Nigeria’s stocks are caught in a devaluation trap.
Not even the best day for emerging-market equities in two months could buoy demand for stocks in Africa’s biggest economy on Tuesday. The All Share Index in Lagos dropped for an eighth day, sliding further into a bear market, even as those of almost every other major developing nation advanced.
The decline shows how leery investors have become about putting money into a country they say is on the cusp of devaluing its currency. Nigeria’s central bank has kept a stranglehold on the naira’s value via currency-trading curbs and restrictions on imports since March last year in an effort to stem capital flight from the continent’s largest oil producer. Money managers including Aberdeen Asset Management Plc and Duet Asset Management Ltd. say that the only way to revive investor demand is to let the currency depreciate.
Nigeria’s All Share Index fell 0.4 percent to 22,456.32 by the close in Lagos on Tuesday, while the MSCI Emerging Markets Index rose 1.6 percent, the most since Nov. 19. Nigeria’s gauge has dropped 22 percent this year, the most among 93 primary indexes tracked by Bloomberg and making the country’s equities the cheapest in sub-Saharan Africa. For money to flow back in, authorities need to let the currency depreciate by about 20 percent and end the foreign-exchange trading restrictions, according to Duet’s Ayodele Salami.
The index climbed 2.3 percent by 10:55 a.m. on Wednesday in Lagos, heading for its best gain this year. Still, the currency controls will continue to weigh on prices, Salami said.
“The Nigerian equity market is ridiculously cheap,” said Salami, who oversees about $500 million of African equities as chief investment officer of the London-based money manager. “But you’d look pretty stupid to buy it and then take a 20 or 25 percent writedown just because of a devaluation. A lot of people will wait on the sidelines.”
The bourse is at its lowest level since July 2012 and trades at 6.7 times forward earnings, compared with 10.1 times for the MSCI Emerging Markets Index and 8.6 times for the Frontier Markets Index.
The risks are still too great for foreigners as long as central bank Governor Godwin Emefiele, who has the backing of President Muhammadu Buhari, fixes the naira at 197 to 199 per dollar. Many see a devaluation as inevitable following Brent crude’s slide to a 12-year low of below $30 a barrel. The currency restrictions have caused a shortage of dollars in a country that imports almost all manufactured goods, hurting businesses and sending the black market rate soaring to a record 305. Forwards prices suggest the interbank rate will weaken 20 percent to 248.75 in three months.
“When oil was at $50-$60, there was definitely money waiting to come in when they devalued,” Dominic Bokor-Ingram, a money manager at Charlemagne Capital Ltd. with $1.9 billion of equities under management, said in an interview in London on Monday. “Today, I’m not so sure anyone would be interested. If they devalue to 230-240, people will say that’s not enough because of where the parallel market is and because of what’s happened to oil.”
Nigeria’s bonds have also been punished, with yields on local government securities rising to 12 percent, higher than those of all developing countries tracked by Bloomberg except Brazil, Kenya and Egypt. Like their equity counterparts, global bond investors say those levels aren’t attractive enough.
“If you get, say, a 20 percent devaluation you will get some investors coming back,” Kevin Daly, a money manager at Aberdeen Asset Management Plc, which sold all its naira debt last year, said by phone from London. “If it is less than that, I don’t think you will get huge amount of inflows. If the market thinks it’s credible adjustment, you will get inflows.”