Is Africa's largest economy finally getting into motion? - Fact sheets May
Within the Frontier Markets universe, all eyes were on Nigeria last month as the inauguration of President Bola Ahmed Tinubu, the 16th president of Nigeria, took place. In his speech, the new president promised economic reforms with the aim of achieving a minimum annual economic growth of 6%. The stock markets responded positively, and the Nigeria All Share Index shot up by 5%. As of the time of writing, the index gained 12% (in euro) since the beginning of this year.
To reinforce his words, Tinubu announced the immediate termination of fuel subsidies. This will result in a direct budget saving of $12.9 billion, which accounts for about two-thirds of the expected oil and gas revenue. The freed-up funds can now be invested in infrastructure, education, and healthcare, according to Tinubu.
The new president inherits a struggling economy from his predecessor, Muhammadu Buhari. The country, with a population of 222 million, is burdened with a towering debt, a shortage of foreign reserves, fuel shortages, high inflation, and a weak currency.
Although Nigeria is rich in oil and is Africa's largest producer, it has limited refining capacity. For years, it has traded crude oil for refined oil from abroad, which was then subsidized on the domestic market. This has led to significant losses in revenue and foreign exchange reserves, contributing to the increasing debt burden. The removal of subsidies will be beneficial for the economy in the long term, but in the short term, citizens are being hit hard as fuel prices have suddenly tripled. This results in higher transportation costs, rising food prices, and increased electricity costs for those using generators.
Another problem in Nigeria is the artificially high exchange rate against the dollar. On the black market, people can exchange their money for dollars at a Naira rate that is 60% weaker than the official market rate. This difference hinders capital inflow and foreign investments. Direct foreign investments in the West African country have declined by 52% over six years, reaching $698 million in 2021. Tinubu has stated his intention to put an end to the dual exchange rates.
If the currency is devalued, the value of Nigerian investments will decrease due to the lower Naira rate. At the same time, the expected response in the stock market is that stocks will rally, as it will give foreign investors the opportunity to trade freely in Nigerian stocks. We have seen this effect occur in Egypt before when the currency had to be devalued. Due to the current situation, Nigerian stocks are extremely undervalued. Most banks are trading at a price-earnings ratio (P/E) of 3x, with a dividend payout of 10% to 15%.
Within the portfolio, for example, we hold a position in Access Holding Bank. Over the past ten years, the bank's revenue and profit have quintupled, and it has significantly expanded its international operations, making its results not solely dependent on the Nigerian economy. The bank is now active in 17 countries, including China and India. The stock is trading at a P/E ratio of 2.3 with a dividend yield of 11.6%. Recently, we reinvested dividend income from Nigeria into Lafarge Cement. This cement producer is trading at a P/E ratio of 6.4 with a dividend of 10%. The company operates in Nigeria and South Africa and may benefit from increasing infrastructure investments under the new president, Tinubu.
More news about Vietnam, Africa and the Global Frontier fund can be found in the latest fact sheets of the equity funds:
TCM Global Frontier High Dividend Equity
TCM Vietnam High Dividend Equity
TCM Africa High Dividend Equity
