Nigeria in 2021: Navigating murky waters

Nigeria in 2021: Navigating murky waters

  • FX is Nigeria’s biggest economic challenge and a key concern for foreign investors
  • The strong performance of Nigeria's stock market in 2020 was driven by local investors
  • Falling interest rates will continue to propel a strong bull market in Nigeria equities, at least over Q1

Macro

Nigeria’s economy, like the rest of the world, has had to struggle through the impact of COVID 19. As the effect of the pandemic and intra-OPEC rifts led to a historic oil price crash in H1 20, Nigeria’s already feeble external position was threatened. As a consequence, Nigeria suffered stagflation in 2020, entering its first recession since 2017 while inflation soared, fanned by the naira devaluation and increased food prices.

At the centre of Nigeria’s economic challenges is FX. While investors’ outstanding backlogs have dropped from US$2bn in August to US$600-800mn in December, driven by de-facto capital controls, foreign investors are unlikely to return unless certain measures are put in place (which we outline in the full report). The liberalisation of the FX regime is the only way out, but appetite under Central Bank Governor Godwin Emefiele and President Muhammadu Buhari seems limited. The one-off devaluation at the end of 2020 has already been reversed, but it could signal another devaluation to come.

Equities

Despite weak macroeconomic fundamentals, Nigerian equities pulled off one of the best market performances globally. But this was driven by local investors' clamour for higher-yielding assets, following the crash in fixed income yields.

With the rally, the P/E multiple of Nigeria's main stock index has increased from 9x the beginning of 2020, to 16x now. This is well ahead of the 5-year average of 12x and also makes it more expensive than Kenya and Egypt, both at 12x.

Regardless, we see the stock market maintaining its bull run (although probably with slower momentum) at least over Q1, as yields are likely to remain suppressed and as companies churn out positive earnings.

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