Nigeria misses out on emerging-market rally as vote nears

Emerging-market assets may be enjoying a strong start to the year, but one country missing out on the rally is Nigeria.

With investors fretting about tight elections just a month away, low oil prices and escalating violence, there’s little to suggest there’ll be an immediate turnaround.

The main stock index in Lagos, the commercial capital, has lost 4.6 percent since the end of 2018, which is the biggest drop globally after Serbia and Romania, according to data compiled by Bloomberg. Nigeria’s local bonds have returned 0.4 percent in dollar terms, less than the average emerging-market gain of 1.5 percent.

“We expect the trend in the market to be bearish before the elections,” Dele Akintola, an equity analyst at Standard Bank Group Ltd.’s Nigerian unit, said in a note last week. “The selling we have seen has been pretty broad-based but it isn’t a panic, more of a slow puncture.”

The Nigerian Stock Exchange’s Chief Executive Officer Oscar Onyema told reporters in Lagos on Monday that the first half of 2019 would probably be volatile.

Blue-chip names have not been spared. The biggest listed company, Dangote Cement Plc, has dropped 5.1 percent this year. Nigerian Breweries Plc, controlled by Heineken NV, is down 8.8 percent.

President Muhammadu Buhari, 76, is running for re-election on Feb. 16, with his main challenge coming from 72-year-old former Vice President Atiku Abubakar. Tensions have risen ahead of the vote, with Abubakar’s party accusing Buhari’s party of preparing to rig the polls, which it denies.

Nigeria, Africa’s most populous country and biggest oil producer, has also been hit by Brent crude’s 30 percent fall since October to around $60 a barrel. That’s crimped foreign-exchange earnings and put the naira under pressure.

The government’s spat with South African wireless operator MTN Group Ltd. hasn’t helped, either. Last year, Nigeria demanded that MTN return $8.1 billion of repatriated dividends and said that it needed to pay $2 billion of outstanding taxes. While MTN reached an agreement with the central bank last month that cleared it of wrongdoing over the dividends, the tax issue is still outstanding.

Silver Lining
The disputes have “harmed the perception of doing business in Nigeria,” Stockholm-based Tundra Fonder AB, which has about $200 million invested in frontier-market equities, said in a note to clients. “It will take the country several years to recover.”

One silver-lining is that local analysts including those at Standard Bank and Lagos-based CSL Research say the stock market will rally after the election, regardless of who wins. “We expect a recovery in the market in the second half of the year as the new administration assumes responsibility of steering the economy,” CSL analysts including Gloria Fadipe said in a note Monday.

According to NSE head Onyema, activity could pick up in the second half of the year on government spending and a boost in consumer demand if the 2019 budget is approved and implemented early.

Given “high potential upside in stock prices, we believe it makes sense for dollar-based investors to take positions on a one-year view now,” CSL said. “Albeit, we recognize considerable investor fatigue with Nigeria that could delay a rally.”

The benchmark index, which dropped to a bearish territory since August, climbed 0.3 percent on Tuesday, rising for a fourth day.