The Worst Performing Frontier Market of 2016 Is Rebounding, Here's What to Watch 1

The performance of stocks in Nigeria in YTD 2017 has been superlative. The MSCI Nigeria Index has returned 10.5% until May 18. This is higher than the MSCI Frontier Markets Index (10.1%) and nearly double the returns provided by the MSCI Frontier Markets Africa Index (5.4%).

The exceptional returns are accentuated by the fact that the Index had nosedived 39.2% in 2016 and was by far the worst performing index not only in Africa but in the entire MSCI frontier markets universe.

ETF performance

The Global X MSCI Nigeria ETF (NGE) is the only ETF traded on US exchanges which provides exclusive exposure to stocks from the country.

- Advertisement -

The NGE, which tracks the MSCI All Nigeria Select 25/50 Index, is invested across only five of the 11 Global Industry Classification Standard (GICS) sectors. Financials and consumer staples are the key drivers of the ETF as stocks from these sectors form a combined 86% of the portfolio.

In YTD 2017, financials have been driving the performance of the fund, led by Guaranty Trust Bank, while consumer staples have dragged on returns due to negative contributions from Nigerian Breweries and Nestlé Nigeria.

View on Nigerian equities

Overseas investors are taking renewed interest in Nigerian equities. According to Bloomberg data, the NGE has witnessed inflows worth $18 million in the year so far. Bloomberg data also shows the money that investors had put in the ETF in the week to May 12 was the first inflow into the fund since March.

The reason for the rise in the ETF can be primarily attributed to the new trading window which has increased dollar-liquidity. Even though Nigeria had freed the naira in 2016, its level was allegedly being artificially controlled given the disparity between the official rate and the rate on the parallel market. This was a big dampener for foreign investors, which has at least partially been addressed.

Also, Nigerian equities, especially financials, had received a shot in the arm after ratings major Moody’s maintained a stable outlook on the country’s banking sector earlier in May.

First quarter corporate earnings, which have beaten estimates, have also instilled some confidence in investors regarding the health of the economy in general.

These factors, coupled with cheap valuations (the NGE has a price-to-earnings ratio of 6), bode well for Nigeria equities.

One factor which is important to note is the health of the ailing President Muhammadu Buhari. Any untoward development could imply a short-term downside to Nigerian stocks.

- Advertisement -