Nigeria’s Bonds Still Attractive Despite Emerging Markets Turmoil

Obinna Chima and Goddy Egene

Despite the turmoil in emerging markets (EMs), which have seen their currencies tumble, Nigeria’s fixed income instruments have remained attractive.

For instance, average yield on Federal Government of Nigeria’s (FGN) Bond in the secondary market closed  thursday at 15.27 per cent, up from an average of 15.13 per cent it closed the previous day.

Also, the average yield on Nigerian Treasury Bills closed at 14.03 per cent, up from 13.29 per cent the previous day.

In fact, the country’s fixed income instruments have outperformed countries such as Argentina, Turkey, South Africa, Brazil, Mexico, Egypt, South Korea, Philippines and China, in terms of average total return for government’s bonds.

The currencies of the above-mentioned economies have also plunged heavily in the past few weeks, even as the naira has remained stable.

EMs across board have been under pressure since the US Federal Reserve raised interest rates in June. Governments and companies had borrowed in dollars when interest rates were low, and the dollar was weak. Now the dollar is strong and interest rates are rising.

The MSCI Emerging Markets Index of shares is down more than 13 percent in 2018.

Also, the Nigerian Stock Exchange (NSE) recorded loss of N1.031 trillion within the nine trading days of September. The NSE had closed the month of August with a capitalisation of N12.722 trillion, while the NSE All-Share Index (ASI) ended at 34,848.45.

To Research Analyst at FXTM, Lukman Otunuga, the simmering trade dispute between the world’s two largest economies had also fuelled global risk aversion while a brutal sell-off in the EM space rattled investor confidence.

He pointed out that with fears mounting over a full-blown trade war triggering global instability and negatively impacting growth, emerging markets especially remain under extreme pressure.

“Throughout the third quarter of 2018, Nigeria has kept afloat with GDP expanding 1.5 per cent during second quarter (Q2) and inflation easing 11.14 per cent. Although the nation’s external reserve dropped to the lowest since March to $45 billion, it still remains at manageable levels.

“With oil prices somewhat supported by geopolitics and the Naira displaying a degree of stability against the Dollar, the outlook looks somewhat encouraging. However, external risks in the form of an appreciating dollar, prospects of higher interest rates and trade tensions could cripple Nigeria’s fragile recovery,” Otunuga explained.

According to Otunuga, although Nigeria’s economic prospects remain tied to oil prices, the upcoming presidential elections could play a leading role in determining if the nation would be able to conclude this year on a firm footing.

He noted that the increased spending ahead of the Febrauary elections would most likely be a welcome development for economic growth.

“If oil prices remain at current levels and support both government revenue and consumption, this may stimulate the recovery further. The largest economy in Africa still has the ability to shock the world stage this year.

“While it is widely known that the cure to Nigeria’s illness – Oil dependency – can be found in economic diversification, the correct steps must be taken while the conditions are still accommodative.

“As the third trading quarter of 2018 slowly comes to an end, global sentiment is likely to remain heavily influenced by U.S.-China trade tensions and the emerging market rout. With the US Federal Reserve expected to raise interest rates this month, the CBN’s effort to defend the naira may be obstructed,” he added.

On his part, a research analyst at Anchoria Asset Management Limited, Mr. Adedeji Adewole, pointed out that compared with other EMs, the Nigerian market remains attractive.

“There have been outflows even before the CBN and the federal government directive that MTN should refund some amount of money to the country, so, that has nothing to do with it.

“Also, the Bank of England and Federal Reserve hiked rate, which contributed to the massive outflows we have seen in the EM. We also have political risk ahead of the election because people are factoring political risks into the overall pricing of instruments, which is part of the downside. Apart from that, the market remains attractive and oil prices remains stable.”

Meanwhile, on the NSE, an unprecedented sell pressure in large capitalised stocks since the beginning of September has further depressed the market to a new low.

Specifically, market capitalisation closed at N11.691 trillion, while NSE ASI ended at 32,022.23, indicating a decline of N1.032 trillion or 8.1 per cent. At the current level, the market has recorded a year-to-date decline of 16.3 per cent Investors’ sentiments have remained at lowest ebb despite strong fundamentals of stocks. While most stocks present entry opportunities due to their low prices, investors have remained at the sidelines as they monitor the events in the polity.

Some market analysts have said the decline was not a reflection of the economic performance.

Analysts at Afrinvest had said the contagion effect of emerging and frontier market routs resulted in a moderate slowdown of portfolio investments into Nigeria in the first half of 2018.

“Sadly, this is expected to continue impacting sentiments as foreign portfolio participation in domestic equities remains feeble. Furthermore, persistent sell-offs, especially in second half (H2) cannot be dissociated from increasing political and policy risks, which historically define election cycles in Nigeria.

“Nonetheless, we do not expect these to have substantial impacts on the broader macroeconomy given the relative stability in external economics (particularly steady and positive outlook in oil market) and the commitment of the Central Bank of Nigeria (CBN) in achieving a stable foreign exchange market,” they said.

According to them, ahead of the 2019 general elections, rising political tensions and heightened insecurity – which have intensified polity uncertainties – are major downside risks to watch out for in H2:2018.

“The trains in the polity have been aggravated by the increasing rifts between the Federal Executive and Legislature, culminating into the delay in approving and signing the 2018 budget, including the supplementary budget. However, while we expect these and other critical issues to persist in the near-term, we believe there will be no lingering impact post-elections. Hence, we expect the risks to dissipate as the elections wind-up, potentially reversing risk-averse capital flight trend,” Afrinvest explained.

While the market continued to decline, investment analysts at Meristem Securities Limited, have advised investors to see the low prices as an opportunity to increase their portfolios.

According to Meristem, the market has bled so much over the past few months and the bearish days would be over soon.

“With stock prices bottoming out, light gleams at the end of the tunnel. The low prices in the market provide investment opportunities for players in the market, but of course, with a focus on the fundamentally justified stocks,” they said.

The analysts explained that the 2019 elections have posed a major concern for most investors which has caused them to withdraw their funds from the market, thus making profit volume opportunities after the election become more visible.

“We believe that after the elections in February 2019, calm will be restored in the market. It is only fair that you don’t get caught sleeping so why not you buy now, ahead of 2019?,” they said.