'Pennies before a steamroller': Nigerian vote delay a reminder of investment risk
(Adds data from FMDQ OTC Securities Exchange and graphic on
this material, reporting credit)
By Karin Strohecker
LONDON, Feb 20 (Reuters) - A surprise delay in Nigeria's
presidential ballot has served foreign asset managers another
reminder of political risk and volatile investment returns in
Africa's biggest economy - just days after piling into assets in
a bet on a smooth election run.
The electoral commission announced a week's delay to voting
in the early hours of Saturday, citing logistical problems, even
as some of Nigeria's 84 million registered voters were already
making their way to polling stations.
The vote pitches President Muhammadu Buhari against former
vice president Atiku Abubakar, in what is seen as a tight race.
The delay adds to uncertainty for investors, who have
endured a wild ride in the West African country: The 2014 oil
price crash, and election in 2015 followed by currency controls
and dollar shortages that tipped the oil-exporting economy into
recession in the same year, its first in more than two decades.
Its bonds got ejected from key indexes.
A new exchange rate mechanism launched in 2017 drew back
some investors but concern has built around the election that
has proved hard to call, threatens to spark violence and
promises little material change.
"The likelihood of violence is now higher than before," said
Thierry Larose at Vontobel Asset Management. "And we have seen
some effect on markets."
Below are five charts that show foreign investor exposure
and positioning in Nigeria.
FLOWS COMING BACK
Lured by a rekindled appetite for emerging markets and an
upbeat oil price outlook, foreign investors have recently raised
exposure to Nigeria, according to flow tracker EPFR https://tmsnrt.rs/2BGB0Yo.
Nigeria's debt in particular has seen a sharper acceleration
of inflows since the start of the year than emerging market debt
Nigeria's debt may have got kicked out of key indexes, but
its stocks escaped a similar fate. They comprised a chunky 6.4
percent in 2017 in MSCI's frontier market index
of smaller and often riskier stocks.
Year-to-date, MSCI's Nigeria index has
risen just over 2 percent, with an 8 percent jump in February
making up for losses earlier in the year. Broader frontier and
emerging equities have performed better, however.
Moreover, trading volumes have decreased steadily overall,
and the percentage of foreigners trading has also shrunk to 48
percent from a peak of 65 percent in September 2017, according
to stock exchange data.
"This is a deeply unloved market whether measured by overall
market volumes, foreign participation, valuation relative to
history, or performance versus frontier or oil-exporter peers,"
said Hasnain Malik at Exotix Capital. "That level of despair
usually means opportunity."
With the International Monetary Fund estimating Nigeria's
debt-to-GDP ratio at just under 27 percent in its 2018 outlook,
the country compares favourably to the Sub-Saharan average of 50
Nigeria's dollar-denominated debt has long been a favourite
off-benchmark play. The issues have outperformed https://tmsnrt.rs/2TVAyMP
both wider emerging market sovereign debt and African peers,
returning some 10 percent year-to-date.
"Eurobond valuations still look attractive as yields are
likely to remain anchored regardless of outcome and the election
means we are unlikely to get issuance until 3Q," said Diana
Amoa, emerging market debt portfolio manager at JPMorgan Asset
Investors are split on local debt markets. On T-bill
markets, the arbitrage between high yields and stable hedging
costs through currency forwards delivers solid returns for
anything up to a year. The picture is less clear further out.
"We continue to like the t-bill trade as it's an attractive
carry play on oil," said Kevin Daly, investment director at
Aberdeen Standard Investments in London.
Data from Lagos-based FMDQ OTC Securities Exchange showed
monthly trading volumes of local currency bills and FX has
broadly risen in recent months. January volumes stood at just
over 15 trillion naira ($49 billion) compared to 11.9 trillion
naira just over a year earlier. According to traders, offshore
funds account for more than half of all the trades.
Others say the local t-bill trade has become too crowded.
And plans by presidential contender Abubakar to possibly float
the naira currency makes it a risky play.
"It is like picking up pennies in front of a steam roller
-you pick up a lot of pennies, but the losses are huge if the
steamroller gets you," said Lutz Roehmeyer at Capitulum Asset
($1 = 305.8000 naira)
(Reporting by Karin Strohecker in London
Additional reporting by Tom Arnold in London and Chijioke
Ohuocha in Lagos
Editing by Frances Kerry)
First Published: 2019-02-20 10:00:00
Updated 2019-02-20 18:30:33
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