Africa’s giant is awakening
NIGERIA: INVESTOR CASE IS BRIGHTENING
Frontier investing is not for the faint-hearted, but as big institutions pick up their push into Africa, so retail investor opportunities are opening up in Nigeria.
Asset management group Allan Gray has tipped Nigeria as a market they are watching quite closely. While we don’t necessarily share the same level of enthusiasm, we do believe that it provides insights into offshore diversification.
Nigeria is a ractive because:
It has just over 182 million people, more than three times the size of the South African market. As more people move into the middle class, this is likely to create a stronger, deeper consumer market;
Volatility in the oil sector and weakness in price – with political instability – has forced a refocus on other sectors, including banking and finance. One investor deterrent has been the inability to move money in and out of the country with any certainty;
Despite its size, the Nigeria Stock Exchange has less than 200 equity listings and a market capitalisation many multiples smaller than the JSE;
According to Allan Gray: “The 10 largest banks in Nigeria have a market cap of US$6.5 billion. These 10 banks account for almost the entire sector, so it is possible to buy the Nigerian banking sector for US$6.5 billion.” That is about the same size as Capitec in South Africa.
While it is clear there is investment opportunity in Nigeria, many “frontier” investors have been bitten by trying to access specific companies on the continent.
Under-developed financial markets have meant that investors have typically had to invest in expensive specialist “Africa” funds or through products like the Standard Bank Africa Equity Exchange-Traded Note (ETN) or the new Cloud Atlas “Big 50” Exchange-Traded Fund (ETF).
Both provide an adequate basket of African continent stocks but in terms of being a pure Nigeria play, come up short with weightings of around 20% on the Standard Bank product and 11% on the Cloud Atlas offering.
In contrast, you could (as a South African retail investor) buy into the MSCI Nigeria ETF and gain direct access to the Nigerian market, without company-specific exposure.
According to the last fund fact sheet, you get to buy Nigerian equities at an average price to earnings ratio of 6.5 times earnings and a price-to-book ratio of 0.87 – a ratio which suggests investors are so pessimistic on Nigerian equities that they value the businesses at a discount to the underlying assets.
The top holdings, which included many of the banks that Allan Gray was punting, included Zenith and Stanbic IBTC, but also include Nigerian Breweries, Dangote Cement and Nestle Nigeria.
Investor tools
Emerging markets are not for everyone – personally we prefer to put our clients into ETFs in the US – but for those investors with a positive long-term view on Africa, there are now tools at your disposal for accessing markets which were previously only available to specialist funds.
Many of these ETFs are accessible through South African FSPs like ourselves for under $1 000.
Iwan Swiegers is director at Capilis Asset Managers.