Earlier this month Global-X Funds offered their first single country ETF, NGE (Nigeria). This ETF allows those who seek investment opportunities in the frontier market a rare opportunity, early exposure to a rapidly growing economy. However, as most Americans know, Africa is strife with problems and Nigeria is no exception. Do the potential returns associated with this investment outweigh the risks? First, I want to explore the reasons why investing in Nigeria is a solid investment with long term returns.
- Goldman Sachs included Nigeria in its Next 11 economics; a fast growing market that is expected to be an important source of global economic growth and opportunity in the future.
- It is the 7th most populous country in the world and the most populous country in Africa with 63% of the population under the age of 25.
- The government has implemented pro-market reforms and privatization in the power and gas industries. Furthermore, it plans to privatize 17 companies in the power sector to increase competitiveness.
- The Nigerian Stock Exchange is in active discussion with the national oil company to list a portion of their joint venture on the exchange, allowing for investors to gain additional access to this sector.
- Nigeria has emerged as the largest destination for FDI in Africa. Qatar has invested $390 million to upgrade the transport sector and China has invested $1 billion for a hydro-power project.
The Financial Times stated that potential investors see Nigeria as an increasingly attractive frontier market, especially when returns elsewhere in the world are slowing. However, frontier markets are high risk investments and Africa poses an even higher risk. Now, I will look at the reasons why Nigeria is a poor investment idea in which all your money could be lost.
- African securities involve heightened risks due to confiscatory taxation, political instability, armed conflict and civil war.
- Nigeria has tense relations between the Muslim North and Christian South as per-capita allocations are vastly different with the North receiving $7.29 per person and the South receiving $21.00 per person. This partially attributed to the South retaining government control for all but three years since 1999.
- The government depends on oil for 80% of its revenue. Moreover, oil must stay above $75 to maintain a stable macroeconomic environment over the next year.
- NGE is allocated into 41% financials and the North’s inhabitants who comprise more than 50% of the population are among the poorest in Africa, representing a less attractive market for banks.
- Border closures due to Islamist violence in the North has decreased trade from Chad, Niger and Cameroon who used to travel to markets to buy Nigerian products.
Overall, Nigeria is a complex nation on the brink rapid economic growth. The risks mentioned can keep Nigeria in a perpetual cycle of being a part of the bottom billion. However, the Southern half of the nation is ready for market reform and embraces the capitalist mentality. A young population and a strong push toward economic liberalization could set the stage for a growing middle class and the potential to achieve the next leg up in economic development.
Clearly I have only provided a brief overview and further research is needed but does this investment opportunity warrant further research?
Very hard country... For whatever reasons, my family has been reasonably active there for the last couple of years in O&G and bribes drive business. Then you have tankers being stopped, documents 'lost' for these, pipelines ravaged... Barely any collaterals. Very resource rich country, but it's not for everyone.
Absolutely. I think all of sub-saharan Africa is. I was visiting my sister, who lives in Mozambique, and you can see the FDI everywhere. E&Y and Deloitte are everywhere. Literally off the plane the first thing you see is a huge E&Y billboard. China is also everywhere. They're developing soccer stadiums, resorts and other random things in exchange for the biggest prize in sub-saharan Africa: oil. Its being found everywhere and Cnooc (and Exxon as well) are going all out for it. This could be a good thing...if they trade their oil like this maybe they can avoid dutch disease.
I think the best play however is Vodafone. Literally everyone in Africa is starting to use cell phones. They all buy prepaid minutes and use phones from Vodafone. I was never a huge fan of the company, until i took this trip and saw Vodafone EVERYWHERE. Now its one of my biggest positions.
The only problem I have is credit. It seems like all the countries are able to modernize by borrowing/trading oil fields. Going forward it will be interesting too see, but it really looks like ss Africa could be the next emerging market bubble.
South Africa is obviously the most famous economy, but I don't think its the best going forward. Its already boomed so much, and other countries will have so much easy growth...Maybe this will turn Rwanda into the new Singapore. They're really making the push and FDI would certainly be an insane boom for the country.
I'v hade my eye on Africa for years and it will certainly be interesting to see what happens.
This seems like an interesting play that could pay big dividends because I don't think that Wall St has Vodaphone's Africa presence on their minds right now. Also it would be insulated from any single african country's turmoil's, no matter what people still need phones. The key would be finding the catalyst so that you don't hold the position forever before realizing a profit.
Absolutely. The only two things people look at in the stock are how the eurozone is doing and what will they do with their verizon wireless stake. The catalyst would probably just be the growth of the region. I like it as a play for that because the stock is also essentially hedged by where else they sell phones (europe, brazil, etc). I bought it on when people were predicting that Europe would cease to exist and plan to hold it untill Europe literally does not exist.
I'd question whether the majority of Americans know anything about anywhere outside the USA, aside from "commies and Al Qaeda".
Anyway, the problem with Nigeria (and all of Africa) is the corruption and lack of investment in infrastructure. China is investing heavily in some countries in order to gain access to the resources and it's going to pay off big time for them. I'm not so convinced about actual equities in the medium term.
agreed.. lots of money to be made but lots of risk to be taken..
I have been spending some time recently researching investment opportunities in Africa. A couple of weeks ago I attended an international business conference at my university where one section of presentations was on Africa, specifically the nations of the SADC (Southern African Development Community). I can not speak as to the specific figures related to things like infrastructure spending; however, the presenters did spend time talking about infrastructure in these countries and made a relatively strong case as to why the countries in the SADC have been working to improve infrastructure.
I think that there do exist potential opportunities in Africa, not necessarily just Nigeria, that deserve additional research but it is somewhat difficult though to actually invest there due to a lack of vehicles focused in Africa. For example, there do exist several mutual funds, and now this ETF, that invest there but they all have some downfalls in my opinion that would keep me from investing with them. One is that these funds tend to be mostly invested in financials in various African economies. That isn't necessarily a bad thing but I am more interested in investing in the companies that are growing there such as a few food chains, breweries and distillers, construction companies, and others. I'm also interested in the possible growth in disposable income of the general populous in these countries and the impacts that would have on consumer based companies there. Another "problem" is that these funds often only invest a part of their capital in Africa. Some of these funds also invest in the Middle East and Asia so if you are specifically wanting to target Africa these funds may not be for you. Although the case can be made that taking a more global approach to emerging markets and only placing a proportion of the fund's assets into Africa can assist in the diversification of the fund and potentially limit the downside that could occur from instability in African countries that tends to come and go over the years.
Yet another problem, or at least a problem in my eyes, relating specifically to this ETF is that Africa is a place where I would want a portfolio manager to be constantly overseeing the fund. In this case I wouldn't mind paying someone who is familiar and experienced with this region to oversee the investment choices and allocation. An ETF is not going to offer that generally so you as the investor has to hope or determine that the holdings of the ETF are in fact what you would want to invest in for a longer period of time with little modification. Perhaps I'm wrong here but that wouldn't be the first time.
All in all I think there exists strong potential for investment in Africa but it certainly has its share of risks. That's just something that each individual investor will have to weigh for themselves to see if it's worth it.
Thanks for the great overview. I completely agree that I was highly disappointed with many of the Africa/Middle East ETFs I have reviewed focus a allocate a substantial portion of their fund to financial. I would rather focus on the issues you mentioned, in addition to infrastructure, housing, energy etc...
Additionally, I must agree that the lack of oversight within the ETF is concerning. An ETF in a developed nation that is not being constantly managed is understandable, however in a region known for many problems paying someone to constantly manage the portfolio would be well worth it.
Financials will be by far the largest industry sector that is available in emerging/frontier markets. Banks can grow through a combination of 1) economic growth, 2) penetration deepening and 3) market share. In addition they are usually some of the largest institutions in a country and the earliest/most sophisticated to tap capital markets. The reality is that it will be much easier for you to invest in them than a family-owned retail operation. The alternative is FMCG, telecoms and energy but in the end you really do not have much investment choice. Of course, the Nigerian banking sector has had its own crisis and one might argue you're better off with an active manager but don't expect your portfolio to be free of financials either way!
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