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Summary NGE is weighted heavily towards the consumer defensive and financial services sectors, which are poised to benefit from Nigeria’s impressive GDP and population growth (population expected to double by 2045). NGE is down 50% since July of last year due to the oil price crash and the Boko Haram attacks from earlier this year, creating an attractive, unique entry point. The weakness of the Nigerian Naira in 2014 has put downward pressure on NGE, and the central bank is again deciding whether or not to devalue the Naira. Nigeria is currently offering investors a unique long-term growth opportunity at a great value through the Global X MSCI Nigeria ETF (NYSEARCA: NGE ). NGE has been beaten down recently due to the strong U.S. Dollar, the oil price crash, and Boko Haram. Fundamentally, the Nigerian economy has not significantly changed in a way that warrants the ~50% decline in NGE’s price since July of 2014. This has created a great entry point for investors looking for strong growth potential over the long term with a nearly 4% dividend as an added bonus. NGE’s Sector Weights & Nigeria’s Demographics As you can see from the chart below, NGE is heavily weighted towards the financial services and consumer defensive sectors. So when considering an investment in NGE, we need to look at how these sectors are performing individually and their prospects for long-term growth rather than solely looking at how the Nigerian economy as a whole is doing right now. This is because the recent drop in oil prices has had a larger impact on the Nigerian economy than it does the holdings of NGE in particular, which I’ll discuss later in this article. Demographically, Nigeria’s population is expected to double over the next few decades, a gain of over 200 million people, with the majority of this growth expected to be in urban areas . This will drive a huge, ongoing demand for companies currently operating in the consumer defensive and financial services sectors. Together, these two sectors make up over 75% of NGE’s total holdings, making it an excellent long-term investment in my opinion. (click to enlarge) (Source: TD Ameritrade & Global X’s Semi-Annual Prospectus ) Dylan Waller made some excellent observations in a prior article that I want to reference as well. He noted that the Nigerian banking sector holdings of NGE, as of last summer, are experiencing over 50% annual growth as of late with a very low average P/E ratio of 5.8. The basic materials sector is in a similar situation as well. So this is very bullish news considering how heavily NGE has bought into these sectors. Also important to note though that the consumer defensive industry has a rather high P/E ratio and some say it is currently in a bubble. For example, Nigerian Breweries PLC has a P/E ratio of 27 and Nestle Nigeria PLC has a P/E ratio of 28. These companies make up 17.68% and 7.3% of NGE’s total holdings respectively, together comprising the majority of the consumer defensive holdings of NGE. So while it may be beneficial to wait for this bubble to pop, you won’t want to miss this great opportunity waiting for something that may not happen. The Effect of Oil Prices With NGE’s current energy holdings at 7.65% of assets, ~30% lower than energy’s contribution to Nigeria’s GDP, it has been less exposed to oil than the Nigerian economy as a whole. This is good because the Nigerian economy, Africa’s largest oil producer, is in dire need of diversification away from oil. Oil currently comprises about 9.8% of GDP (which due to the oil price collapse, is much lower than it has been historically). If you look at the numbers more closely, non-oil GDP growth averaged at a lower, but still respectable 4.5% in the first 2 quarters of 2015 while the oil GDP averaged -7.47% over the same time period. In the first 2 quarters of 2014, non-oil GDP growth averaged at 7.46%. Some of this loss year over year can be accounted for by the effect oil GDP has on the rest of the economy, but also one must consider the temporary effect of increased Boko Haram activity in 2015, which I’ll discuss later in this article. Oil currently accounts for the vast majority of the Nigerian government’s revenue, so for the government to successfully neutralize Boko Haram and develop infrastructure, oil cannot go below the $40 range for an extended period of time. The longer these low oil prices persist, the more negative the effect they’ll have on the country’s government. Taking all of this into account, if you think that oil will stay above $40 for the foreseeable future, this is somewhat bullish for NGE. I believe that there is not much more downside for the oil related portion of the economy with substantial upside potential for the financial and consumer defensive sectors in the long term. (click to enlarge) (Source: Nigerian National Bureau of Statistics ) The Naira and the Central Bank of Nigeria As you can see in the chart below, in 2014, the Central Bank of Nigeria devalued the Naira significantly. This pushed down the relative price of NGE because the shares are purchased in Naira, but NGE itself is priced in U.S. Dollars. Currently, there are strict currency controls in place, which have temporarily stabilized the value of the currency. President Buhari has been a strong advocate of these currency controls in order to slow the rampant inflation (~9% currently). As of 11/11/2015 president Buhari chose Kemi Adeosun , a strong advocate of not devaluing the Naira, as his Finance Minister. (click to enlarge) (Source: xe.com/currencycharts ) Many critics say that not devaluing the Naira and keeping the currency controls in place decreases foreign investment, making doing international business in Nigeria more difficult. Some banks are estimating the Central Bank of Nigeria will have to devalue the Naira from about 200 per dollar now to 220-230 per dollar sometime between Q4 2015 and Q1 2016, but what the Central Bank of Nigeria will do over the next few months is still uncertain. It’s not totally clear the effect the higher inflation will have relative to the increased international investment that would occur as a result of a devaluation of the Naira, so I will leave this up to the readers to review. Boko Haram and Nigeria Boko Haram attacks have also had a definite effect on the Nigerian economy. GDP will fall as people will move from economically productive areas threatened by Boko Haram into safer areas where they can work. This insurgency also diverts more government spending to the military, at a time where government revenue has fallen significantly due to low oil prices. This means less money can be spent on badly needed infrastructure projects like President Buhari has publicly stated he has a desire to build. President Buhari made national security one of his primary promises on the campaign trail, and has made great strides in the fight against Boko Haram. They are considered to be severely weakened compared to the last few years, and recently have shown decreased interest in conducting attacks within Nigeria. While still very much active, Boko Haram has been pushed into the less economically productive, northeastern corner of Nigeria and now have significantly less influence than they did previously. Below is a chart showing the relationship between NGE’s stock price and mentions of Boko Haram on Twitter as well as on publicly accessible news websites. It can be assumed that when Boko Haram is actively operating, there will be a large amount of mentions on Twitter and in the media. (click to enlarge) (Source: TickerTags.com) For example, you can see the stock price of NGE goes down and mentions go up around early January when the devastating attack on Baga took place, and again in mid July when a series of Mosque bombings took place. Of course, there are many factors that affect the stock price of NGE, but Boko Haram is one that has a definite impact whenever they stage a major attack. Conclusion Nigeria’s extremely fast growing urban population bodes well for the consumer product, construction, and banking industries within Nigeria, all of which are major holdings in NGE. The success the government has had in fighting Boko Haram should be applauded as well, which will go a long way to creating a much more stable country that will bring increased interest from foreign investors. All of this combined with low oil prices and a devalued Naira have created a unique buying opportunity for long-term investors. An investment in NGE is not without its risks though, as the low oil prices, potential Boko Haram resurgence and the short-term impact of a potential Naira devaluation are serious issues that are not to be ignored. In conclusion, there are many factors that point to a bright long-term future for Nigeria, though it is not without risk. I believe the current pricing provides a great entry point, as a series of temporary and unfortunate events have pushed NGE down far too low in my opinion. I see a strong potential for growth here for investors who are patient, with a nearly 4% dividend yield as an added bonus. Scalper1 News
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