Offshore fund managers increase holding of Nigeria bonds and stocks
by PATRICK ATUANYA & LOLADE AKINMURELE
August 9, 2017 | 1:23 am| | | Start Conversation
Investors put more money into emerging markets such as Nigeria last week, the highest amount since the stock market touched its highest level since 2014.
Emerging market equity funds counted $2.2bn of inflows in the week to August 2, while emerging market bond funds recorded $1.9bn of capital commitments, according to flows tracked by EPFR the global leader in funds data.
The additions lifted inflows since the year began to nearly $90bn for the two fund categories.
Enthusiasm for emerging markets like Nigeria has been bolstered by low interest rates across the globe and sustained weakness in the US dollar, analysts say.
EPFR noted that money managers of EM bond funds “have been rotating exposure from larger to smaller markets with allocations to Brazil and Russia at 16- and 28-month lows respectively. In contrast, average weightings for Nigeria and the Ukraine have risen to levels last seen in the fourth quarter of 2014 and 2011 respectively.”
Foreign inflows into the NSE have been positive for three consecutive months since April 2017, following the relaxation of foreign exchange rules by the Central Bank of Nigeria (CBN) and opening of a new investor and exporters (I & E) window to attract offshore funds.
Bond and stock investors have long called for a convergence of Nigeria’s numerous exchange rates.
The naira weakened 13 percent against the dollar last week on the main interbank market after monetary officials told lenders to start quoting trades made in the Nafex currency window that was opened for investors in April.
The drop in the naira has almost wiped out the spread with the black-market rate.
While offshore funds gradually return, for retail investors looking to put money to work in Nigerian assets, they may be forgiven for wondering if the bull market in equities can continue to run and elevated fixed income yields are here to stay.
After a 41 percent jump in the stock market index and one year Treasury Bills, with yields north of 18 percent, analysts say a diversified portfolio of assets is the best way to go.
“Guaranty Trust, Zenith, Access and UBA will continue to wax strong, for the banks, while Unilever and Nestle are top of my picks in the consumer goods sector. Dangote and Lafarge enter the good bunch in the industrial sector,” said Ayodeji Ebo, managing director of Lagos-based Afrinvest Securities Limited, who added that improving company earnings hold a potential upside for stocks, particularly the banks.
UBA has gained the most year to date for bank stocks, rising by a whopping 112.4 percent and sporting a trailing price earnings ratio (P/E ratio) of 4.39x, while Guaranty Trust Bank (GTB) has a year to date return of 62.75 percent and a P/E ratio of 7.80x.
Zenith and Access’ YTD returns are 66.10 percent and 73.76 percent respectively. Their P/E ratios are 5.48x and 3.68x respectively, according to data from Bloomberg.
Analysts say it is always best to buy at the bottom and sell at the top.
However, if investors believe that Nigeria’s economic slump has hit a trough, following reforms to the foreign exchange markets, it means company profits should begin to rebound as soon as this year and show up in higher stock prices.
Even with the massive rally in the stock market this year, the NSE main index, which closed at 37,999.5 points, is still below its last major high of 43,000 points reached 3 years ago in 2014.
“One of the best places to put money to work now would be a diversified portfolio consisting of oil, consumer goods, industrials, financials and agriculture stocks, as well as some fixed income,” an investment analyst told BusinessDay.
The major devaluation of the naira that took place in 2015 means that Nigerian assets are cheap right now and attracting renewed attention from foreign investors.
Dangote Cement recently sold a 2.3 percent stake to foreign investors in a stock market deal valued at N86.1 billion ($236 million).
The firm sold 416 million shares of Dangote Cement at N210 naira per share.
Analysts also say fixed income securities should form a part of an investor’s portfolio with Federal Government Securities yielding 18 percent for one year Treasury Bills.
“Investors with low risk appetite could weigh up government treasury bills, with true yields anywhere around 20 percent. It is the risk premium the government offers investors for the country’s macro risks and would start to fall as the economy recovers,” said Tajudeen Ibrahim, head of research at Chapel Hill Denham.
The major drawback for fixed income investors on the retail side used to be the large minimum requirements.
However the Federal Government recently introduced the FGN Savings Bond for retail investors, where investors can get exposure to 2 and 3 year FGN bonds with coupons of up to 14.5 percent with minimum subscription for this as low as N5, 000.
Interest is paid quarterly into the bondholder’s account and the principal is repaid in full at the end of the tenor of the bond (2 or 3 years). Investors can subscribe through stockbroking firms trading on the floor of The Nigerian Stock Exchange (NSE).
While fixed income investments are considered risk free, inflation is still a threat to bond investments.
The FGN Savings bond, however offers much better yields to an investor than a typical savings account, which pays two percent, or a fixed deposit that pays seven percent.
Other analysts tell BusinessDay that Investors should always have a space for other asset classes such as Real Estate or even Bitcoins in their portfolio.
This is because investors cannot be too diversified and should always give a chance to be a part of an emerging technology like crypto- currencies.
Bitcoin recently crossed the $3,000 per coin mark up from $800 some 12 months ago.
Real Estate is also a big gauge against inflation, provided that property being acquired has the right paper work and approved government plans.
PATRICK ATUANYA & LOLADE AKINMURELE
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