Africa’s Most Liquid and Largest Frontier Market Shows Signs of a Silver Lining

Africa is a challenging market

Frontera recently interviewed Asha Mehta, Senior Vice President and Portfolio Manager at Acadian Asset Management, to understand reasons behind their seemingly bearish stance on Africa within the frontier market (FRN) (FM) universe. Based upon the conversation with Asha, Acadian is very cautious about investing in Africa. They’ve found Africa to be a very challenging market over the past year and a half.

“Within Africa, with a frontier lens, the most relevant market is Nigeria (NGE),” Asha told Frontera. South Africa (EZA), for its part, is distinct from other frontiers considering:

1. it is very macro-driven, and
2. technically it would qualify as an emerging market (EEM) (VWO)
3. South African equity is trading at expensive valuations compared to the rest of Africa. Opportunities in other markets look more compelling than South Africa.

Nigeria: Africa’s most liquid and largest frontier market

“Nigeria (NGE) is the most liquid and largest frontier market within Africa (keeping South Africa under the emerging market asset class). That said, the economy has been distressed over the recent period in terms of rising political and economic risks, and currency and capital challenges, ” said Asha.

According to Acadian:

1. “Political risk has had macroeconomic ramifications on the economy of Nigeria. The economy’s budget has been distressed with break-even oil prices significantly higher than where oil is actually traded.
2. Economic risk posed by the NDA (Niger Delta Avengers) that has been limiting production opportunities for Nigeria.
3. The currency is in need of significant devaluation. The central bank did do a modest devaluation last year, which was negative from a stock market perspective, but somehow positive directionally from the viewpoint of managing the economy.
4. Repatriation of capital has been hard to come by, failing investors’ first and foremost objective of preservation of capital.
5. Corporates generally have struggled over the past couple of years with the capital controls that have been in place. Moreover, Acadian sees poor quality at the corporate level.”

These risks have significant implications for the Nigerian economy which is quite dependent on commodities, particularly oil.

Silver lining

Nonetheless, Acadian also sees a silver lining in Nigeria’s dark cloud. The asset manager is slowly beginning to see some positive signs from the economy, such as:

1. Companies have started to repay dividends
2. There’s a parallel rate in the currency markets in Nigeria, and currency figures are beginning to come in line with one other.

“There have been very modest changes, but directionally Acadian is positive on Nigeria. The market is trading at a material discount to frontier markets broadly,” Asha told Frontera (see chart above). When the macro situation improves, there should be more opportunity in the Nigerian market. For its part though, Acadian is still looking at the Nigerian market very cautiously.

Acadian is invested in certain high-quality banks trading at attractive valuations. Given the macroeconomic distress that the economy is in, the firm has been very cautious in selecting banks that would be able to sustain through the unfolding of any financial distress.