A higher oil price will help the Nigerian economy, but it is not required to make the Nigerian banks very attractive investments, according to Andrew Lapping, Portfolio Manager at Allan Gray.

Lapping, who manages the Allan Gray Africa ex-SA Equity Fund, said that the Nigerian stock market is very weak as the naira/US dollar peg is unsustainable and the economy is fragile.

He added, however, that Nigerian bank share prices are pricing in a greater than 50% chance of bankruptcy.

“We think most of the banks will survive and some will thrive as the Nigerian economy is not only about oil,” he said.

“We have taken this opportunity to invest in what we think are quality franchises at very depressed prices. We think these prices more than compensate investors for the currency and economic risks,” Lapping said.

As of March 31, Nigeria tops the $231m Allan Gray Africa ex-SA Equity Fund’s allocation at 26%.

The Fund is exposed to the oil market through its investments in Nigeria’s Seplat Petroleum Development Company, as well as indirectly though the Nigerian banks.

The first quarter of the year was particularly volatile for the Fund, which closed 4.4% down for the quarter, masking substantial intra-quarter moves and sector-specific contributors and detractors.

“There were no major position changes in the Fund, but we did initiate a few smaller positions in Egypt and selectively added exposure to Nigerian banks,” commented Lapping.

He added that sentiment towards the oil market is very poor: commentators who in July 2014 thought the oil price would remain steady above $100/bbl are now calling for the price to remain below $40/bbl.

“While we are the first to admit that forecasting commodity prices is extremely difficult, we do have a view on the oil price, which is premised on sustainability and the business cycle,” Lapping said.

“We currently aren’t modelling the oil price returning to its previous highs, but if it does we won’t complain. Fortunately, Seplat, our largest oil exposure, offers good value at the current oil price and higher prices offer further upside,” said Lapping.