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Growing Market, Bad Economy



Dear Speculators,

It's been quite a while since our last letter. Series of events have kept us from writing. Nevertheless, we apologize and hope that it never repeats itself. Since our last letter, the market has risen around 10%, bank stocks like GTBank and Access Bank have grown over 25% since the last week of February. UBA, Skye Bank and Zenith Bank are not so far behind in these upward price reviews. Blue Chip companies like Total and Dangote Cement have also performed decently in the last 3 months. Oando seems to have bottomed out at NGN5 but we are still worried about the company's finances and we think it's too early to start jumping into this ship. Nigeria is still yet to devalue her naira but the possibility of this occurrence is becoming more and more obvious as it has been covered a lot in the press recently with many public officials now accepting that no other options exists for the country outside devaluation at this point in time.

The economy has continued to suffer inflationary pressures instigated by fuel scarcity and dollar scarcity. Fuel scarcity has increased the cost of operation in local firms and transportation costs while the dollar scarcity has increased the price level of imported products. In view of this problem, both the NNPC and CBN have major roles to play in resolving this unfortunate situation. As the government continues to test new policies on the economy, we expect volatility in the economy and in the financial markets. While we may see negative financial and economic reports in the short term but we are confident that the long term will be more positive. By doing nothing, we lose opportunities. Going long on stocks is a much better idea now than holding cash and losing its value to inflation. Economies in various European countries and Japan are now adopting negative interest rates. We expect to see a large chunk of money move away from these countries into emerging markets like Nigeria with strong growth potentials over the next year or two.

A stock market rally usually precedes an economic boom. Whether it will be so in this case, optimists are already getting back into the market. Generally, the market is still down year on year but as the oil price continues to grow, we may see more confidence restored in the Nigeria Stock Market and an increase in foreign portfolio investments. Its still a good season to plant your cash in stocks and bonds in the country as we expect a rich harvest by year end. Proper research and caution as always is advised. As Joel Greenblatt always says, "by buying stocks of top quality firms when their market price is considerably undervalued, you are almost certain to outperform the market".

Signed:
Emeka Ucheaga
Managing Partner,
Emeka Ucheaga Advisory

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