By Thys Louw, Assistant Portfolio Manager
Falling oil prices, an import-dependent economy and multiple policy mistakes by authorities almost tipped Nigeria into depression. Over the last two years we have had little-to-no exposure to Nigeria on the back of our pessimistic view of Nigerian economic policymaking in an environment of lower oil prices. This strategy has not only saved our clients from significant losses, but also ensured that our EMD strategies faced no repatriation risks due to significant shortages of US dollars. However, in our view, an opportunity is beginning to open up and we are re-allocating to a country with improving economic fundamentals, more sensible economic policy settings and one which is priced attractively.
Consequences of bad economic management:
- Polling and market expectations were for Kirchner to win by several percentage points in the Buenos Aires province – the industrial heartland of the country and a key support base for her populist agenda
- However, she ended up effectively tied with the Cambiemos candidate (from Macri’s party) on just over 34%
- More generally the fragmented Peronist factions across the country fared relatively poorly
- Thus there was little from the result to suggest that Kirchner can return as president in 2019
- Nigeria suffered a severe erosion of its foreign exchange reserves following the oil price collapse between 2014-16.
- Authorities sought to prop up the naira at unsustainably high levels, although their efforts did little to stem capital outflows and prevent the economy from falling into recession.
- By the end of March 2017, a total of eight exchange rates existed, inflation stood at 17%, there were three consecutive quarters of negative economic growth and Nigeria had been kicked out of all main emerging market debt indices.
Where are we now?
- After a series of policy mistakes, in April 2017 the government finally announced a credible and practical mechanism to attract some inward investment from offshore investors.
- An investors and exporters (I&E) window enables market participants to set market clearing exchange rates for the naira instead of relying purely on a fixed exchange rate regime.
- This has gone some way in eroding the differential between official and black market exchange rates.
- The creation of this exchange rate has had an immediate impact on growth indicators and domestic confidence, with PMIs, inflation expectations and the equity market all heading in the right direction.
- While the country is not nearly of the woods yet, it is reassuring to see some return of sensible economic decision making.
How are we capitalising on this opportunity?
- We recently initiated a position in dollar debt in our core blended EMD and some frontier portfolios at attractive levels, which should be supported by the improvement in economic growth, increased supply of foreign exchange and the recent rise in oil production.
- We also recently initiated a modest position in Nigerian t-bills to gain exposure to the naira in permitted portfolios. These securities offer yields of approximately 23% (at the time of writing) and with the external picture being helped by the revival in oil exports and the implementation of the I&E window, the risk/reward opportunity looks attractive.
This content is for informational purposes only and should not be construed as an offer, or solicitation of an offer, to buy or sell securities. All of the views expressed about the markets, securities or companies reflect the personal views of the individual fund manager (or team) named. While opinions stated are honestly held, they are not guarantees and should not be relied on. Investec Asset Management in the normal course of its activities as an international investment manager may already hold or intend to purchase or sell the stocks mentioned on behalf of its clients. The information or opinions provided should not be taken as specific advice on the merits of any investment decision. This content may contains statements about expected or anticipated future events and financial results that are forward-looking in nature and, as a result, are subject to certain risks and uncertainties, such as general economic, market and business conditions, new legislation and regulatory actions, competitive and general economic factors and conditions and the occurrence of unexpected events. Actual outcomes may differ materially from those stated herein.
Issued by Investec Asset Management, issued December 2017.