Renaissance Capital Africa, a unit of the Russian investment bank, expects a flurry of foreign investment inflows into Nigerian equities on the back of the cheapest valuations in two decades.
“Holders of equities have already seen gains of 20 percent since the end of February, as the naira has strengthened from 1,600/US$ to around 1,300/US$. We expect a bigger rally to come,” Rencap Africa analysts said in a note to clients on April 2.
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“In US dollar terms, Nigerian equities are around the cheapest they’ve been in 20 years,” the analysts said. “The currency is the cheapest in Africa. 2024 is a turn around year for Nigeria and other key frontier markets.”
Nigerian stocks are up 39.65 percent since the beginning of the year, according to data from the Nigeria Exchange Group. That’s despite a jumbo interest rate hike by the Central Bank of Nigeria (CBN) at its last two meetings where rates were raised by a combined 600 basis points.
Nigeria’s stock market emerged the best performing stock market globally in the first quarter of 2024, outperforming those of Kenya, Japan, and Zambia, which were also on the list.
FPIs turn gaze to Nigeria
Once every five to ten years, investors get a chance to make a quick, large dollar return investing in a Frontier market.
Starting in September 2023, it was Pakistan which had returned 60% in US Dollars to investors in its equity market by early 2024.
In early 2024, it was Kenya providing a 40% return to US Dollar based equity investors since late January. In recent weeks, Egypt has attracted US$8-11bn of portfolio inflows since it devalued, and in recent weeks, it has finally become Nigeria’s turn to join the party.
“An estimated US$1.5bn has been invested in Nigeria’s T-bills, with one rating agency expecting US$5-10bn of portfolio inflows over the course of 2024,” the Rencap Africa analysts said.
The CBN’s jumbo rate hike and a more credible exchange rate policy are proving too hard to resist for foreign investors who once snubbed Nigeria.
Markets that improve as fast as Nigeria are often called “unloved rallies” – because most people don’t invest heavily at the weakest point and aren’t positioned for the rally.
In Pakistan, there is still less than 5% foreign participation in the equity market, even after the big move.
In Kenya, every analyst polled by Bloomberg in early January assumed the KES would weaken to 171-210/US$ by the end of 2024. Just weeks later the KES rallied from 165/US$ to 131/US$. It wasn’t just economists who missed out.
Few Kenyans were selling all their US dollars at 165/US$; at that point, panic saw most trades were selling shillings and scrambling to buy US dollars.
In Egypt, locals were using stock market arbitrage between Cairo and London to escape Egyptian pounds at an exchange rate as weak as 80/US$, while since its devaluation the EGP has strengthened to 47/US$.
The big currency adjustments in these frontier markets have improved current accounts.
Nigeria is now running a surplus, and so is Pakistan. Egypt is close, and Kenya’s deficit has been reduced to 4% of GDP. Today there is a natural flow of US Dollars to Nigeria and many other Frontier markets. More dollars means it is easier to repay maturing bonds.
Previously, market interest rates were too low in many countries, but now Nigeria has hiked 600bps, so has Egypt, while Kenya’s 13% policy rate is double its inflation rate. Pakistan’s interest rates are expected to be above its inflation rate when March data are released, for the first time since 2020.
“Monetary policy has become sensible again, so portfolio investors can now invest with some confidence that sooner or later, inflation will start to fall,” the Rencap Africa analysts said.
