Nigeria IMI is trading at 4.8x 12m, thus making the country assets cheaper than ever a Fund Manager EFGHermes has said in what it called Nigeria Strategy note to investors. It said that Nigeria assets are on an all-time low. Our analysts forecast 14% earnings CAGR for 2019-21e with non-banks’ earnings recovering strongly in 2020 after a difficult 2019, and a 2019 of 10 per cent (11.2% for banks). Despite this, policy uncertainty makes it very difficult to become bullish. The latest government moves include the impossible-to-enforce closure of land borders to all trade and the CBN’s increase in minimum LDRs to 65%.
The latter policy may support earnings growth for stronger banks, but it is hard to reconcile policies that force private sector lending with those that severely restrict trade. These factors keep us UW on Nigeria relative to FEM peers – our preferred stock remains GTB, whose 3Q19 results demonstrate its ability to generate solid returns through thick and thin. We remain cautious on non-financials given valuations and current macro settings, with Nigeria Breweries being our preferred non-bank name. Flow data shows that foreigners have been net sellers for much of the year, totalling $106m YTD, though foreigners were net buyers of $16 million in August when MTNN was added to MSCI indices. More surprisingly, local pension funds have kept cutting their exposure to equities after a regulation change in early 2019 that eliminated minimum allocations to variable return assets. The falling equity share in pension AUMs is not just about poor market performance – comparing the profiles of equity AUMs and total returns from the NGSE Index suggest that pension funds are either: i) allocating no fresh funds to stocks, despite strong flows into pension funds N681 billion in 12 months ending June 2019; or ii underperforming the local index by a wide margin.
We understand foreigners’ reluctance to engage. However, even given high yields on government paper, we are surprised that locals with LT NGN liabilities are shying away from inexpensive stocks that offer good dividend yields and the potential for LT capital gains. We believe this could be because current incentives for pension funds do not reward managers for outperformance. Meanwhile, investors are asking again about the outlook for USD/NGN – almost unchanged for over two years – after the recent reserve burn. Current gross reserves of $40.0 billion (mid-October) are down $4 billion from the 2019 high, though they are still equivalent to a respectable nine months of imports. The fall in reserves seems only partly due to portfolio outflows: CBN data shows foreign holdings of CBN OMOs – the main carry trade vehicle – down just $600 million from their July high of $17.23 billion at end-August, though anecdotal evidence hints at a bigger outflow $2 billion.
We had wondered if the CBN was allowing USD swaps with local banks to lapse, contributing to the reserve burn, but the recent drop in banks’ NFAs appears to rule this out. Recent reserve and NFA declines likely have as much to do with the falling trade balance (latest 12m sum down to$10 billion in July 2019 from U$18 billion a year previously. Portfolio flows may still be a challenge in the near term: $15.4 billion in OMOs mature in the current quarter, around $5.3 billion of which may be foreign-owned (using August CBN data as a guide to total foreign OMO holdings). Maturing OMOs will have to be financed with rollovers or reserve/NFA drawdown. We note that previous stock market rallies have been associated with NFA growth and significant pressure on reserves and/or NFAs could mean another leg down for this already-inexpensive market. Meanwhile, the importance of portfolio investment for reserves mean that policy rate cuts, that could support equities, seem highly unlikely this year.
