Nigeria risks scare investors out of equities into bonds

Nigeria’s main stock index returned 44 per cent in dollar terms in 2013, thanks to a stable naira currency, making it one of the best performing African equity markets

Fund managers in Nigeria have been moving cash into government bonds this year and selling riskier assets, dampening a stock market rally as uncertainty over forthcoming elections and growing security risks hit demand for equities.
Nigeria’s main stock index returned 44 per cent in dollar terms in 2013, thanks to a stable naira currency, making it one of the best performing African equity markets. The gains boosted its allure as an investment destination, attracting foreign investors and pension funds.
But Africa’s largest economy has since suffered currency weakness, down almost 3 per cent this year, and is beset by uncertainty over upcoming elections, coupled with April’s abduction of over 200 schoolgirls by Islamist group Boko Haram.
That, plus a string of bombs across the north and centre of Nigeria – including three in the capital Abuja – blamed on the militants, have brought it home to many foreign investors that Africa’s top oil producer faces grave security problems.
Nigeria’s stock index has struggled to rise much above a 43,000 point resistance level. It is up 4 per cent this year, lifted largely after index compiler MSCI reweighted Nigeria, making it the second biggest in its frontier index after Kuwait.
The stock exchange in the first quarter said that local participation in the equity market had waned as domestic buyers composed mainly of retail investors stayed wary of stocks, which fell more than six percent during the period.
“Once elections are over, there will be greater clarity. The safest thing to do at this point is to buy bonds,” said Adeniyi Falade, managing director of Crusader Sterling Pension, which manages over N100 billion ($616 million) in pension funds.
Asset management firm FSDH, which manages over N50 billion, said it viewed the equity market as overbought and had cut its exposure in favour of treasury bills.
At the end of March, pension funds had 13 per cent of industry assets worth N4.2 trillion invested in equities and 68 percent in government bonds, data from the pensions regulator showed. Pension funds can invest half of their portfolio in stocks.
Nigeria rebased its GDP in April, pushing it up to $500 billion and enabling it to overtake South Africa to become the continent’s largest economy, although it also slashed growth estimates for 2012 and 2013.
But a spike in violence by Boko Haram in the same month underscored the growing instability faced by Nigeria.
It had previously had a muted impact on financial markets, as attacks had been largely restricted to the north, but this year they have radiated towards the centre again to cities such as Jos and the capital Abuja.
Falade said fund allocation to bonds had risen to 70 per cent in the third quarter as portfolios took less risk, a situation he expects to continue until after elections in February 2015.
Sub-Saharan Africa’s second-biggest stock index witnessed a one-off rally to hit a four-month high in June after MSCI increased Nigeria’s weighting to 19 per cent, from 12 percent, in its frontier market index.
“There is more exposure to fixed income. Our current allocation is 80-85 percent,” said Michael Oyebola, managing director at FBN Capital Asset Management, whose assets under management rose to N32 billion in under a year, from N4 billion.
“We have found out that most of our clients are risk averse,” he said, adding that yields on treasury bills were attractive at around 12 per cent for the one-year note, as against a 5 per cent dividend yield on stocks.
Nigeria has taken advantage of the liquidity in debt markets to raise N4.37 trillion in treasury bills in the first quarter as yield hungry-investors sought to lock-in rates.
Meanwhile, Nigeria’s actual GDP growth rate for 2013 has been revised down to 5.49 per cent, from 7.41 pct previously estimated during a rebasing exercise, the statistics office said on Friday.
In a surprise data release, the office also said GDP growth for 2012 had been revised down to 4.21 per cent, from a previous estimate of 6.5 per cent.
Nigeria overtook South Africa as Africa’s largest economy in April, after a rebasing calculation almost doubled its gross domestic product to more than $500 billion.