This article is a section from a report “Investing in Nigeria” and shall be viewed in the context of the title. Please view the report for more information on the subject as well as references for this article.
Recent market activity
The top 30 companies by market cap, the NSE30, haven’t fully recovered yet from the downfall in 2014, investors are waiting to see if the long term growth challenges will be tackled. Mid-cap and large-cap companies saw big loses in 2014, the small-cap ones returned 8.25% over the year. This reflects the economic situation quite well – the big companies are to see if their growth is to be continued, while the small ones grow no matter what, due to not being affected by the macro economic problems. Position against growth is what is valued by investors.
Since there are concerns regarding Naira devaluation, extraordinary returns are required for foreigners to get involved at the moment.
The Q1 of 2015 saw increased volumes in trading at the Kenya’s stock market – this is perceived to be due to the elections at Nigeria. The “wait and see” approach by investors have made some stock greatly discounted.
Market forces and sentiment
The slowdowns and any issues in the economy are reflected in the capital markets and provides a tough environment for the markets to thrive. If there is one problem, the market will shut down quickly. This is quite bad for the listed companies, as they are volatile to the overall view on Nigeria.
The investment appetite and involvement can be changed by some policies. For example, the CBN introduced a one year minimum holding period for federal government’s bonds after the 2008 downturn. This was lifted in 2011 and the fixed income markets saw an increased activity – fund managers don’t want to be locked in when the developed markets raise their interest rates.
Any new regulations can be directly reflected in the equity market. For instance, a banking regulation that required banks to raise cash reserves resulted in reduced outlook for profitability. This was well reflected in the stock prices of the banks. Such reflections also increase uncertainty and in a market such as Nigeria the effect is usually a sell-off.
The big indexes have a big influence on the market and investment sentiment.
Any big upcoming events causes withdraw of the capital and a “wait and see” approach by the investors. There are African focused funds, capital can be transferred to other African nations while the developments in Nigeria pan out.
There are initiatives in place for West Africa wide capital markets integration – trading between the countries with an ease using electric interconnection. Any new assets introduced, as well as any NSE activities, can have an effect on other assets. Decreased interest rates would reflect themselves in the stocks going up, due to some investors moving their capital from fixed income to equities, for instance.
Playing the Nigeria’s stock exchange
There are multiple ways foreigner investors can play the Nigerian capital markets. It comes down to the length of time an investor wishes to stay in the market. There is a tendency for the emerging market fund managers to move in and out of markets, looking for under-developed markets with the prospect of improving. This results in a rotation of in and out of Nigeria by these investors.
The long term investors that wish to hold their stocks should be looking at industries driven by domestic consumption – FMCG and food markets. A lot of the international food brands see their profits coming from Africa.
Funds such as Ashmore Group and others are well invested in the 30-35 largest Nigerian stocks. Most of their stocks are focused on the domestic consumption, revealing insights in the research and assumptions they have one the market. Investors can mirror some of the big emerging fund activities in Nigeria.
The emerging funds also provide a great opportunity to invest in Nigeria and other frontier markets using the developed world’s stock exchanges. Ashmore Group is traded at the London Stock Exchange, other groups such as T. Rowe Price have emerging market funds, traded at the NASDAQ.
There are ETF’s trading at the NSE, but they are not gaining much popularity, as investors that want to deal in Nigeria directly much rather see their investments and make decisions, instead of handing their money over to someone else.
Perhaps the greatest opportunity is in the NASD – a centralized and transparent over the counter securities exchange. Many of the Nigerian companies use NASD for their capital requirements, as they don’t face all of the concerns associated with a public listing on the NSE. There is also a reasonable level of liquidity for the securities. While the companies are not as well regulated, they are mostly small companies that have a lot of growth potential. NASD is the way for investors looking to hold their stocks for a while for a potentially big return. There are Nigerian boutique investment companies that guide investors at investing in the NASD.