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.