Charles Robertson. Photo credit: Bloomberg

Nigeria attractive for investment, says RenCap

Renaissance Capital analyst, Charles Robertson has said that at their current value and with the ongoing reforms in the economy, the various investment windows in the Nigerian financial market are attractive.

Robertson stated this in a report on Thursday. He noted that with the naira at around N400/$ on the parallel market, the currency currently offers a five per cent discount to his firm’s estimated fair value (this discount will likely disappear due to inflation over 2017), “while we think equities and naira bonds are cheap.”

According to Robertson, after spending most of the past fortnight in Nigeria for the Renaissance Capital’s 8th Annual Pan-Africa Investor Conference in Lagos and the 10th African Finance Corporation’s (AFC) infrastructure-focused conference in Abuja, “we believe we have learnt enough to justify a more optimistic stance towards Nigerian assets.”

He added: “In February, we argued that when greater FX flexibility came to Nigeria, investors might only enter the market at an exchange rate of N450-500/$. We assumed there would be no Egyptian-style float of the currency. We thought investors would need a ‘Nigeria FX risk premium’ of at least 10-20% to compensate for the potential risk that FX flexibility might be short-lived. But we were wrong to only look at investing in Nigeria through the FX prism.

“We should have also considered whether bonds and equities were cheap or expensive. What has become evident in recent weeks is that naira bonds yielding 18% and equities are cheap enough that investors are prepared to buy the naira even with just a small discount to the N375/$ fair value estimate of our 22-year REER model. Note due to inflation we estimate that fair value will depreciate to NGN410-415/$ by mid-2018.”

According to him, the catalyst of the current trend in the market was the introduction of the new investor and exporter (I&E) FX window on 24 April, which “finally gave portfolio investors a currency market they could access after two years of market-destroying FX illiquidity.”

“After a hesitant start, foreign inflows began to pick up, and the stock market reacted sharply at the time of our Lagos conference. Media reports suggest $600mn has flowed into Nigeria over four weeks (a fair amount has flowed out too).”