With even Goldman Sachs turning cold on the core
emerging markets basket of Brazil, India, Russia and
China, investors are combing the world looking for a
place to put their money to work. For this new
generation of adventurers, the goal is to be on the
ground in the right new market before it becomes
the core — and Nigeria just started flashing all the
signals.
For years, the country – the biggest and most
dynamic frontier economy in Africa, with a GDP on
par with global capital destinations like Hong Kong
and Singapore – had a Wild West reputation for both
rambunctious growth and a little danger. But while
the entrepreneurial energy of Lagos still reminds
fund managers of Houston multiplied by four times
the population, success in cracking down on security
threats in the oil-rich interior is changing the security
situation for the better.
Monday’s reports that government forces may have
killed Abubakar Shekau, the leader of the Boko
Haram insurgency, mean the rewards here may now
substantially outweigh the risks. As Nigerian Senate
President David Mark told me, security is a critical
factor for the current administration and extremist
groups like Boko Haram have already been pushed to
the country’s borders.
However, many investors still have an outdated
conception of Nigeria as a dangerous market
engulfed by unrest and corruption, and so stocks in
Lagos still trade at something of a distress discount
to reflect the country’s past – and create an
opportunity for investors willing to understand what
the Nigeria of today is really all about.
Massive growth, dramatic value
The $31 billion currently moving on the Nigerian
Stock Exchange represents annual economic activity
of $268 billion. To buy the same amount of
productivity in Singapore, for example, would cost
nearly $737 billion, or 23 times as much. Even in
relatively mature emerging markets like Brazil and
Russia that are unlikely to enjoy much in the way of
future growth, domestic equity trades at a 200% to
300% premium over what it would cost in Lagos.
Meanwhile, the Nigerian economy is growing at an
annualized rate well above 6%, faster than any of the
top-tier emerging markets short of China itself.
Although the oil sector still contributed $8 billion to
GDP in the first quarter of 2013 – largely in the form
of exports to the United States — the country’s
petroleum wealth now takes a back seat to its
expanding middle class. Construction, hospitality
and service are actually booming at a rate faster than
what even China can currently claim, without the
top-down state meddling.
While a planned Beijing-style economy runs counter
to all the laissez-faire impulses the oil boom has
brought to Lagos, investors here can also count on
more transparency and better corporate governance
than ever. Compared to the sometimes-intimidating
government presence of countries like China, India or
Russia, Nigeria has traditionally confronted investors
with too much freedom, but the regulatory
environment is making great strides.
President Goodluck Jonathan has pursued a
“Transformation Agenda” with two extremely
market-friendly goals since his election in 2011:
accelerate the modernization of the economy and
finish the job of eliminating money laundering,
payroll fraud and other once-persistent red flags for
investors who want to make sure their interests are
taken as seriously as they would be in any developed
economy.
Judges who accept bribes are losing their jobs and
facing formal prosecution. And as Senator Mark tells
me, the level of corruption that Nigerians and foreign
investors once dealt with on a day-to-day basis would
seem “extremely exaggerated” in modern Lagos.
In the place of corruption, the young and dynamic
population is finding work. New infrastructure is
coming online to support private enterprise and
while oil remains the center of the economy,
education, employment, agriculture and even home
ownership are rapidly emerging as linchpins of the
new Nigeria.
Opening the floodgates to global capital is another
strategic goal. Yvonne Emordi, head of strategy at
the Nigerian Stock Exchange, is serious about
boosting the country’s overall public market
capitalization to $1 trillion by 2016.
Putting Lagos on equal footing with Bombay or Sao
Paulo as a global capital hub in three years would be
quite a feat, but the foundations for that kind of
growth are already in place. Nigeria was one of the
world’s four best-performing markets last year with a
35.45% gain, while a compound return above 10% a
year since 2003 can easily support doubling the
market’s capitalization from decade to decade if the
trend continues.
While thin capital flows often turns one year’s top
frontier into a big loser immediately thereafter,
Nigeria is relatively liquid by African standards and
seems to be early in its cycle of attracting liquidity.
Overseas investors currently hold about 43% of the
shares in Lagos, which is relatively balanced –
nowhere near an unsustainable glut of fast foreign
money but those who come in now already have
something like critical mass to work with.
And while the risk of terrorist disruption recedes,
money keeps flowing in the form of direct investment
in the domestic economy. In just the last six months,
U.S. corporations like Procter & Gamble have
committed at least $700 million to build new
factories and agricultural facilities in the country
while the Nigerian government itself announced a $1
billion fund to nurture the local software industry,
which officials think can ultimately capture $20
billion a year from rivals like India.
Getting ahead of the game
India is a good example of the long-term potential
Nigeria can unlock for its people and for the world’s
investors. In 2001, when Goldman Sachs was first
developing its BRIC strategy, India’s GDP was under
$500 billion and the blue-chip Sensex index was
trading around 3,200. Twelve years later, the
economy had doubled in size and a tidal wave of
money pushed the market bellwether within sight of
19,000.
Brazil and Russia have also seen their stocks multiply
in value as the BRIC evolved into the hot strategy of
the decade. Last year alone, over $100 billion poured
into BRIC exchange-traded funds, representing a full
1.6% of the combined capitalization of the four
countries and giving share prices an external boost.
Should Nigeria enjoy a similar trajectory, there are
fortunes to be made here. Despite its reputation as a
leading oil producer, it is already much better
diversified than Russia.
If anything, the economy more closely resembles
that of Brazil: rich in petroleum but blessed with an
abundance of other resources and a population that
is only now starting to live up to their potential as
consumers. GDP per capita – a key gauge of the
penetration of middle-class lifestyles – is still only a
fourth of that in Brazil and barely a third of what
investors can now get in China. In terms of domestic
development, the Nigerian economy already has
critical mass but we are still very close to the ground
floor on future growth.
Until recently, U.S. investors practically needed to
have both feet in the ground in go-go Lagos in order
to get any direct exposure at all to that growth curve.
There are no Nigerian American depositary receipts
(ADRs). Even in London, the only shares available are
in the country’s leading banks.
Those same banks appear again in the 12% of Van
Eck’s African ETF (AFK) currently invested in Nigerian
stocks. Only a single holding there – Nigerian
Breweries – represents the thriving consumer sector.
And then there is the Global X Nigeria ETF (NGE),
which has drifted on either side of its April offering
price and is currently looking defensive amid the
ongoing “risk off” move. P/E in the portfolio is still
low at under 9.5 and many of the holdings are names
you will not find anywhere else: Nigerian subsidiaries
of global consumer brands like Nestle, Unilever and
Guinness, construction-oriented plays and even food
processors.
For now, NGE is the best game in town if you want to
add some spice to an otherwise sagging BRIC
allocation. There will be other ways to take your
portfolio to the BRINC as Nigeria continues to
eliminate sources of domestic unrest and awareness
of the country’s economic progress spreads.
Either way, with performance in the BRIC markets
suffering it may be time to look a little farther afield
for the benefits those countries used to provide.
Senator Mark tells me he sees a little room left for
heavy lifting to bring Nigeria’s infrastructure up to
modern standards, but once that happens, it may be
all hands on deck.
www.forbes.com/sites/hilarykramer/2013/08/21/nigeria-beckons-investors-fleeing-the-bric/