Nigeria Beckons Investors Fleeing The BRIC
konknaijaboy | On 04, Sep 2013
With even Goldman Sachs turning cold on the core emerging markets basket of Brazil, India, Russia and China, investors are combing the world looking for a place to put their money to work. For this new generation of adventurers, the goal is to be on the ground in the right new market before it becomes the core — and Nigeria just started flashing all the signals.
For years, the country – the biggest and most dynamic frontier economy in Africa, with a GDP on par with global capital destinations like Hong Kong and Singapore – had a Wild West reputation for both rambunctious growth and a little danger. But while the entrepreneurial energy of Lagos still reminds fund managers of Houston multiplied by four times the population, success in cracking down on security threats in the oil-rich interior is changing the security situation for the better.
Monday’s reports that government forces may have killed Abubakar Shekau, the leader of the Boko Haram insurgency, mean the rewards here may now substantially outweigh the risks. As Nigerian Senate President David Mark told me, security is a critical factor for the current administration and extremist groups like Boko Haram have already been pushed to the country’s borders.
However, many investors still have an outdated conception of Nigeria as a dangerous market engulfed by unrest and corruption, and so stocks in Lagos still trade at something of a distress discount to reflect the country’s past – and create an opportunity for investors willing to understand what the Nigeria of today is really all about.
Massive growth, dramatic value
The $31 billion currently moving on the Nigerian Stock Exchange represents annual economic activity of $268 billion. To buy the same amount of productivity in Singapore, for example, would cost nearly $737 billion, or 23 times as much. Even in relatively mature emerging markets like Brazil and Russia that are unlikely to enjoy much in the way of future growth, domestic equity trades at a 200% to 300% premium over what it would cost in Lagos.
Meanwhile, the Nigerian economy is growing at an annualized rate well above 6%, faster than any of the top-tier emerging markets short of China itself. Although the oil sector still contributed $8 billion to GDP in the first quarter of 2013 – largely in the form of exports to the United States — the country’s petroleum wealth now takes a back seat to its expanding middle class. Construction, hospitality and service are actually booming at a rate faster than what even China can currently claim, without the top-down state meddling.
While a planned Beijing-style economy runs counter to all the laissez-faire impulses the oil boom has brought to Lagos, investors here can also count on more transparency and better corporate governance than ever. Compared to the sometimes-intimidating government presence of countries like China, India or Russia, Nigeria has traditionally confronted investors with too much freedom, but the regulatory environment is making great strides.
President Goodluck Jonathan has pursued a “Transformation Agenda” with two extremely market-friendly goals since his election in 2011: accelerate the modernization of the economy and finish the job of eliminating money laundering, payroll fraud and other once-persistent red flags for investors who want to make sure their interests are taken as seriously as they would be in any developed economy.
Judges who accept bribes are losing their jobs and facing formal prosecution. And as Senator Mark tells me, the level of corruption that Nigerians and foreign investors once dealt with on a day-to-day basis would seem “extremely exaggerated” in modern Lagos.
In the place of corruption, the young and dynamic population is finding work. New infrastructure is coming online to support private enterprise and while oil remains the center of the economy, education, employment, agriculture and even home ownership are rapidly emerging as linchpins of the new Nigeria.
Opening the floodgates to global capital is another strategic goal. Yvonne Emordi, head of strategy at the Nigerian Stock Exchange, is serious about boosting the country’s overall public market capitalization to $1 trillion by 2016.
Putting Lagos on equal footing with Bombay or Sao Paulo as a global capital hub in three years would be quite a feat, but the foundations for that kind of growth are already in place. Nigeria was one of the world’s four best-performing markets last year with a 35.45% gain, while a compound return above 10% a year since 2003 can easily support doubling the market’s capitalization from decade to decade if the trend continues.
While thin capital flows often turns one year’s top frontier into a big loser immediately thereafter, Nigeria is relatively liquid by African standards and seems to be early in its cycle of attracting liquidity. Overseas investors currently hold about 43% of the shares in Lagos, which is relatively balanced – nowhere near an unsustainable glut of fast foreign money but those who come in now already have something like critical mass to work with.
And while the risk of terrorist disruption recedes, money keeps flowing in the form of direct investment in the domestic economy. In just the last six months, U.S. corporations like Procter & Gamble PG -0.5% have committed at least $700 million to build new factories and agricultural facilities in the country while the Nigerian government itself announced a $1 billion fund to nurture the local software industry, which officials think can ultimately capture $20 billion a year from rivals like India.
Getting ahead of the game
India is a good example of the long-term potential Nigeria can unlock for its people and for the world’s investors. In 2001, when Goldman Sachs was first developing its BRIC strategy, India’s GDP was under $500 billion and the blue-chip Sensex index was trading around 3,200. Twelve years later, the economy had doubled in size and a tidal wave of money pushed the market bellwether within sight of 19,000.
Brazil and Russia have also seen their stocks multiply in value as the BRIC evolved into the hot strategy of the decade. Last year alone, over $100 billion poured into BRIC exchange-traded funds, representing a full 1.6% of the combined capitalization of the four countries and giving share prices an external boost.
Should Nigeria enjoy a similar trajectory, there are fortunes to be made here. Despite its reputation as a leading oil producer, it is already much better diversified than Russia.
If anything, the economy more closely resembles that of Brazil: rich in petroleum but blessed with an abundance of other resources and a population that is only now starting to live up to their potential as consumers. GDP per capita – a key gauge of the penetration of middle-class lifestyles – is still only a fourth of that in Brazil and barely a third of what investors can now get in China. In terms of domestic development, the Nigerian economy already has critical mass but we are still very close to the ground floor on future growth.
Until recently, U.S. investors practically needed to have both feet in the ground in go-go Lagos in order to get any direct exposure at all to that growth curve. There are no Nigerian American depositary receipts (ADRs). Even in London, the only shares available are in the country’s leading banks.
Those same banks appear again in the 12% of Van Eck’s African ETF (AFK) currently invested in Nigerian stocks. Only a single holding there – Nigerian Breweries – represents the thriving consumer sector.
And then there is the Global X Nigeria ETF (NGE), which has drifted on either side of its April offering price and is currently looking defensive amid the ongoing “risk off” move. P/E in the portfolio is still low at under 9.5 and many of the holdings are names you will not find anywhere else: Nigerian subsidiaries of global consumer brands like Nestle, Unilever and Guinness, construction-oriented plays and even food processors.
For now, NGE is the best game in town if you want to add some spice to an otherwise sagging BRIC allocation. There will be other ways to take your portfolio to the BRINC as Nigeria continues to eliminate sources of domestic unrest and awareness of the country’s economic progress spreads.
Either way, with performance in the BRIC markets suffering it may be time to look a little farther afield for the benefits those countries used to provide. Senator Mark tells me he sees a little room left for heavy lifting to bring Nigeria’s infrastructure up to modern standards, but once that happens, it may be all hands on deck.
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