Frontier markets valuation hit highest level since 2014

The MSCI Frontier Market Index that tracks stocks from nations such as Nigeria, Argentina and Kuwait has seen its valuation soar this year to the highest since at least 2014.
The MSCI Frontier Markets Index trades at 13.2 times the 12-month estimated profits of its member companies, the richest valuation on record, Bloomberg data shows.

Analysts say that’s because a wave of reforms is sweeping across smaller developing economies, be it Argentina’s overhaul of its inefficient tax system, Vietnam’s privatization drive or currency liberalization from Nigeria to Morocco.

Credit growth and bank profits are becoming a recurring theme in frontier markets. In Nigeria, the world’s best-performing stock market this year, tier-2 lenders are seen as the most attractive opportunity.
“Every portfolio manager in Nigeria has exposure to Nigerian banking stocks and most of them have a large exposure to tier-1. For a long time, most of the tier-2 banks were undervalued, so by the time there was saturation in investment in tier-1 banks the money started moving to tier-2 banks,” said Dolapo Ashiru, MD/CEO, Mega Capital Financial Services Limited.

Nigeria’s stock market uptrend strengthened on Friday as the NSE All-Share Index (ASI) crossed the 45,000 points psychological line.
The combined market capitalisation of stocks in the Frontier market index has exceeded $700 billion for the first time since 2008, and the frontier group has begun to outpace emerging-market stocks after three years of underperformance.

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From Morocco to Nigeria, policymakers are allowing pegged currencies to move more freely. This follows a shift by Kazakhstan, Argentina and Egypt in the last couple of years that has eased the risk investors will struggle to repatriate profits.
Following the rally in the equities market in 2017, Lagos-based CardinalStone researchers expect stock market momentum to remain positive “given the optimistic outlook for macro-economic fundamentals.”
“Nigeria’s Gross Domestic Product is projected to consolidate further in 2018 following the rebound from the economic recession in 2017. Rising consumer confidence indicates a positive outlook for private consumption which is expected to be a key driver for growth. Furthermore, oil price stability together with the observed decline in oil production disruptions presents opportunities for more sustainable growth,” CardinalStone analysts said.

The over N2trillion gain in Nigeria’s stock market this year could be linked to growing optimism from investors on reforms being undertaken in the countries, higher oil prices and a steady global growth outlook.
Skye Bank Plc, Diamond Bank Plc, FCMB Group Plc, Unity Bank Plc and Wema Bank Plc have outperformed other stocks at the Nigerian Stock Exchange (NSE) this year.
Research analysts’ price list shows the performance of these five tier-2 lenders impressed with record gains in excess of 100percent.

Skye Bank Plc share price has risen by 158percent this year; Diamond Bank Plc (138percent); FCMB (135.8percent); Unity Bank Plc (130.2percent); and Wema Bank Plc (125percent).
“People are returning to frontier markets quite enthusiastically. Strengthening oil prices may be one broad theme, but otherwise, there are specific elements like currency reforms that are driving specific markets,” says Tony Hann, head of equities at London-based Blackfriars Asset Management Limited.