RISKS on the rise

August 16, 2011 Market Commentary

Last week, equities markets globally experienced the highest volatility since the week of the collapse of Lehman Brothers (on September 15, 2008) due to skittishness about the fiscal position of some big euro zone countries and fears that the world economy could be returning into a recession. As we identified in our July 2011 Market Update report, we believe risk thresholds are being re-priced, not unlike what the market witnessed in 2008, though not of the same magnitude. Re-pricing of risk thresholds is a consequence of the earlier financial crisis evolving into a fiscal and macroeconomic crisis. Markets will likely be volatile as perception of risk level fluctuates and the future appears unpredictable.

We advise calmness and portfolio re-evaluation with a bid to reducing exposure to volatility. Cash is once again becoming an important asset class. Apart from helping to preserve capital, it provides a strong warchest to take advantage of opportunities- especially stocks at bargain prices.

Risks levels (or the perception) have increased from:

The United StatesWeakness in recent economic indicators which showed that the worlds largest economy had not recovered from the recent recession as fast as anticipated; The prolonged debate among U.S. politicians before the debt ceiling was raised few hours shy of a deadline: which prescribed immediate spending cuts in the short term and no concrete plan for deficit reduction in the longer term, contrary to market expectations of a more robust fiscal plan in the short term and deficit reduction in the longer term, which portends uncertainty for economic recovery with the presently weak economic growth, and showing the unpredictability/uncertainty of U.S. politicians to take necessary economic reform decisions in the future, undermining confidence of consumers and businesses; The downgrade of USAs debt by Standard & Poors by one notch (from AAA to
Contact: Ayo-Oluwa Aderibigbe a.aderibigbe@wstc.com.ng +234 (1) 4618490 Oluwatosin Sanusi o.sanusi@wstc.com.ng +234 (1) 4618490 Babajide Fadahunsi b.fadahunsi@wstc.com.ng +234 (1) 4618490

AA+).

The Euro zoneUnconvincing resolution of the debt crisis in Greece, while other peripheral European countries are threatening to go bust amidst fiscal woes. Threats of debt crisis engulfing much bigger Italy and Spain, which saw the yields on their bonds rising, though now curtailed by the European Central Bank purchase of their debt. A temporary palliative!

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IMPORTANT DISCLOSURES ARE INCULUDED AT THE END OF THIS REPORT

RISKS on the rise

Market Commentary

W S T C

Pessimistic outlook for economic growth amidst concurrent aggressive austerity plans by leading economies, France and Italy in particular, following the lead of the United Kingdom.

As recent economic indicators have shown, the impact and spill over effects of the 2008 financial crisis on the broader economy in the U.S. and Europe was underestimated. The initial financial crisis of 2008 has evolved into a fiscal and macroeconomic crisis, thus slower economic growth. Therefore, risk assessment toward investment consideration has ballooned beyond the stability of the financial and banking system to riskiness of whole sovereign and economic regions (which were previously taken for granted).

According to IMF figures, the U.S. and Europe economies account for circa 44 per cent of the worlds nominal GDP. Therefore, a slowdown in these economic heavyweights is predestined to have a negative effect on the global economy.

In Nigeria Nigerias domestic economy is significantly exposed to events in the developed world, because crude oil income accounts for over 90 per cent of Nigerias foreign exchange earnings, and 80% of government budgetary revenue. The government is the largest employer of labour and the largest spender.

A global economic slowdown could depress the price of crude oil below Nigerian government budget benchmark ($75/barrel). This would result in a fiscal strain on the government, which would further increase its borrowing appetite, crowd out private borrowers and put downward pressure on economic growth.

A severe decline in crude oil prices (and government revenue) would also threaten accretion to reserves, and a strain on keeping exchange rate at current levels (NGN151.01/$). Thus, a risk on exchange rate as well.

Apart from the significant dependence of the Nigerian economy on oil revenues, the following undercurrents underscore the riskiness of the environment: Incoherent fiscal and monetary policies Lack of definitive stance on revamping public infrastructure Insecurity (e.g., the rise of the Boko Haram sect)

MARKET VOLATILITY
Thus, globally and in Nigeria, equities markets experienced volatility as risk sensitivity was being priced into company valuations.

RISKS on the rise

Market Commentary

W S T C

Our opinion as regards the Nigerian market We expect some volatility to continue in the short -medium term due to the following reasons: Re-pricing of risk threshold on a global perspective as perception of risk level fluctuates, leading to capital re-allocation to corrected valuations. Not so attractive valuations compared to other markets. We estimate the Nigerian market P/E at 12.6x compared to:
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Emerging markets: Brazil (10.4x), China (9.3x), India (16.4x), Russia (7.4x),

South Africa (16.4x), Turkey (10.8x) and

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Frontier markets: Argentina (10.4x), Bulgaria (6.0x), Pakistan (8.4x),

Romania (9.8x) Movement of institutional foreign funds which account for c. 70% of trades.

We recommend Portfolio re-evaluation and reconstruction: To take into account increased risk levels: reduce exposure to volatility and illiquid assets (in summary, preserve capital) To allocate capital to resilient sectors e.g. consumer markets To create liquidity for taking advantage of bargain opportunities that could arise during periods of uncertainty, and Gradual re-entry into sectors (e.g. construction) likely to benefit most as the economy recovers Investors to avoid the panic reflex, but rather stick to long-term investment plans.

Source: ThomsonReuters through Financial Times

RISKS on the rise

Market Commentary

W S T C

Disclosures
The value of any investment is subject to fluctuations, i.e. may rise and fall. Past performance is no guide to the future. The rate of exchange between currencies may cause the value of investment to increase or decrease. Hence investors may not get back the full value of their original investment. This document is not an offer to buy or sell any security. This document does not provide individually tailored investment advice. It has been prepared without regard to the individual financial circumstances and objectives of persons who receive it. The appropriateness of a particular investment will depend on an investors individual circumstances and objectives. The investments and shares referred to in this document may not be suitable for all investors. This document is based on information WSTC Financial Services Limited (WSTC) received from publicly available reports and industry sources. WSTC may not have verified all of this information with third parties. Neither WSTC nor its advisors, shareholders, directors or employees can guarantee the accuracy, reasonableness or completeness of the information received from any sources consulted for this publication, and neither WSTC nor its advisors, shareholders, directors or employees accepts any liability whatsoever (in negligence or otherwise) for any loss howsoever arising from any use of this document or its contents or otherwise arising in connection with this document. This document is not to be relied upon and should not be a substitute for the exercise of independent judgment. This document includes certain statements, estimates and projections with respect to the anticipated future performance of securities listed on the Nigerian Stock Exchange and as to the market for these shares. Such statements, estimates and projections are based on information that we consider reliable and may reflect various assumptions made concerning anticipated economic developments, which have not been independently verified and may or may not prove correct. No representation or warranty is made as to the accuracy of such statements, estimates and projections or as to their appropriateness for the purpose intended and it should not be relied upon as such. Opinions expressed are current opinions as of the date appearing on this material only and may change without notice. Other third parties may have issued other reports that are inconsistent with, and reach different conclusions from, the information presented in this report. Those reports reflect the different assumptions, views and analytical methods of the analysts who prepared them.

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