SHOULD YOU BUY A NIGERIA-FOCUSED ETF

 

Street scene in Lagos, Nigeria
Photo credit: Justin Hartman / Foter / CC BY-NC-SA. For see bizNews.com

For people looking to get some offshore exposure, ETFs are a quick and cost-effective option, and South African investors today have easy access to an unprecedented array of globally focused ETF offerings.
Those who have high risk tolerance and who want to take a punt on the growth of Africa may have, at one time or another, considered an African ETF, such as the Global X MSCI Nigeria ETF. Today, I’m going to ask whether a Nigerian ETF seems like a solid investment
The Global X MSCI Nigeria ETF
According to the fund literature, “The Global X MSCI Nigeria ETF (NGE) provides exposure to the largest and most liquid companies in Nigeria, giving investors a cost-efficient way to access a country with long-term growth potential.”
It’s major holdings include Nigerian Breweries, Guaranty Trust Bank, Zenith Bank, Nestle Nigeria, Ecobank Transitional, Guiness Nigeria, and Forte Oil. The holdings represent a fair sample of the mix of sectors likely to be big in Nigeria – consumer goods, financial services, and of course, oil.
The Nigerian economy has enjoyed a healthy boom over the last few years, fuelled by the twin trends of soaring oil production and the dramatic expansion of the Nigerian middle class. A great deal of investment flowed into the country during that period.
Lately, however, the mood has changed. In particular, the sharp drop in oil prices over the last five months has led to a strong sell-off of Nigerian assets. The chart below shows the sell-off of the Global X MSCI Nigeria ETF – as you can see, the last few months have been very rough.
Yet overall, the outlook for Nigeria hasn’t changed that much in the last six months. The economy continues to deliver solid growth, and there is every likelihood that when oil rebounds, Nigerian stocks will follow suit. Furthermore, the MSCI Nigeria ETF is focused on financials and consumer goods counters as much as it is on oil stocks, and those are likely to continue to deliver reasonable growth even as the oil industry takes a hit. Should oil recover over the next year or so, there’s every reason to think those stocks will do well.
In other words, it is possible that, right now, there is good value to be found in a Nigerian ETF like the Global X MSCI Nigeria ETF. Nigeria is a country with a lot of natural resources, and a large and vibrant population. There are a number of exciting businesses in the country, and every reason to think that Nigeria will continue to grow – albeit at a slower rate with the slowdown in the oil price – for years to come.
Downside risk
Of course, there is always a lot of risk when investing in a country like Nigeria, with its patchy history, and issues of corruption and domestic terrorism. So, while it is likely that there is value to be found in Nigerian equity, it is also true that there is a great deal of downside risk associated with the potential for a good return, and a Nigeria-focused ETF is not a good option for the faint of heart.