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Nigerian Stock Exchange: A new sweet spot for foreign investors

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Chief executive officer of the Nigerian Stock Exchange Oscar Onyeama is a happy man. The bourse he led experienced dramatic growth last year and he was awarded the innovative CEO of the year in recognition of his leadership in turning around the bourse.

In January, a grinning Onyeama explained at the Exchange’s 2017 Market Recap and Outlook for 2018 that the bourse had already recorded 12 percent growth making it the world’s third best performing market. Only two or three years ago, the Nigerian stock market had a negative outlook (what investors’ would call a bear market) and closed the year 2016 on a bad note with a 6.17 percent loss.

It meant investors were accumulating major losses– an average monthly loss of 0.27 percent. The market for equities alone dipped by about 610 billion naira between January 1, 2016 and December 30, 2016. The Nigerian Stock Exchange All Share Index also shed 1,495.7 points over the same period to close the year at 26,874.62 points.

‘‘Stocks market analysts have noted that the current bullish trend of the Nigerian equities market will depend on many global, domestic, regulatory and industrial factors.’’

And about 35 percent of the 168 stocks listed on the main board of the NSE recorded no price movement in 2016 with the financial services sector accounting for the largest number of inactive stocks. Foreign activities took a significant decline too, with the highest drop of 73 percent recorded in April 2016.

The bourse was badly cut in the midst of the recession experienced in the country. According to data from the National Bureau of Statistics in 2016, Nigeria’s domestic production was contracting by -0.36 percent, -2.06 percent and -2.24 percent in the first three quarters of 2016 respectively.

Within the same period, prices of raw materials and foodstuff skyrocketed as inflation hit 18.48 percent in November from 9.6 per cent in January 2016. Continuous depreciation of the naira due to forex scarcity further fuelled negative investors’ sentiments too.

The naira officially depreciated from N197/$1 in January 2016 to as low as N305/$1 by December with the local currency trading close to N500/$1 on the black market. A report by Bloomberg in 2016 had rated Nigeria’s naira as one of the world’s worst performing currencies in 2016 alongside the Egyptian pound and Venezuela’s bolivar.

Fast forward to present, Nigeria’s bourse is accelerating– reaching ₦272.48 billion in total transactions in March, a 28.50% jump from the ₦212.05 billion recorded in the previous month. Furthermore, 2018 first quarter results showed the composite NSE All Share Index gained 3,261.32 points or 8.53 per cent to close at 41,504.51 points from the opening level of 38,243.19 points in December 29, 2017.

Investors traded a huge volume of 42.87 billion shares from previous quarter’s 23.26 billion shares traded. Within the period, the market index touched a high of 45,321.82 basis points and it’s looking like nothing will stop its momentum.

Market capitalization for the period was up by N1.384 trillion to close higher at N14.993 trillion, from an opening value of N13.609 trillion. This rapid growth is majorly backed by stronger crude prices, which has been circling around $70 – $75 in 2018. The global oil price has a perfect correlation with the Nigerian Stock Exchange All Share Index.

When prices are rising, sentiments about the Nigerian economy is positive and macroeconomic indices are stabilized. The crude oil trend has helped the country grow its foreign reserves, stabilized its foreign exchange market, and attracted Foreign Portfolio Participation.

Another contributing factor to the positive performance of the market is the creation of the Investors’ and Exporters’ (I and E) FX window by the Central Bank of Nigeria (CBN) and appreciation of some high value stocks in the equity market. Foreign investors are now a lot more confident about the ease of entry and exit of their investments, due to the introduction of the I and E window.

The CBN’s policies have been able to close the gap between the interbank and blackmarket rates, stabilizing prices and controlling imported inflation. Dangote Cement’s shares, which represents a third of the total market capitalization, has been on a steady rise helping to improve the outlook of the market too.

Stocks of other blue chip companies like the Nigeria Breweries, Nestle, Zenith, GTB, Unilever, FBNH, Seplat have all gained significantly and boosted investors’ confidence. Positive earnings reported by these blue-chip companies have strengthened market fundamentals. Also, with treasury bills mostly selling at rates below the inflation rate, investors have been forced to gravitate towards the stock market in search of better yields.

The highest return rate on 91-day tenor has been around 12%, while 182 and 364 days tenor between 10% and 15%. Inflation rate started at about 15% at the beginning of the year before decelerating to 12.48% in April. Foreign investors’ sentiments have turned more bullish on Nigeria, and they are picking up deals even in Nigeria’s 2nd tier banks.

These foreign investors are looking for cheap assets that they can acquire to give them easy inroads into Africa’s largest market; most of those funds are going into equities. Also, fund managers who missed out in the Nigerian stock market rally of 2017 are rushing in to buy stocks, which are still relatively cheap.

Added to all these is the global surge in equity prices across the world that has contributed significantly to demand of stocks in emerging markets like Nigeria. Foreign investors’ appetite for cheap assets generally began in 2017 when Liberty Mutual Group, an American diversified global insurer and the fourth-largest property and casualty insurer in the United State, acquired about 70% of the equity of Unic Insurance Plc, even though the share price has been performing woefully.

Milost Global, a private equity firm headquartered in New York City with more than $25 billion in committed capital, expressed interest to invest $1 billion in one of Nigeria’s 2nd tier bank, Unity Bank. $250 million is to be invested immediately in the bank in exchange for a 30% equity stake. $750 million will then be invested over the next four years.

The investment was also reported to be a mix of equity and convertible bonds. The announcement was unexpected as the share price of the bank was a paltry 56 kobo and was even overvalued, considering that it had over ₦237 billion in negative retained earnings as at 2016. Milost came into prominence last year when it announced that it had acquired Primewater View, a Nigerian Real Estate firm for over $1 billion.

The company also reported that it signed a deal to inject about $350 million into Japaul, another stock that’s doing badly and announced plans to buy one or two Nigerian Banks. Overall, Milost has said that it plans to invest about ₦2.6 trillion in Nigeria.

The thirst for Nigeria’s market was ascertained when the NSE disclosed that Nigeria’s Foreign Portfolio Investment (FPI) increased by 59% in March to ₦132.21 billion; against the ₦83.22 billion recorded in February. Oando Plc and seven other companies outperformed stocks on the Nigerian Stock Exchange (NSE) in April to emerge as top performing equities in percentage terms.

Oando emerged as the best performing equity with a growth of 52.75 per cent to close at ₦9.15 per share as against ₦5.99 in March. Learn Africa came second with a growth of 39.18 per cent to close at N1.35, while ETI grew by 36 per cent to close at N20.10. AIICO Insurance improved by 16.13 per cent during the period, Nestle 15.87 per cent, Seplat grew by 15.04, Prestige Assurance 13.33 per cent and Unic Insurance appreciated by 11.11 per cent.

These gains are indicators of investors’ confidence in the equity in spite of the ongoing forensic audit initiated by the Securities and Exchange Commission (SEC). Investors in industrial goods and banking stocks were ahead of other investors. The NSE Industrial Goods Index recorded the highest quarter-on-quarter return of 10.96 per cent.

The NSE Banking Index followed with a return of 9.49 per cent. The NSE Insurance Index rallied average gain of 8.41 per cent. The NSE Oil and Gas Index appreciated by 4.90 per cent while the NSE Consumer Goods Index posted a modest return of 0.21 per cent.

The NSE 30 Index, which tracks the 30 most capitalized companies at the stock market, posted a threemonth return of 7.30 per cent. Impressive quarter one companies’ results, low company valuations, unrelenting increase in oil prices and lower inflation rate could shore up the market in the short term.

However, the sustenance of the current foreign exchange intervention regime and continued restoration of security in the Niger Delta region will be critical in ensuring the equities market maintains the current momentum for a long time.

Stocks market analysts have noted that the current bullish trend of the Nigerian equities market will depend on many global, domestic, regulatory and industrial factors. Also, as long as the political economy remains favorable, Foreign Portfolio Investment (FPI) inflows will not only continue to improve but also contribute to Nigeria’s economic growth.

Commenting on the bourse’s projection for 2018, Mr Onyema said that political activities and currency movements would affect the market growth. “Indeed, to some extent, political activities and currency movements will have some effect on the market, but we expect that such impacts will be short lived and the performance of the underlying business activities will ultimately determine market performance,’’ he explained.

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Nigeria

President Buhari’s Second Term: A chance to provide peace, prosperity, and security?

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Nigerians re-elected President Buhari for another four years in what many have termed – a chance to make amends. In what could be called his third stint at the helm of affairs in Africa’s most populous country, questions about a coherent economic strategy are already being asked. In the last dispensation, protectionist posturing was worsened by a management style perceived to be distant while crucial decisions were delayed.

The economy is set to continue its recovery from the worst recession in its history. Nonetheless, the forecast is for economic growth to remain well below historic averages in the next five years. According to economic survey by Economist Intelligent Unit (EIU), Nigeria’s Gross Domestic Product (GDP) is set to reach $473.5bn in 2019 and rise to $680.9bn by 2022. This prediction will hinge, for the most part, on the current intensity of economic reforms and current rate of investment being sustained.

 

Background of the economy leading to election 2019

The Nigerian economy grew by 1.9% in 2018, an improvement from 0.8% recorded in 2017, with the non-oil sector being the fulcrum for the growth picture. Over the last quarter of 2018, the economy recorded a solid growth of 2.4% – with the expansion in the non-oil space (2.7% YoY) taming the contraction observed in the oil sector (-1.6% YoY). Dissecting the components in the non-oil territory, all subsectors expanded, with the services and Agriculture sector leading the pack. Notably, improvement in the number of active subscribers in ICT subsector coupled with mild support from transport drove the expansion in the services sector (3.8% YoY). Furthermore, while the Agriculture sector improved by 2.5% in Q4 18, it was disappointing compared to its four-year average of 3.8%. On the flipside, the oil sector dived into recessionary waters buoyed by low crude production (-2.6% to 1.91mbpd).

 

Declining Income per Capita

It is important to note that Nigeria has a huge population of over 180million and a population growth rate of 2.6% – higher than the 2018 GDP growth of 1.9%. GDP growth is projected to reach 2.0% and 2.2% in 2019 and 2020 respectively before rising to 3.2% by 2021. This means Nigeria would have had five consecutive years of declining income per capita – from 2016 to 2020. A burgeoning youth population is also unlikely to be matched by job growth, meaning unemployment – at over 40% – is likely to rise even further.

A breakdown of the GDP components show that Nigeria’s gross fixed investment, at $66.5bn, will account for just 14.0% of GDP in 2019. This pales in comparison to that of other notable emerging economies – Brazil (19%), India (27.12%), China (42.86%), and South Africa (18.7%). Majority of countries in the world have gross fixed investment of 18-22%. The EIU goes further to forecast that gross fixed investment in Nigeria will rise by just one basis points to 14.1% ($86.2bn) by 2022.

 

Why does this matter?

The importance of this component of GDP is that it is a clear indicator of the future productive capacity of the economy. The aforementioned basically means that the current and projected rate of investment is simply suboptimal and far below the level required to propel Nigeria to an accelerated growth path. It is incapable of providing Nigeria with the investment impetus that will have the desired multiplier effect on output. Nigeria has also grossly underinvested in its infrastructure. The existing infrastructure gap is estimated at over $300bn and requires 10% of GDP ($37.6bn)/annum over the next 10 years to bridge – an unlikely feat given that  current infrastructure needs are far in excess of current cash flows. Nigeria’s capital budget in 2018 was $7.98bn – 26.6% of total budget and 2.2% of GDP. This compares to 6% of combined GDP of emerging market economies. Nigeria’s share of emerging markets total spend on infrastructure is currently less than 1%.

 

Few options, Tough Choices

Nigeria’s high population growth rate means it must be much more efficient with economic policy. Putting Nigeria on an accelerated path to a free and market driven economy requires making tough game-changing decisions now. It will begin with figuring out how to raise the level of gross fixed investment to levels above and beyond the global average of 18-22%. Investment in the next 3-5 years will depend on policies and incentives.

Galvanizing domestic and international investment will be crucial. This will require a structure that incentivizes private investment considerably more than what is currently obtainable. Achieving this will require significant increases in public investment in infrastructure, in addition to more comprehensive and deep-seated market oriented structural reforms.

 

The Game changing Formula

Raising the level of investment in infrastructure given the government’s current revenue and borrowing constraints requires rethinking ways to attract private sector funding in the form of Public Private Partnerships (PPP). Outright sale and concessions of government assets– airports, seaports, inner city highways and trunk roads– should be a key consideration for policymakers.

Airports concession has the potential to lower the average cost for aviation operators by 50%. The government’s stake in the power distribution companies should be sold to the private sector while the power sector forbearance needs to be dealt with. The rail investment program needs to be accelerated while the road networks to major seaports need to improve.  Another item that is top on the list of reforms is the foreign exchange policy where a movement to currency convertibility with minimal intervention is paramount. Fears of a wild depreciation if the Central Bank of Nigeria lets go of its current policy of a managed float, are greatly exaggerated. The almost insignificant deviation between the parallel and the Investor Exporter Foreign Exchange (IEFX) window – which is closer to market equilibrium than the official rate – supports this fact. There is also the issue of fuel subsidy which has now taken the form of under recovery as the Nigerian National Petroleum Company (NNPC) now fully bears the brunt of the subsidy as the sole importer of Premium Motor Spirit (PMS). Deregulating the downstream sector of the petroleum industry requires the removal of subsidies, which will spur competition, bring about efficiency and increased investment in domestic refining – the lack of which has been a huge drain on Nigeria’s foreign exchange earnings over the years.  Not only is a game changing formula now imperative, it has become inevitable. Nigeria can continue at its current pace of reforms and investment – a recipe for chaos, social and political disintegration; or take drastic measures to raise public and private sector investment to levels that will accelerate productivity and economic growth.

THE ROAD AHEAD

Ending extreme poverty must be a top policy priority for Nigerians and the new government. The country has the capacity to deal effectively with poverty: large endowments of natural resources, especially oil; a young and highly educated population; and many people adept at entrepreneurship and the creation of wealth.

Nevertheless, there are many threats to the creation of wealth. Two of them stand out: widespread corruption and the absence of peace and security in many regions. Corruption, like embezzlement of public funds, has plagued Nigeria since independence. Buhari came to power in 2015 promising to clean up corruption and restore professionalism in the public services. Although he appears to have made significant progress in that fight, his critics say that he only targeted his political opponents and ignored his allies and supporters. Still, many Nigerians give him credit for his efforts and for not illegally amassing wealth for himself. To deal more effectively with corruption, Buhari must now significantly improve openness and transparency in government communication, especially with respect to government procurement programs.

The Buhari government also needs to deal with extremism and other threats to peace and security like Boko Haram and the lawless armed gangs who roam parts of the country kidnapping people and holding them for ransom. This must be done not just through military action but also by providing opportunities for young people, especially in the rural areas, for self-actualization.

Finally, the government must address the issue of lack of basic infrastructure for development: passable roads, adequate and reliable power, water treatment plants (access to clean drinking water is a major problem for most communities), basic health care, affordable housing (especially in urban areas), police protection, and other services that can enhance the ability of citizens to live in peace.

Posterity will judge Buhari and his government by how well they use the opportunity granted to them by Nigerian voters to make peace, security, and prosperity possible for their fellow citizens.

On the economic front, we expect resilience in agriculture sector and a recovery in the oil sector to be the key drivers for growth in non-oil and oil sector accordingly. In the non-oil sector, muted growth in ICT and in turn services as well as weak growth in Manufacturing due to depressed consumer wallet and delay with minimum wage bill, guides to slower growth in the non-oil sector of 1.3% YoY (2018: 2.0% YoY). In the oil space, the additional 200kbpd from the Egina oil field guides the expectation of an expansion in crude production over 2019 (2.06mbpd), albeit capped by OPEC cut. That said, it is expected growth in the oil sector to print at 7.1% (2018: 1.1%). Overall, 2019 growth estimate is forecast to 1.98%, a notch away from 1.93% recorded in 2018. For Q1 19, a slowdown in growth is expected to 1.3% YoY driven by a contraction in the oil sector (-1.1% YoY) and moderation in non-oil sector growth.

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