Nigerian Equities Cheap, But Not Cheerful as Investors Bull on Bond Yields at 14%

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by Anthony Osae-Brown

(Bloomberg) — Nigerian stocks have next to no chance of success when they’re competing for capital against one of the emerging world’s highest bond yields.

Weighed down by concern over Nigeria’s economic growth, the prospect of rising bad loans at banks and thinning profit margins, stock inflows have slowed, despite valuations near the cheapest since 2011. That contrasts with the billions pouring into government bonds, which yield 14% on average.

Even though Nigerian stocks look “extremely cheap,” they hold more downside than upside risks, EFG-Hermes analysts Simon Kitchen and Vinita Kotedia wrote in a report earlier this month, cutting their recommendation to underweight. Low trading volumes and dwindling foreign participation are driven “by often-inconsistent macro policies that are ultimately designed to maintain dollar-naira stability,” they said.

The central bank on Tuesday defied a global trend toward dovishness and kept its key interest rate at 13.5%, safeguarding the nation’s real rate of about 2%. It also helps keep bonds attractive, aids policy makers in their quest to maintain the naira’s stability, and offsets investors’ concerns over the time it’s taken President Muhammadu Buhari to form a cabinet. His list of nominees was presented to lawmakers yesterday, five months after he was re-elected.

The currency has hovered around 360 per dollar since late 2017, a boon for traders, but not the economy, which is growing at a slower pace than the population. That’s why Nigerian debt has attracted about $9 billion in foreign cash for the five months through May, compared a little over $1 billion for stocks, according to data on the central bank website. Foreigners hold $15 billion worth of local-currency bonds, Goldman Sachs Group estimates.

The result is a 11% drop in the main equity gauge this year and an average 16% return for the nation’s bonds, which are among the top five performers in Bloomberg Barclays’ emerging market local-currency bond gauge.

Nigeria’s central bank governor Godwin Emefiele expressed concern on the “bearish trend” in stocks during his monetary policy committee briefing on July 23, even as he welcomed the “continued stability” of the naira, sustained by the inflow of hot money.

“The return on debt is certain, the yields are attractive,” Oluwasegun Akinwale, a banking analyst at Lagos-based Asset & Resource Management, said by telephone. “Why should I stay in equities when there is no policy clarity?”

(Updates YTD stock loss, adds central bank concerns to seventh paragraph)

–With assistance from Tope Alake.

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