Nigeria – Always a mess, always alluring
We hope you had a wonderful holiday, and happy New Year. We took a two week break, and it was rather wonderful. We are back at it though, and excited to see what 2015 brings. 2014 was a heavily bifurcated market, with South Asia on a tear and much of Africa and Latin America in the doldrums. That is the beauty of Frontier Markets, there will never be a year when all Frontier Markets are up or down.
Nigeria is a mess, but this is no different than any year in the past 30 years. When has Nigeria not been a mess? Yes, markets were exuberant from 2005 – 2008, and yes, Nigeria enjoyed a long period of strong equity returns from 1998 – 2008. However, Nigeria has never been considered stable. The market fell -13.0% this week, being rattled by the fall in oil prices and significant uncertainty related to the February 14 election. Nigeria’s all share index is down -27% over the past year, and concerns over the stability of the country at $50 oil continue to mount. See the chart below to see the index’s performance over the last decade or so. Turnover, however, has been increasing since 2011, making the markets significantly more liquid. On average, $500mm is traded per day, making Nigeria one of the most liquid markets in Africa. It also has a market cap of approximately $60bn as at January 9, 2015.
This is interesting for us. Nigeria never benefited from its oil resource. It has failed to produce wealth for the country or provide any measurable benefit to the average person. On the contrary, Nigeria is the poster child for ‘Dutch disease.’ In a paper by Ji Otaha, he says, “The revenue it generates when prices are high tends to cause “Dutch-Diseases”, high oil revenue raises exchange rates, promotes an adverse balance of payments when prices fall, reduce the incentive to risk investment in non-oil sectors like agriculture and manufacturing. Just one example is Nigeria, which, since initiating the export of oil has seen its agricultural sector collapsing and now it is entirely dependent on imported food.“ Similarly, the World Bank has looked at the root cause of Nigeria’s dismal economic performance and attributes the volatility in government expenditure as the primary reason why the economy has not grown from its oil wealth. Government expenditure’s volatility is caused primarily by endemic corruption in the country.
If Nigeria’s oil wealth has not benefited the country, why should oil’s fall harm the country? Take a look at the table below. It provides you with an overview of the companies in Nigeria that have a market cap larger than $50mm as at January 9, 2015. It is important to note that only 8 companies out of 60, are related to oil and gas. The vast majority of Nigerian publicly-listed companies have income that is derived in other industries. We believe that Nigeria provides compelling opportunities for investment, if you have a long-term horizon.
Nigerian banks have been pummeled again and again. Investment house after investment house has recommended Nigerian banks as compelling investment opportunities. 35mm Nigerians keep their cash at home, and the economy is expected to grow 5.5% this year and Nigerians will need banks for the foreseeable future, like we all do. Nigeria’s banking industry is well-positioned for consolidation and banks such as Zenith Bank, Guaranty Trust, Ecobank, Union Bank, and Access Bank are likely to benefit.
Along the same line of thinking, there are several breweries and food products companies that are unaffected by Nigeria’s instabilities. People buy alcohol when they are happy and sad, and people eat regardless of mood too. Granted, these companies have not been hit as severely as the financial sector in Nigeria or the oil and gas sector, but many names such as Champion Breweries, Presco, Honeywell Flour, and Dangote Sugar are trailing similar companies in Frontier Markets.
We will have a piece on ‘How to Invest in Nigeria’ in the coming weeks, keep your eyes on the lookout for that.
In the meantime, get comfortable with Nigeria and we would stress, that like Pakistan, look at the company, its record of execution in Nigeria and its fundamentals. The macro picture for the country is less important than it would be in a smaller market. Nigeria’s debt-GDP ratio is only 13% and its budget is set to a $65 price for oil. These are relatively conservative numbers. Certainly, political instability related to the election could create some headwinds for the market over the short-term, but as we always say, when you invest in Frontier Markets, invest for the long-term or don’t invest at all. What is around the corner will only hurt you, if that is your destination.