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Nigeria exited its first full-year economic recession in a quarter of a century in the second quarter of 2017, with the IMF and World Bank forecasting growth of around 2 percent this year. Ike Onyia, the chief executive officer of Lagos-based FBNQuest Asset Management, in this interview with BusinessDay’s Patrick Atuanya, Lolade Akinmurele and Dipo Oladehinde, shared his views on investment opportunities in Nigeria post-recession.
What investment opportunities are emerging in Nigeria, post-recession?
Last year, Nigeria provided investors with relatively strong returns across money, fixed-income and public equity markets. Post-recession and with improving economic fundamentals driven by oil prices, stable output, growing foreign currency reserves and appropriate policies, we anticipate that businesses in Nigeria will do much better. With inflation trending downwards, money market and fixed income securities may provide short to medium-term investor’s with real rates of return. Long-term investors, with varying degrees of risk tolerance, will find viable investment opportunities in both public and private equity markets. The key consideration for investors after risk, will be the adoption of a suitable asset allocation strategy, which if optimal, will take advantage of investment opportunities across several sectors in Nigeria.
Are there alternatives to Treasury Bills as yields slide?
Treasury Bills are short-term money market securities with maturities of one year or less and are suitable for investors seeking liquidity and capital preservation objectives. Investors with these objectives should still consider exposure to treasury bills an appropriate strategy, in spite of a decline in yields from between 18 per cent and 22 per cent last year to between 12 per cent and 15 per cent, thus far, in 2018. It might be inaccurate to develop expectations around an absolute number and seek a perfect substitute with the same level risk tolerance threshold. Indeed, while yields looked attractive on the face of it, when you factor in average inflation of approximately 17 per cent in 2017, the real rate of return was between 1 per cent and 5 per cent. So last year’s yields may look attractive on an absolute basis, but much less so when adjusted for inflation. Investors can consider other opportunities within money markets include Bankers Acceptances and Commercial Paper but those with higher risk appetite and longer investment horizons may consider additional exposure to other asset classes such as bonds and public equities. In 2017, a portfolio diversified across money market, bonds and equity securities will have outperformed yields achieved from a money market only portfolio. In other words, investors should still consider including treasury bills in their portfolio but seek alternatives for higher yields through a carefully advised allocation strategy to include other asset classes.
Stocks have rallied to a near 3-year high, do you expect the bullish momentum to be sustained especially on the back of impending elections?
The NSE All-Shares Index achieved strong growth of 43 per cent in 2017, making it one of the top three performing stock markets in the world. This growth was spurred by rising commodity prices and the introduction of the Investors and Exporters (I&E) window by the Central Bank of Nigeria, which ensured foreign exchange stability and liquidity. Oil price trends and Nigeria’s economy are closely correlated and at the moment, prices and output are relatively stable. Following five quarters of negative growth, Nigeria has just exited a recession and is expected to grow at more than twice its growth rate in 2017. Also, tight liquidity management and stable foreign currency markets have led to a decline in inflation and interest rates. All of these elements and more, support positive growth for businesses and the stock market over the course of 2018, however, valuations are high following the bull run in 2017 and investors have to be selective and cautious in constructing their equities portfolio.
What does the impending election hold for investors?
Since 1999, Nigeria has witnessed four election cycles and as is usually the case, politics takes centre stage. Investors with a long-term mind set and appetite for exposure to one of the largest economies in Africa should stay the course. Indeed, while the run-up to the election will lead some investor segments to exercise caution, this could in itself present others with the opportunity to pick up investment assets at good valuations.
How has the Investors and Exporters (I&E) window affected or had an impact on you?
The I & E window effect was positive and provided liquidity in the foreign currency market, which in turn spurred investment activity in stocks, amongst others.
How are your funds performing?
Across board all our funds performed strongly and clients were well served as a result of our investment strategies, which outperformed relevant benchmark indices. Our FBN Money Market Fund achieved returns in excess of 17 per cent the FBN Fixed Income Fund achieved 19.14 per cent while the FBN Eurobond (USD) Fund achieved in US$ returns of 12.17 percent,.
The funds’ performance is down to our strong and highly experienced investment management and research team.
Expectation for 2018?
With a fairly stable forecast oil price trading range, the macro-economic story will be positive and we should witness strong growth relative to the recessionary environment that just passed. As expected, there will be a surge in political activities, which will most certainly attract a lot of attention. However, financial markets will present viable investment opportunities for consideration. In money markets, yields are expected to be less than last year as the Federal Government refinances its local debt book. The public equity market may witness a correction given current valuations of select stocks but will most likely end the year positive. Private equity markets continue to provide a pipeline of interesting value propositions focused on several sectors including consumer, financial services, agri-business, broad-based technology, education, healthcare and more evident in the number of successful capital raises and exits.
Forecast for 2018?
IMF and World Bank forecast growth in Africa at over 3 per cent and over 2 per cent for Nigeria.. FBNQuest Capital Research has forecast a growth of 2 per cent in 2018, which is over double the pace of growth of 0.8 per cent in 2017.
In 2018, I think that we will see improved growth over 2017, although it will be fragile.
