A tree does not move unless there is wind.
In the West we take our civilian governments for granted, but in Nigeria, that has only been a reality since the tech bubble days of 1999. Before that, military rule and colonial (British) rule of course. Nigeria has a young constitution, a young and growing population, and a grand amount of natural resources. The room for economic growth is immense with millions of Nigerian citizens living in poverty (70%) and even without power (45% electrification).
When I say a young population - 44% of Nigeria's population is under age 15. Call me crazy but, I want to deploy some long term money in a part of the world without absurd debt levels (govt debt to GDP is 13%) and crushing demographics. The Nigerian population is over 120 million with over 20 million of those living in Lagos. Pictured below is a look at Nigerian demographics come 2030. As you can see, the working age population stands to grow considerably as we move forward, and is currently growing at about 3.5 percent. Nigeria will be the 4th most populous country in 2050. This will be a tailwind that should lead to impressive growth rates in the future. To add to the demographics, during a 2016 recession with high unemployment - the Nigerian labor productivity index rose by 10.8%. In Nigeria, consistent and reliable power generation has long been a struggle and something as simple as reliable power can and will continue to expand labor productivity of the large and growing labor force. Add to this, the government is taking an active role in supporting higher agricultural productivity, which should pay dividends in the future, helping the trade balance.
Speaking of growth rates, the Nigerian economy has not been growing recently. Nigeria has been mired in an ugly recession thanks to being caught with its pants down when oil collapsed. Nigeria spent over a year in recession and is slowly growing again. The most recent data shows the non oil areas of the economy picking up quite nicely which is very important news for Nigeria and perhaps attributable to recession Darwinism, as I think of it. This is thanks to the govt slashing import duties (over 100 items) to bring down input costs for manufacturers, and inflation/rates falling. When oil is down Nigeria often has FX reserves issues, largely thanks to agriculture and refined petroleum imports which the country is proactively trying to onshore. Staple foods are being grown more and more in Nigeria which coupled with boosted oil exports (while refining more at home) will dramatically boost reserves. Sometimes it takes ugly recessions to change the structure of an economy for the better (the West banned those). The government, which is still getting its democracy sea legs under it, is still learning how to allow the private economy to grow. We are talking about a country that did not have an election without significant issues until Justin Bieber was already famous.
Black gold is the lifeblood of the Nigerian economy and the recession in the economy and the stock market have been due to falling oil prices and oil exports. Nigerian exports were virtually cut in half while the price of oil was slammed during an era of a currency peg (removed last year). This conspired to create a vicious recession over the past year. In its 2017 budget, Nigeria penciled in 2.2 million bpd of oil exports at 44 bucks. The exports are recovering and prices have been steadily above the government's targets. Barring any major disruptions in the delta region, exports will meet their target this year. With non oil sectors growing, if oil can stabilize above $45 with exports staying above 2 million bpd, the economy can grow aggressively.
I briefly mentioned rates falling and this is important when looking at Nigerian stocks. NGE trades at a P/E ratio of 10 and a price to book of 0.88, but with inflation above 17% (targeting 11% in a year) and fixed income with absurdly high yields, it is understandable how the market became so cheap. The good news concerning rates, and thus valuations moving forward, is that inflation is starting to cool as seen below. The central bank has rates at 14% while private sector loans are about 30%. Obviously this is an incredible headwind that demands attention. Government debt yields around 20% right now so equities are competing against attractive interest rates and attractive government yields. When the government begins to grow and shore up the FX reserves and currency and gets inflation tamed, stocks will begin to look much more attractive for inflows, including international flows. Nigeria was removed from some Frontier indexes which helped pile on during the downturn. When Nigeria is added to more indexes, the tailwind behind equities will of course be significant. Likewise, when rates fall, small businesses will be able to get financing and expand which will help with the unemployment crisis (88% of employment comes from here) and growth issues. The fact that the economy is holding its ground with small businesses facing 30% loans is actually sort of impressive to me. If the US had 17% inflation and 30% loans for businesses, I dare say the S&P's P/E would be under 10 (if the sun even came up).
Of course, these high rates were due to Nigeria devaluing the naira last year which is painful today but perhaps planted the seeds for future success in Nigeria.
This may come as a shock but China is partnering with Nigeria on some infrastructure projects. China is well known for investing and partnering with firms and nations in Africa and Nigeria is no exception. On a recent trip to Nigeria Chinese Foreign Minister Wang Yi said “Compared with the size, population and market of our two countries，our cooperation still have a large potential to be deepened”. Many investors are familiar with OBOR but not many know of FOCAC or the Forum on China-Africa Cooperation. Chinese investment in Nigeria grew by 27% in 2016. China has invested $45 billion in Nigeria and recently announced an additional $40 billion. One of Nigeria's most pressing problems is education and China is currently planning on building a university in Nigeria as well as port and airport upgrades. Many point to this and mock Nigeria for ceding political influence to China, but for an economy desperate for upgrades to education and infrastructure, who cares if you have to ignore Taiwan to get $80 billion in upgrades? That is nearly 10% of GDP for what it is worth. To add to this, China is partnering with investment in the Lekki Free Zone in Lagos, which its website describes as a project aimed at developing, operating and managing a modern Free Zone in accordance with international practice by making full use of the advantages of Lagos as being the important distribution hub in West Africa, thereby further enhancing the economic cooperation between Nigeria and China with their mutual complement and compatibility of resources, optimizing the Nigerian industrial structure and improving its national living standard. Also worth noting is tourism, and if you can attract Chinese tourists in the future, you are inviting a human stimulus package . Chinese tourists to Africa are growing and last year Nigeria led the way with 200,000 visitors from China. This is also important to watch and may grow considering some incredible attractions being built in Nigeria (more on that next).
If you are not familiar with Eko Atlantic,it is worth checking out. Eko Atlantic is a new coastal city being built in Lagos on reclaimed land. That is right, Nigeria is turning the ocean floor into a Dubai style city in West Africa. Lagos is the world's fastest growing megacity and this new development will cement Lagos as THE city in Africa for finance, commerce, tourism, etc. Nearly 500,000 people are expected to live here and the development will include a business district full of skyscrapers. Eko will be home to independent and reliable electricity and water, advanced fibre optic telecoms, and state of the art buildings. This seems like a pipe dream in Nigeria and of course it will hit snags, but the construction is under way, and you can see it on Google Maps or Google Earth right now. Below are a few pictures and a quick video about the Business District. This is impressive development for a country with 20% rates and a stock market trading under 1.0 price to book. In addition to Eko Atlantic is Centenary City in the capital city of Abuja which is another impressive project.
As an investor that believes in technical analysis, I was not willing to invest in Nigeria until the wind moved the tree. Well as you can see on the charts, the wind has started to blow.
As you can see on the daily chart, price blasted through the 200 DMA and is breaking out.
Below is the weekly chart which shows us the break of the down trend as well as a breakout and a possible new up trend being established.
Below is the monthly chart which suggests that the bottom may be in.
Last but not least, take a look at the log scale thanks to my friend @KlendathuCap
A tree is best measured when it's down.
This beautiful proverb is true in investing, and in the US we have not had an opportunity to measure reality while the markets are down and experiencing real price discovery in quite some time. The Nigerian economy has been on the ground, allowing investors to measure the impacts of oil prices, trade, policy, currency risk, politics, etc. Those that measured a bright future like myself have decided to buy the Nigerian economy at a P/E of 10 and to wait to measure our gains later, in a growing forest.
This blog is for informational purposes only and should not be considered as investment advice of any kind, whatsoever, period, dot. You should also not consider any information from this blog as a recommendation, or an offer or solicitation for the purchase or sale of any security referenced. All information from sources are believed to be reliable although its accuracy or completeness cannot be guaranteed. All information and opinions are subject to change without notice because I am a trader and I change my mind like..a lot.