Across emerging, frontier and developed markets around the globe, Nigeria remains an investment hub for investors desiring good returns. Analysing data across markets show the much of potential returns across instruments that Nigerian markets (fixed income and equities) present. While NSE ASI is underpriced relative to other major markets across Africa, the Nigerian fixed income market has one of the most attractive yields compared with other emerging markets (using JP Morgan Index member Countries) as well as relatively stable exchange rate. We analyse in this report the attractiveness of Nigerian markets.
Domestic macros remain positive
Nigeria’s GDP growth remained strong at 6.56 percent in Q1:2013, which was mainly driven by the non-oil sector as oil sector growth declined in the quarter. We expect the GDP growth rate to hover around 6.5±0.5 percent, despite the likely slight downward impact of the state of emergency in three Northern states (Borno, Yobe and Adamawa) on agricultural output’s contribution to GDP in Q2. Nonetheless, we believe the domestic growth will continue to be driven by the non-oil sector, given the uncertainty in crude oil production and the downward trend in global oil prices.
Inflation rate has stayed at single digit so far in the year with a low of 8.6 percent in March. We expect this feat to be sustained in May and June, with our forecasts at 9 percent and 8.57 percent, respectively. The CBN has expressed concerns on increased fiscal spending and the possible inflationary impacts. Government’s declaration of state of emergency in three Northern states is expected to raise expenditure figures for the year. In our view, maintaining the MPR at current levels may possibly check such inflationary tendencies.
Outlook on interest rates remains positive looking into the month of June. With the benchmark rate at 12 percent, yields have continued to hover at an average below the policy rate. Money market interest rates trended downwards for a major part of the first quarter as investors sought to take advantage of high rates in the period given expectations of reduction in the benchmark rate and increased demand from local and foreign investors.
Hence, treasury bills rates dropped by about 200bps in Q1:2013, while bond yields fell by 50bps to 150bps. However, indications of retention of the MPR at 12 percent as well as higher returns in the equities market led to the rise in yields, particularly on the longer end of the yield curve. Given our expectations of retention in the MPR through the year as well as continuous funds flow to the fixed income market, which is relatively more attractive compared with other African markets, we expect rates to hover around current levels through H1:2013.
Nigerian fixed income market: Riding a wave of positivity
The Nigerian fixed income market is still well positioned to attract much of foreign inflow into emerging and frontier markets judging from its relative attractiveness when compared with peers. Nigerian fixed income market has enjoyed a sizeable amount of funds flow from 2011 till date, given the predominant high yield environment. Much of funds inflow was felt in 2012 due to improved credit rating and inclusion of some Nigerian bonds in JP Morgan emerging bond index. However, sustained exchange rate stability relative to other member countries of the JP-Morgan basket as well as the high yield environment will continue to attract funds.
Analysis of the member countries of the JP-Morgan basket reveals that while Nigeria’s credit rating remains fair relative to other peer markets, Nigeria has the second largest most attractive yields after Egypt with a much stable exchange rate compared with others. It is only logical that funds will continue to be attracted to Nigeria’s fixed income market with a multiplier effect on the equities market.
Yields settled on average at 11.80 percent at the end of May, an increase of 0.43 percent compared with that of April and 0.80 percent increase relative to March. Yields on FGN bonds recorded 0.41 percent rise across all instruments in May, compared with the April average yield of 11.29 percent. This follows on from a rise of 0.16 percent from March to April. The naira spot rate at the interbank market fluctuated during the month, starting the month at NGN/USD158, it reached a low of NGN/USD157.27 before closing at NGN/USD158.20, depreciating against the green back by 0.13 percent.
The performance of fixed income securities in the year up to May shows that investors’ appetite for fixed income securities is still favourable, complementing the performance of the equities market which has also drawn a greater share of the pool of investors’ funds. In our view, Nigeria’s fixed income market in June will continue to ride on the back of stable exchange rate, attractive yields on short- and long-tenured instruments, relatively stable economy and improved credit rating.
Equities market remains cheap
The Nigerian bourse remains relatively attractive on a comparative basis with other emerging and African markets. The equities market remains largely positive relative to the general mood of 2012. We expect the continuous flow of foreign funds, which will possibly be buoyed by expectations of impressive Q2 results to keep the market upbeat; comparable macros seem to align with this assertion. A comparative analysis of emerging markets, developed markets and frontier markets reveals that the NSE ASI has a lower PE ratio, suggesting that the market is fairly undervalued when compared with these markets.