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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, Reuters reported on Wednesday.
The Independent National Electoral Commission announced a week’s delay to voting in the early hours of Saturday, citing logistical problems.
The delay adds to uncertainty for investors, who have endured a wild ride in the 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. The country’s 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.
“The likelihood of violence is now higher than before. And we have seen some effect on markets,” said Thierry Larose at Vontobel Asset Management.
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.
According to Reuters, the country’s debt in particular has seen a sharper acceleration of inflows since the start of the year than emerging market debt more widely.
Nigeria’s debt may have got kicked out of key indexes, but its stocks escaped a similar fate. They comprised a chunky 6.4 per cent 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 two per cent, with an eight per cent 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 per cent from a peak of 65 per cent 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. That level of despair usually means opportunity,” said Hasnain Malik at Exotix Capital.
With the International Monetary Fund estimating Nigeria’s debt-to-GDP ratio at just under 27 per cent in its 2018 outlook, the country compares favourably to the sub-Saharan Africa average of 50 per cent.
Nigeria’s dollar-denominated debt has long been a favourite off-benchmark play. The issues have outperformed both wider emerging market sovereign debt and African peers, returning some 10 per cent 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 the third quarter,” said Diana Amoa, emerging market debt portfolio manager at JPMorgan Asset Management.
Investors are split on local debt markets. On Treasury 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.
