2.0 THE ECONOMY

The year 2017 witnessed strong growth around the world. The outlook on global growth in 2017 was expected to recover the losses following the downturn of 3.2% in 2016 which is the weakest since the global financial crisis. Accordingly, the IMF's October 2017 World Economic Outlook projected global growth at 3.6% for the year 2017. Similarly, Ghana's economic growth continued on the stronger path that began in 1Q17 at 6.6% to 9.3% in 3Q17 compared to 4.3% and 4.6% for the same period last year. GDP growth is estimated at 7.9% by close of the year, up from the original forecast of 6.3%. The relatively high growth is largely attributed to increased oil and gas production.

Inflation as measured by y/y Consumer Price Index (CPI) trended downwards from a peak of 15.4% in Dec-16 to 11.8% in Dec-17. Inflation rate however, remained above the targeted objective of 11.2%. The notable decline in inflation rate over the past several months suggests signs of dampening inflation pressures which is mainly attributed to non-food components of the consumer basket.

The cedi index (which comprises of USD, BPS, CFA and EURO) opened the year 2017 with 369.42 points but rose to 409.86 points by the close of the year. The cedi was less volatile during the year despite a sharp depreciation, recorded in the first quarter. This was mainly due to liquidity conditions. Since then, the cedi has been relatively stable, mainly on accounts of improved domestic conditions, increased portfolio inflows and expectations of continued tight policy stance. During the period in review, the cedi depreciated by 5.13% against the US dollar, by 19.38% against the euro, and by 14.83% to the pound. During the same period in 2016, the Cedi depreciated by 10.68% and 7.37% against the dollar and euro respectively, but appreciated by 7.48%against the pound sterling.

1.1 Outlook

Ghana's Current Positive Momentum in Economic Growth Is Likely to Continue in 2018.

In Ghana, we expect the ongoing economic recovery to continue on a positive trajectory on account of the following:

a. Increase in oil and gold production as favourable ITLOS ruling in favour of Ghana is likely to spur oil production.

b. Ability to regain and sustain economic stabilization programmes.

c. As business confidence and profits rebound, Increase in corporate capital expenditure is expected to increase in 2018, particularly in manufacturing, warehousing, and utilities.

d. We also expect government's spending capacity to increase on accounts of improved oil earnings and revenue mobilization following The Tax Stamp Policy which was launched in Aug-2017.

Our outlook on price level is that Inflation rate will stay in double-digit in 2018 due to possible further supply-side shocks from:

a. Volatility of exchange rate and pass through on imported food and core prices;

b. Upward adjustment of fuel prices in line with rising crude oil price on the international market.

Despite the above, we expect inflation rate to average below 15.5% in 2018 on account of the following:

a. Continued fiscal consolidation is expected to limit inflation pressure.

b. Lower cost of production when the proposed electricity tariff reforms are implemented in 2018.

c. Lower food prices (a main component of inflation) resulting from government's 'Planting for Food' initiative.

The Cedi Remains Sensitive to Fiscal Policy Developments And Economic Growth Prospects.

The outlook for the cedi, and therefore the risks to the inflation outlook, will be highly sensitive to economic growth prospects. Owing to the fact that Ghana is in debt distress, any further fiscal slippage could result in worst-case ratings by credit rating agencies. This could have a significant adverse effect on the value of the cedi.

2.0 FIXED INCOME MARKET

Activities in the fixed income market in 2017 were mainly driven by expansionary monetary policy, subdued inflationary pressures and strong performance of the equities market. MPC sought to tackle interest rate to ease credit facilities to the private sector, following the favourable inflation expectations outcome and relative stability of the cedi.

At the primary market auctions for the government securities, a total amount of 182-day and 91-day raised in 2016, dropped by 8.96% to GHS66,431.96mn in 2017. This is attributable to an increase in investors' appetite for equities as rates continued to remain fairly low in the fixed income market. Additionally, strong company fundamentals which improved investor sentiment towards equities, further weakened interest for fixed income securities in 2017 and most fund managers flew to other asset classes to enjoy appreciable returns.

Monetary policy rate was reduced by a cumulative 550 basis points since January, 2017 to 20% in November, 2017. Accordingly, the average lending rate dropped to 29.1% in Oct-17, from 31.2% in Dec-16.

The Government, as part of its debt management strategy issued longer dated bonds in 2017. Government issued its first energy debt via ESLA Plc; 7-yr and 10-yr. It also issued another 5yr, 7-yr, 10-yr and 15-yr local bonds. The year 2017 also saw corporate entities raising more debt capital through the issue of corporate bonds.

Treasury rates, especially on short-term instruments trended downwards. Yields on the 182 and 91 averaged 14.09% and 14.08% in 2017 compared to 23.95% and 22.16% in 2016 respectively. On the long end of the market, the 5-Year, 7-Year and 10-Year Bonds closed the year at 17.60%, 19.75% and 19.00% respectively.

This notwithstanding, fixed income securities produced positive returns in 2017 across most market segments. The NDK 2-yr and 3-yr Index recorded the highest gains of 46.35% and 44.90% in 2017 respectively. The 5-yr recorded 9.57%, which is the lowest during the year. The NDK-Index gained 24.89% during the year.

2.1 Outlook

Looking forward, we expect low inflation, continued fiscal consolidation, economic growth and ample liquidity to result in downward yields across the curve in 2018. We forecast the 182-day and 91-day to trade between 12.4% and 13.6%.

We also expect the firm interest in longer-dated Ghana bonds to continue in 2018. Hence, we anticipate returns to be in longer dated securities in 2018 with lower volatility.

Corporate securities could continue to outperform government's securities although they remain risky. Nonetheless, the fundamentals of some of these companies (especially banks) have improved over the past year following the issue of the energy bond. We expect the asset quality of banks to improve in 2018. We see value in corporate bonds, treasuries and fixed deposits than in sovereign securities.

We advise investors to buy higher spread products to reduce the overall risk if rates rise more or faster than expected. Overall, spreads are expected to be tighter and provide less of a cushion if market sentiments arising from the equity market and economic growth turn negative. Inventors should therefore maintain some liquidity to take advantage of any opportunities that may arise.

Research therefore should be focused on identifying key positive fundamentals of companies that are more resilient to any future uncertainty. Currently, we see opportunities in Access Bank Ghana, AFB PLC, Izwe Loans and other banks which are expected to raise capital to meet their minimum capital.

3.0 EQUITIES MARKET

The equities market in 2017, was supported by a favorable macro-economic environment. Strong growth coupled with low inflation which has seen interest rates trending downwards as well as the relative stability of the cedi contributed to the positive return for the year.

The Ghana Stock Exchange All Share Index (GSE ASI) closed at 2,579.72 points, up from 1,689.09 points at the end of 2017, representing an appreciation of 52.73% after posting losses of 15.33% and 11.77% in 2016 and 2015 respectively.

In terms of trading activities, a total volume of 321.34bn worth GHS515.12mn were traded in 2017, compared to a total volume of 237.08mn shares valued at GHS241mn in 2016.

The exchange was bullish with a total of 19 equities recording gains, 12 of the listed equities did not witness price changes and 11 of them saw their market price fall.

3.1 Outlook:

THERE IS POTENTIAL FOR ANOTHER GOOD EQUITY YEAR

We anticipate earnings growth to remain robust in 2018. The GSE market performance in 2018 should hinge on:

a. Ongoing economic recovery,

b. Improvement in earnings,

c. Low inflation and

d. Low interest rates.

We expect the robust economic growth seen in 2017 to continue in 2018 to boost the earnings of corporate institutions. Thus, stronger revenue growth will strengthen the fundamentals of most listed companies hence, equity market will push higher.

In addition, we expect slower pace of decline in headline inflation which should bode well for low interest rate. This could be positive for the performance of equities as investors make available more funds to the private sector other than government.

Investors' appetite for banking stocks is expected to increase although banks are expected to meet the minimum capital requirement by close of this year. Investors would like to take positions quickly to benefit from expansions and growth coupled with improvement in banks asset quality.