Old Mutual Investment Group remains underweight to Nigeria in their portfolios relative to the MSCI Africa indices on concerns around currency devaluation and the economic slowdown, according to portfolio manager Cavan Osborne.

“Our Nigerian exposure tends to be the higher quality companies. While the prices of the listed banks seem to be reflecting these concerns, the consumer stocks are, by our analysis, not building in any disappointing news in the short term. The call on Nigeria is a call on the oil price,” he said.

Osborne, who manages the Old Mutual African Frontiers Fund, and is the lead manager of the Old Mutual Pan African Fund, said that while many free-floating emerging market currencies have weakened, and in particular the oil exporters, Nigeria has decided to keep its currency stable over the past six months.

The Central Bank Governor and the President have committed to maintaining the Naira at N199 to the US dollar.

“In fairness, the currency has depreciated by 20% over the last 12 months. Given that President Buhari has only recently been elected, it is unlikely that he is going to change his mind in the short term,” he said.

He added that if the currency doesn’t depreciate, then it is likely that exchange controls are going to get more severe.

“To further try and reduce demand for US dollars, the Central Bank introduced a law that disallows Nigerian banks from taking dollar deposits. So, we highlight that repatriating money from Nigeria could be a real problem in the short term,” Osborne said.

The Central Bank of Nigeria has also introduced regulations that have been driving down banking sector profitability.

These negative returns from regulation are now being compounded by potential bad debts.

“Nigerian banks have 20%-30% exposure to the oil industry, which is under pressure given the low oil price. Loans to the upstream companies have already had to be restructured. These loans tend to be large and are therefore syndicated among the banks. Because these oil loans have been restructured from five years to seven years, they are (mostly) no longer classified as non-performing,” he said.

“But we remain very concerned. The other problem area for banks is lending to ‘general commerce’. These are often loans to customers that are importing goods into the country. Many of these customers are in trouble because they can no longer source currency through official channels and their suppliers do not want to accept Naira,” said Osborne.

When speaking about consumer companies, Osborne said that volumes are down for most companies.
He expects turnover growth to be low, and margins to compress.

Nevertheless, he said that the key positive is that most of the consumer companies have significant spare capacity.

“Many of the businesses saw the long-term potential of the country and have been positioning ahead of the growth. It means that in the short term, despite pressure on profits, cash flows should be fine as capital expenditure is likely to reduce,” said Osborne.

“The other reason to be wary of not owning the Nigerian consumer companies, is the potential for M&As. In July, Guinness Nigeria’s parent company Diageo made an offer to minority shareholders, and Unilever has made an offer for Unilever Nigeria. So parent companies are seeing the current market weakness as an opportunity,” he added.