Tag Archives: economy

NGE: Invest In Nigeria’s Economic Revival

I am going to be a bit provocative and suggest that low oil prices is good for the world especially for the oil producers. When we look across the board at the largest global oil producers from Russia to Saudi Arabia, Iran, Venezuela, Nigeria and Brazil. It becomes clear that abundant oil or high oil prices is neither a blessing nor a benefit to the populace of these nations. These nations have been characterised by mismanagement and corrupt usage of funds and it is only now that we have had an extended season of low oil prices that we are now hearing and seeing serious structural, economic and constitutional reforms to wean these nations from almost complete reliance on oil revenues. Nigeria’s Reforms Out of all these nations, the one that excites me the most is Nigeria for a number of reasons. Firstly, nations like Saudi Arabia, Russia and the South Americans have a number of regional and internal political challenges that I believe will act as a drag on their ability to take decisive measures to reorient their economy. On the other hand, despite the matter of Boko Haram, Nigeria is as a whole politically stable and united under one democratically elected leader and administration. This is important because the oil markets are extremely volatile and wild moves there can wreak havoc on a nation’s balance sheet within a short time and the ability to make fast and decisive decisions are very critical to success in the endeavour to shield and wean a nation from dependence on oil or commodities revenues. This is what the Nigerian President Mr. Buhari has begun to do with the banning of large amounts of imports and restriction of the use of dollars in Nigeria thus making it increasingly expensive to do dollar transactions abroad. While these actions in the short term has caused significant disruptions and distortions like the extortionate prices that dollars is currently being sold on the black market, in the medium and long term, many will agree that these actions are the best for the economy. These actions will benefit the economy for three reasons, it will discourage the importation of substandard and dangerous products that are endangering the health and safety of the local population, it will help to stimulate local production which over time will be instrumental for the diversification of the local economy. Finally, it will help to counteract and counter balance the low prices of oil because as oil is traded in dollars, the fall in oil prices means less dollars to import products and also as the level of imports falls and local production increases, it softens the blow of low oil prices. All of these actions will have the combined effect of increasing the price of the naira itself, stabilize the CBN’s dollar reserve accounts, reduce inflation over time and also interest rates can then be reduced to manageable rates. Further, the net effects of this will also make local naira denominated bonds more attractive over the medium to long term. Secondly, they are very much focused on the matter of corruption and have taken several measures to streamline government accounts and increase transparency into how governmental funds are used. As far as I am aware, these are unprecedented steps even for developed economies. Despite this, the administration has come under significant pressure to change their focus back to Nigeria’s other economic challenges without understanding that by simply curtailing and cutting out corruption, the Nigerian economy will begin to experience more stability and success. Local Equity Markets Growth In light of all of the foregoing, in going back to my original thesis, what really excites me about all of these measures is the effect it will have on the local equity markets. Click to enlarge The chart above compares the Brent Crude Benchmark with the Nigerian Stock Market Index and it is self-evident that the correlation between the price of crude oil and the returns from the NSE were much linked. I am gradually coming around to the realization that oil prices will remain depressed for at least another year for various reasons. Firstly, it is clear that the depressed price of global crude oil is a supply problem and not a demand problem especially in the short and medium term. We know this because crude oil demand increased by 1.5 to 1.8 million barrels per day which is a 5 years high yet the price remained depressed. No one can really price or adequately measure when oil prices will increase or supply will reduce based on two factors, one factor is the ongoing saga of shale oil production in North America where it seems that industry consolidation is taking place. It will take about a year for the dust to settle and only then can we know with any certainty where short and medium term prices will be heading. The second major factor is Iran. They continue to be unpredictable and the market is correctly pricing in significant outputs of crude oil from Iran into the price per barrel. What this means is that things will get worse than better but this will be a positive for a nation like Nigeria particularly considering its current reform trajectory. It is my belief that over the next 12 months, we will see a gradual delinking in the chart above whereby oil prices continue to fall perhaps to 20-25 but at the same time, the NSE begins to gain ground as the constituent companies begin to do better under new economic conditions. This is true because if one looks at the listed companies of the NSE, it becomes clear that most of these companies are well placed to do well as this drive to increase local production, consumption and demand consolidates. The chart above is indicative of this divergence within the markets and we can see Dangote Cement, Flour Mills of Nigeria and Oando which is a leading indigenous oil company. As one can see that while they were all nearly at the same place in May 2015, Oando continues to weaken while the other two are gradually strengthening. These two represent construction, agriculture and food production, three sectors that we should see significant growth within the next 12 months as the national policies begin to take root. This final chart is the Global X Nigeria Index ETF NGE which invests at least 80% of its total assets in the securities of the Underlying Index which is designed to reflect broad based equity market performance in Nigeria. This is an ETF that has hit the bottom and has significant upside potential over the next 12 months. Here we can also see that the growth is tentative but increasingly established. This trend of divergence is one that we are seeing across the board whereby as commodities markets weaken, stock prices appreciate especially when the local economy is supported by government policies. To highlight this point, I have added two South American favorites of mine. In the first one, I compared the Brazilian stock market index to the crude oil prices and in the second, I compared the Argentinean stock market to the feeder cattle prices. Click to enlarge Click to enlarge In conclusion, it is my belief that rather than being a negative, low commodities prices can be a stimulant to help commodities dependent nations diversify their economy and thus creating profitable investment opportunities for investors in local production, manufacturing and services companies. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Buffett’s 5 Business Lessons

Originally published on Mar 30, 2016 What by Buffett’s standards is a good business? A good business according to Warren Buffett is a business that earns a high rate of return on tangible assets. The very best businesses are ones that earn high rates of return on tangible assets and grows. You can turn a good business into a bad investment by buying at too high of a price. Buffett’s statements above alludes to businesses that do not require a lot of capital investment such as the Van Tuyl Automotive car dealership business he purchased in 2014. Whereby in the dealership business, you can lease the real estate, arrange the floor plan, and sell a lot of volume with narrow margins and still manage a high return on capital. Years ago, car dealerships were many and across the U.S., there were about 30,000. Now that amount is a little more than half and on average each dealer does greater volume than ever before. However, I will say that his investment in BNSF Railway is quite the opposite and is a highly capital intensive business. Click to enlarge Are the big banks good business and are they still as good of a business prior to the 2008 crisis? Banks earn on assets not on their net worth. Since 2008, the government now requires banks to have more net worth for each dollar of asset. Meaning that their earnings on net worth will go down. Banks are required to have more net worth than before to make the “same” amount of money. In general, they are great business because they can borrow money cheaply. Think of your deposits sitting in a Wells Fargo (NYSE: WFC ) or Bank of America (NYSE: BAC ) checking or savings account. What interest rates are those paying out? More than likely it is something to the tune of less than 0.10% annual percentage yield. Banks turn around and lend that money out at interest rates at least 20 to 30 times that. “Keep the business if you expect the company to do well in the future versus the price now compared to other opportunities you might think you know equally well.” In 2014, Buffett still believed that most stocks were being priced at a range of reasonableness. There has only been five times in Buffett’s lifetime that he recalls whereby businesses were either priced too expensive or very cheap. There is no way to pinpoint exactly where those peaks and troughs are, but he believe he can make a call on either end of the spectrum every 5-10 years. Overall, buy good businesses at reasonable prices and you’ll make money. Another piece of advice? Buy stock in a business so good that an idiot can run it because one day an idiot will. Forget about what is happening in the United States about the Fed and economy. In the long run, the American system works and unleashes human potential, which will bring value to the economy. Buy a business because of what is happening in the business not because of what you think political effects have on the business or doesn’t have on the business. When do you throw in the towel on an investment or business? If you have a bad manager with bad results, you can sometimes change the manager and get good results. But if you have a bad business and a good manager, most of the time, you can’t get better with a better manager. Some businesses are just plain tough and the bad economics almost always trumps good management. Buffett loves it when the things they buy go down in value. When you go to the grocery store and find something cheaper today than yesterday you are elated. But for some reason with a stock, people tend to hold on to it and sell when it gets to what they paid for it. People have a tendency to justify holding on to positions. The stocks don’t care what you bought them for. You are nothing to the stock, but the stock is everything to you. How do you know when to sell a stock or rearrange your portfolio? When you can get can more for your money somewhere else. Prices change constantly and valuations shift daily. Today, you can rearrange your business empire at virtually no cost. But people can use that to a disadvantage as well by trading too much. Keep the business if you expect the company to do well in the future versus the price now compared to other opportunities you might think you know equally well.

Global Manufacturing Picks Up: ETFs To Watch

The month of March will be remembered for the revival in the manufacturing sector in the world’s two largest economies – the U.S. and China. While a stronger dollar and huge capex cuts by energy companies to fight back the plunge in oil prices hurt the U.S. manufacturing sector, soft demand in the wake of global growth worries can be held responsible for the overall global slowdown. However, things took a turn in March as signs of stabilization showed up. Let’s delve deeper into the data. Finally Chinese Manufacturing in Positive If we talk of manufacturing slowdown, China comes first to mind. But after posting sluggish factory output data since July 2015, the economy posted growth in March. China’s official manufacturing purchasing managers’ index (PMI) came in at 50.2 for March , which beat Reuters’ forecast of 49.3 and February’s reading of 49.0. Any reading at or above 50 suggests expansion in activity. While this official data considers larger companies, another index, namely Caixin Manufacturing PMI, considers smaller or medium-sized companies. Investors should note that the Caixin Manufacturing PMI for March also rose to 49.7 from 48.0 in February, “marking the first increase from the previous month in a year.” Improving Trend in the U.S. A five-month long losing streak also bucked the trend in the U.S. in March. The ISM manufacturing data expanded to 51.8 in March from 49.5 in February buoyed by new orders and increased output. The data came above the Wall Street Journal’s expectation of 50.5. Out of the 18 manufacturing industries, 12 reported expansion in March. What Cooks Up in the Euro Area? Coming to the Eurozone, the Markit Eurozone Manufacturing PMI came in at 51.6 in March 2016, surpassing a preliminary reading of 51.4 and 51.2 recorded in February. The reading also bettered the forecast of 51.4 . All is not well across the globe. But noticeable improvement in the big three gives us reasons to look at the below-mentioned international industrial ETFs. Global – iShares Global Industrials ETF (NYSEARCA: EXI ) The fund looks to track the S&P Global 1200 Industrials Sector Index. The $16.2 million ETF is heavy on the U.S. which takes about 53% of the basket. General Electric (NYSE: GE ) (8.62%), 3M Co. (NYSE: MMM ) (2.93%) and Siemens AG ( OTCPK:SIEGY ) (2.56%) are the top three stocks of the fund. The fund charges 48 bps in fees. It added 0.5% in the last one month (as of April 5, 2016). China – Global X China Industrial ETF (NYSEARCA: CHII ) The Global X China Industrial ETF seeks to provide investment results of the Solactive China Industrials Index. The $3.6 million fund charges 65 bps in fees. This fund is heavy on building and construction (34.4%) and machinery and equipment (31.6%) industries. The fund has exposure to about 40 stocks. CHII added 2.9% in the last one month (as of April 5, 2016). U.S. – Industrial Select Sector SPDR ETF (NYSEARCA: XLI ) This product tracks the Industrial Select Sector Index. General Electric occupies the top spot with an 11.7% allocation, while 3M, Honeywell (NYSE: HON ) and Boeing (NYSE: BA ) have a combined exposure of over 10% in the fund. XLI has garnered $6.65 billion in assets and trades in heavy volume of 13.8 million shares per day. It has a low expense ratio of 0.14%. The fund has the highest exposure to aerospace and defense (25.3%), followed by industrial conglomerates (21.6%). The product gained 2.4% in the last one month (as of April 5, 2016). Original Post