Does Slower Economic Growth Actually Mean Low Equity Returns For Nigeria and South Africa? 1

The decline in commodity prices, reflected by the graph of the Thomson Reuters/CoreCommodity CRB Index below, has had a damaging impact on emerging markets whose exports are driven by commodities.

As we had seen in the graph provided in the previous article, BMI Research has outlined the economic growth prospects of five historically underperforming emerging market countries. Among those, two are from Africa.

Nigeria and South Africa

Africa’s two largest economies – Nigeria and South Africa – both have witnessed severe repercussions following the downturn in commodities prices. While the drop in crude oil prices has been largely responsible for the decline in economic output in Nigeria — gems, metal ores, and coal have had the same impact on South Africa.

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Though both economies are in recovery mode, the pace of growth is noticeably lower than in the past. What bearing will this have on equities?

Impact on equities

Nigerian and South African equities, represented by the Global X MSCI Nigeria ETF (NGE) and the iShares MSCI South Africa ETF (EZA) respectively, have had noticeably contrasting fortunes in YTD 2017 as shown by the graph below.

However, the slowdown in economic growth seems to be the result of other developments rather than the cause for the decline in local equities.

A common factor that has been driving equities in both nations is political developments. While uncertainty regarding the health of President Muhammadu Buhari has been worrying for Nigerian equities, President Jacob Zuma’s political decisions have led to a reduction in credit rating and elevation of insecurity in South Africa.

While commodity prices will continue having an impact on stocks in these countries, investors will also be influenced by political and development agendas not necessarily reflected by economic output. For instance, Nigeria has been in poor economic health, but its international bond issuances have been very well received this year. Its equities have also done quite well, with the NGE posting a gains of 15% until June 19, before correcting on worries regarding a possible downgrade by MSCI.

From an immediate perspective, South Africa looks more vulnerable than Nigeria when it comes to the political situation. Also, valuation-wise, the NGE is much cheaper than the EZA with a price-to-earnings ratio of 8.75 versus 15.47 respectively.

For Nigeria, successful implementation of the ambitious Economic Recovery and Growth Plan (ERGP) will be crucial for investors. However, many are also keeping an eye on news relating to the President’s health, with any untoward development having the potential to dent equities.

Let’s look at the two remaining countries from the five historically underperforming emerging markets under assessment in the next article.

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