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Stocks with some of the highest weightings on the MSCI Frontier Market index are expected to rally following news by the index provider that Nigeria will remain part of its frontier indexes.
There are 16 Nigerian stocks in the MSCI frontier index with Nigerian Breweries (1.67%), Zenith (0.86%) and Nestle (0.80%) having some of the highest weighting.
“A handful of foreign fund managers waited on the sidelines in anticipation of the final MSCI announcement,” Cardinal Stone Partner’s equity analysts led by Jerry Nnebue, said in an October 27 note to investors.
“We believe this potential demand from these foreign investors as well as tactical local market participants will spur positive sentiments in the short term. With the reassurance that investors can complete their transactions at a market determined exchange rate, we expect to see further influx of capital into the equities market,” according to Cardinal Stone Partner’s equity analysts.
Foreign portfolio managers tracking the MSCI Frontier Market index currently allocate weights to Nigerian stocks varying from 3.98 percent to 4.99 percent compared to the 7.96 percent benchmark weight of the MSCI frontier index.
This implies that these fund managers are still significantly underweight.
The MSCI said on Friday that Nigerian stocks were no longer under review for a possible demotion – a status the securities had been under since September 2016 after the government introduced capital controls.
“The market will be removed from the review list for potential reclassification to Standalone status,” MSCI said in a statement, adding that the central bank’s introduction of a new foreign exchange window in April had improved the situation for foreign investors.
“Market participants have indicated that since the establishment of this window, funds can be repatriated at close to the official rate. Concerns on the spreads and delays which investors have earlier experienced have also eased.”
Nigeria’s equities have been on a bull run since the introduction of the “Investors and Exporters (IE) window” that allowed for FX transactions at market determined rates with year-to-date returns recovering from as low as -6.0 percent in April to 35.6 percent on Friday.
The performance (+35.6%) ranks second, slightly behind Argentina (+41.2%), among the 29 countries in the MSCI Frontier markets index.
“MSCI’s decision is consistent with the significant improvement in FX liquidity in the I&E FX window in recent months,” Samir Gadio, head, Africa Strategy and FICC Research at Standard Chartered Bank said in response to questions.
“Yet portfolio flows into equities appear to have been more subdued, as evidenced by still low traded volumes on the NSE. Thus the initial rally in the stock market may have materialised on relatively low liquidity. If market rates were to decline further without compromising exchange rate stability, this may support some domestic investor asset reallocation to equities.”
Analysts say valuations remain attractive for Nigerian banks given the decent upside in their price-to-book ratios compared to the pre-2014 crash period.
Meanwhile, at 1.17x on a price to book ratio, Nigerian banks are trading at comfortable discount compared to their Middle East and African peers at 1.47x.
MSCI’s latest decision is positive for naira equities, which implies impact likely to consolidate gains from higher FPI inflows, according to ARM Securities Research.
Some $1 billion worth of funds currently track the MSCI frontier index, according to ARM estimates.
“With Nigeria’s weighting at 7.9%, the decision implies ~ $79 million (~N29 billion) is no longer in danger of leaving Nigeria’s equity market. For context, the implied sum under consideration (N29 billion) is 65% greater than the average monthly net FPI flow to Nigeria’s equity market from January through August.
“In addition to this, the sum also approximates 53% of mean monthly net FPI inflows since the introduction of the IEW. By the materiality of the current decision therefore, we expect naira equities to positively respond to the decision in coming periods.”
Meanwhile, Brent oil held gains near the highest level in more than two years as Saudi Arabia’s Crown Prince Mohammed bin Salman backed the extension of OPEC-led output cuts.
Futures were little changed near $60 a barrel in London, up 2.6 percent for the week. The prince said Thursday that “of course” he wanted to prolong the curbs beyond the end of March 2018.
OPEC is considering an exit strategy to avoid flooding the market once the agreement finally expires, people familiar with the talks said this week. Total SA’s CEO, Patrick Pouyanne, said the imbalance between crude supply and demand was finally dissipating.
Brent has gained, as speculation mounts that the OPEC will agree at its November 30 meeting to extend cuts by its members, and allied nations aimed at draining a global glut. Oil ministers from Saudi Arabia and Russia will meet November 2 to discuss prolonging the deal, Russian Energy Minister Alexander Novak said last week.
Stronger demand will help cut stockpiles this year for the first time since prices slumped in 2014, the International Energy Agency said earlier this month.
Brent for December settlement was at $59.26 a barrel on the London-based ICE Futures Europe exchange as of 10:20am in London. Prices rose 1.5 percent to $59.30 on Thursday, the highest close since July 2015. The global benchmark traded at a premium of $6.69 to West Texas Intermediate.
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