With the Nigerian economy courting imminent recession and the inflation level touching six-year highs, Nigerian President Muhammadu Buhari has given the green signal to the central bank to introduce a more flexible exchange rate system. A flexible system will let market forces determine the value of the local naira currency.
The Nigerian currency, naira, is considered overvalued due to a pegged regime. An overvalued currency acts as an overhang on the country's growth and investment. This move by the Nigerian government has led to speculations about the devaluation of naira, which could be beneficial for the country in the long term.
Nigeria, Africa's largest economy, has been hit by low crude oil prices, as it depends on oil for 70% of its revenues. As a result, Nigeria's economic growth represented by the country's gross domestic product shrunk in the first quarter of 2016, as manufacturers faced difficulty in importing raw materials and other equipment. The Nigerian economy was already reeling under higher unemployment, a weak currency and civil unrest.
Several market participants see the recent steps by the Nigerian government as too little, too late, and believe that the nation is heading into a recession.
In this scenario, we highlight the sole ETF targeting the country, the Global X MSCI Nigeria ETF (NYSEARCA:NGE), which is likely to be on investors' radar in the coming days (see Africa-Middle East Equity ETFs here). NGE has a Zacks ETF Rank #3 or "Hold" rating with a High risk outlook, and has gained 9.6% in the past 30 days.
NGE in Focus
NGE tracks the MSCI All Nigeria Select 25/50 Index to provide exposure to the largest and most liquid companies in the country. It has an asset base of $25.1 million. The fund trades in a paltry volume of about 90,000 shares a day, while it charges 93 basis points as fees.
The fund provides a concentrated exposure to a basket of 21 stocks. NGE is heavily concentrated in its top holdings, with the top three firms occupying more than one-third of total fund assets. Sector-wise, Financials dominates the product, having a little less than half of the total fund exposure. Consumer Staples is the second-largest sector in the fund with about 39% exposure.
The best part about this fund is it is relatively less invested in the Energy sector, which continues to be in a tight spot. Though it has gained in the last one-month period on firming oil prices, the gains could be short-lived as investors get jittery about recessionary pressure.