Nigeria: What's The Story Beyond Oil?

Includes: NGE
by: Federico Chirico


Despite the recent challenges faced by the country, investors and analysts do not seem to have lost confidence in Nigeria.

Surprisingly attention is no longer focused exclusively on energy.

An important retail business is growing driven by strong demographics.

Looking at the latest headlines from major financial journals, it clearly seems that Nigeria has been in the news for all the wrong reasons in the last 6 months. The suspension of Mr. Sanusi from Nigeria Central Bank governor together with an escalation of corruption scandals, terrorist issues, and the decline in international reserves seemed to mark a turnaround point for the country.

But despite the several challenges, market analysts and investors do not seem to have lost their confidence in Nigeria's potential. Rating agency Fitch has confirmed the stability of its outlook due to strong economic fundamentals and a continued strong GDP growth, while equity index provider MSCI increased the weight of Africa's biggest economy in its frontier market index to 19 percent, triggering a 4-month high on Nigerian Stock index. So where is this reliance coming from? The fact that the country is a key global player in the oil and gas business does not appear to be enough to explain such a trend.

Demographics seems to be the main underlying factor leading for confidence, as Nigeria is a very big market to serve with rising per capita income. According to Oxford Economics, population is expected to arrive above 200 million by 2020, making the country the fifth most populated in the world, and the most populated in Africa. Its middle class, formed by barely one million individuals until few years ago, exponentially grew to the current 5 million.

The recent rebasing of Nigeria's Gross Domestic Product with the primary purpose to reflect more accurately those sectors that were almost non-existent in the early 90s, provided and in depth look at the country's economy and suggested indeed that investment appetite is not limited to energy sector.

According to this exercise, telecommunication has been highlighted one of the most vibrant sectors, with MTN, Airtel and Globacom, now well known retail brands, as outcomes of the rapid development of an industry that was negligible just two decades ago. Given the lack of line infrastructure and the still increasing demand for mobile services, operators are expected to grow exponentially and be a potential target for investments in the following years.

Another element emerging from the rebasing is the greater relevance gained by the entertainment sector, where the local film industry represents one of the greater export potential for the country in the long run. According to a recent report from Financial Derivative Company, "Nollywood is now estimated to be worth about N853.9billion ($5.1billion), about 1.2 per cent of the revised GDP number." These numbers are impressive if we consider that Nigerian movies are still considered as semi-professional and are far from comparable to more conventional movie industries. The great demand across the continent and the relatively low production costs make this business an ideal entry point for investors.

The Global X Nigeria ETF (NYSEARCA:NGE), seems to be the right financial instrument to capture this trend. Launched more than a year ago, the fund has an exposure of 18.27% of its portfolio to consumer goods companies and 39.59% of its assets invested in the Nigerian financial industry, whose success is strongly correlated to retail banking development. Only 28.52% is allocated to the Oil & Gas segment. Despite the challenges faced by the country, the fund managed to achieve a performance of 1.91% year to date. Not a bad result considering the context and the future potential.

These positive stories alone do not sweep away the concerns of a country that still needs to find its way to stability, but it is also possible to say that Nigerian growth is no longer oil dependent but is rather more connected to good governance. The challenges faced by terrorism, the reaction of the economy to tapering and, most importantly, the elections in 2015 are the factors that will determine the long-term investment growth in the country. If the country will manage to address these challenges, it will have the way paved to success.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it. The author has no business relationship with any company whose stock is mentioned in this article.

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