Asset management group Allan Gray has recently tipped Nigeria as a market they are watching quite closely. While we don’t necessarily share the same level of enthusiasm, we do believe that it provides a great opportunity to educate the South African investing public about offshore diversification.
Let’s briefly take a look at the investment case for Nigeria:
- Nigeria is estimated to have a population of just over 182 million people, more than three times the size of the South African market. As more people move into the middle class, this is likely to create a stronger, deeper consumer market on the continent.
- The country has suffered from volatility in the oil sector and weakness in the commodity price – coupled with some political instability – has forced the country to refocus on other markets including its banking and finance sectors. One of the key deterrents for foreign investors has been the inability to move money in and out of the country with any certainty – if this can be resolved then foreign direct investment (FDI) will boom.
- For such a potentially large economy, the Nigeria Stock Exchange has a stock market with less than 200 equity listings and a market capitalisation many multiples smaller than the JSE.
- According to Allan Gray: “The ten largest banks in Nigeria have a market cap of US$6.5 billion. These ten banks account for almost the entire sector, so it is possible to buy the Nigerian banking sector for US$6.5 billion.” That is about the same size as Capitec in South Africa and one-third the size of Standard Bank… for the entire Nigerian banking sector at the moment.
While it is clear that there is a potential investment opportunity in Nigeria, many so-called “frontier” or “emerging market” investors have been bitten by trying to access specific companies on the continent.
Under-developed financial markets have meant that investors have typically had to invest in expensive specialist “Africa” funds or through products like the Standard Bank Africa Equity Exchange-Traded Note (ETN) or the new Cloud Atlas “Big 50” Exchange-Traded Fund (ETF).
Both will provide you with an adequate basket of African continent stocks but in terms of being a pure Nigeria play, come up short with weightings of around 20% on the Standard Bank product and 11% on the Cloud Atlas offering.
In contrast, you could (as a South African retail investor) buy into the MSCI Nigeria ETF and gain direct access to the Nigerian market, without company-specific exposure.
According to the last fund fact sheet, you get to buy Nigerian equities at an average price to earnings ratio of 6.5 times earnings and a price-to-book ratio of 0.87 – a ratio which suggests investors are so pessimistic on Nigerian equities that they value the businesses at a discount to the underlying assets.
The top holdings, which included many of the banks that Allan Gray was punting, included Zenith and Stanbic IBTC, but also include Nigerian Breweries, Dangote Cement and Nestle Nigeria.
Emerging markets are not for everyone – personally we prefer to put our clients into ETFs in the US – but for those investors with a positive long-term view on Africa, there are now tools at your disposal for accessing markets which were previously only available to specialist funds. Many of these ETFs are accessible through South African FSPs like ourselves for under $1 000 and we believe this could be a significant competitive advantage as retail investors grow their exposure to global financial markets.
Iwan Swiegers is director at Capilis Asset Managers.