cut was premised on the fact that the immediate impact of a loosening stance would be detrimental to the currency and external trade balances.

On to governance updates, Nigeria unveiled the Economic Recovery and Growth Plan 2017 -2020 which included measures to reduce the country’s dependence on oil and to relax foreign exchange restrictions. President Buhari also returned back to the country 51 days after he left on a medical vacation and resumed duty almost immediately. On his resumption, he stated his satisfaction on the progress made by the country in his absence after being fully briefed by Vice-President Yemi Osinbajo who acted as President while he was away in London. Consequently, President Buhari approved release of more London-Paris club refunds to State Governments. Lastly, the Central Bank of Nigeria has also approved licence for Development Bank with N398.45bn seed fund.

Financial Market Update

The stock market lost 5.05% in Q1, 2017 when compared with Q4, 2016 as it closed the period at 25,516.34 points. Fall in equities market were largely as a result of hostile macroeconomic environment, unimpressive end of year results churned out by most of the listed companies, exodus of foreign portfolio flows due to weakened confidence in the financial markets and increased yields on fixed income securities and persistent rise in inflation.

In line with our medium /long term view of the equity market, we maintained our hold strategy on the stocks in the portfolio. Meanwhile, as a professional fund manager that is conscious of the performance of the portfolio, we explored the fixed income securities market for safer investment with guaranteed income to stabilize and improve returns on investment.

The yields on Federal Government Bonds closed higher at the primary market in the period under review with stop rates on 5-year FGN Bond, 10 –year FGN Bond and 20-year FGN Bond closing at 16.2400%, 16.2884% and 16.2800% respectively. The 5, 10, 20 - year bonds were oversubscribed indicating investors’ appetite for fixed income instruments.

At the official segment of the FX market, the naira depreciated to close the period Q1, 2017 at N306.35/1$ when compared with its close price of N305.00/1$ in Q4, 2016. The naira appreciated in the parallel market as it closed the period Q1, 2017 at N395.00/1$ as against N490.00/1$ in Q4, 2016. The pronounced appreciation in the parallel market could be attributed to the Central Bank’s persistent intervention and supply of the greenback to the FX market.

Monetary Policy Committee (MPC) of the CBN met in the period under review as highlighted above. The latest official inflation rate as released by the Bureau of Statistics shows a 12 months average of 17.00% while the year-on-year change was 17.78%.

Find below the key economic indicators for your perusal:

MAR-15 JUN-16 SEP-16 DEC-16 MAR-17
Exchange Rate (₦/USD)
Official 199.09 282.97 305.31 305.00 306.35
Parallel 323.00 352.00 379.00 490.00 395.00
Monetary Policy Rate (MPR) % 12 12 14 14 14
Inflation Rate
12-Mth Ave (%) 9.38 10.70 12.74 15.00 17.00
Year-on-Year (%) 11.40 15.60 17.60 18.48 17.78
Foreign Reserve (Billion USD) 27.86 26.36 24.57 25.72 30.30
Crude oil Price in the Int’l Market ($/barrel) 38.64 50.35 48.77 56.76 52.83
GDP Growth Rate 2.11% -0.36% -2.06% -2.224% -1.30%
NSE-ASI 25,306.22 29,597.79 28,335.40 26,874.62 25,516.34
NSE 30 1,108.60 1,316.34 1,261.73 1,195.20 1,136.30
NSE PENSION INDEX 694.03 882.30 839.08 810.04 798.16
Liquidity Ratio (%) 30.00 30.00 30.00 30.00 30.00
Cash Reserve Ratio (%) 22.50 22.50 22.50 22.50 22.50

As shown above, the asset allocation which is in compliance with PenCom’s investment regulation and guidelines, stood as follows; Quoted Equities 7%, Government Securities 77%, Money Market 13% and Cash & Others 3%. The unit price grew from N2.8083 in January, 2017 to N2.8780 as at 31st March, 2017 translating to year to date growth of 2.48% and an annualized return of 10.07%.

The Asset Allocation of our NLPC PFA Retiree Fund as at 31st March, 2017 stood as follows; Government Securities 75%, Money Market 19%, Equities 3% and Cash & others 3%.

The NLPC PFA Retirees Fund opened with a unit price of N2.3231 in January 2017 and grew to N2.3949 as at 31st March, 2017 translating to year to date growth of 3.09% and an annualized return of 12.53%.

The recently released federal government growth and recovery plan which provides a framework on how the government plans to work the troubled economy out of recession was indeed a good development as it will aid business planning and strategy formulation and also act as a catalyst for attracting foreign direct investment inflows into the country.
Worthy of mention are the improving trends in several key sectors of the economy, including agriculture and mining which has ignited hope that recovery is imminent. In addition, apprehension concerning the Nigerian macroeconomic condition has lessened – good confirmations were the huge success of the recently issued Eurobond and the Nigeria’s growth rate that was recently revised to positive by the International Monetary Fund (IMF) coupled with the survey carried out by a foremost polling services firm (NOIPolls) where 82% of Nigerians attested to the fact that the economic growth rate will close the year 2017 positive.

Positive also for the Nigerian economy are the improvement in oil prices in the international market and our local production (largely as a result of high level negotiations with the Niger Delta Militants by the Government).

We are of the view that the economy will rebound in the period Q3 –Q4, 2017 from the stagflation debacles. The recovery, however, will be slow and fragile. Tight liquidity conditions, capital controls, continued delays in passing the 2017 budget and renewed militant attacks/insurgencies could dampen growth prospects.

Other factors that might negatively impact on the country’s growth prospects in 2017 are but not limited to: rising cost of doing business, high volatility of the Nigerian naira (NGN) against other major foreign currencies and possible rise in global interest rates.

In the meantime, given the high rates/yields in the domestic financial markets, we anticipate renewed interest in financial instruments by Nigerians in diaspora, local Institutional investors, handful of foreign investors and local high net worth individuals (HNIs). Considering the lingering headwinds in the economy and their effects on the financial markets, the outlook for the stock market is bearish. Although we may witness some activities here and there - largely driven by profiteering, a sustained expectation of positive ride may be subdued by the prevailing factors. Against this background, we shall continue to maintain our medium to long term view of the equities market. Whilst holding on to stocks with good fundamentals, we shall continue to increase our holdings as buy opportunities exist.

Lastly, our futuristic view of yields on fixed income securities is that in the interim, inverted yield curve will still continue to reign given the high inflation and interest rates coupled with the weak status of the naira.
We shall however continue to explore strategies to take advantage of the fixed income markets with strong focus on securities at the medium/long end of the yield curve in order to improve the portfolio return accordingly.
We will continue to focus on our goal of growing the Fund under management by optimizing returns on investment without compromising the security and liquidity of assets and also ensuring that every worker with retirement savings account with the company receives his/her benefits as at when due.