CAPITAL MARKETS: Betting bus-loads of cash
By Matthew Green
Published: July 12 2007 10:49 | Last updated: July 12 2007 10:49
Keen to dispel doubts about Nigeria dating back to army rule, the promoters of the Lagos stock exchange have found
a potent catchphrase to lure investors – “the highest returns in the world”.
Some banking stocks have trebled in the past six months alone – the most spectacular sign of the shift in the
country‟s status from marginal emerging market play to star performer.
Driven by a combination of government reforms, debt relief and high oil prices at a time of heightened appetite for
new types of risk, the gains have revealed a glimpse of untapped potential and looming hazards.
“We‟ve made a bus-load of money betting on this market,” says Bolaji Balogun, managing partner at Chapel Hill, an
advisory firm in Lagos. “There‟s a massive number of Nigerian investors who are investing their capital here. That‟s
what‟s attracting a lot more of the international money.”
Some analysts expect soaring stock prices to suffer a correction in the next year, although many operators believe
strong local demand has reduced the chance of a crash.
A history of military rule put Nigeria largely off limits for foreign investors until a few years ago, when the government
of former president Olusegun Obasanjo embarked on a programme to overhaul what could be Africa‟s economic
powerhouse.
Nigeria slashed $36bn in external debt in 2004 to $3.5bn today, improved monetary stability through reforms backed
by the International Monetary Fund and accumulated robust foreign exchange reserves, although domestic debt has
risen sharply.
A tougher line on money laundering and a newly-awarded BB- sovereign debt rating added to the allure at a time
when global funds were turning to Africa as an antidote to dwindling returns in established pastures.
The sheer size of the country‟s debt and equity markets has enticed hedge funds that worry about liquidity in smaller
sub-Saharan countries, while strong domestic buying insulated Nigeria from a global sell-off in March.
Violence and rigging rendered April elections that brought President Umaru Yar‟Adua to power illegitimate in the eyes
of many Nigerians, but investors see the first civilian-to-civilian handover since independence as a sign of stability.
“Three years ago, I would not run into a room and meet JP Morgan and Morgan Stanley,” says Ike Chioke, deputy
managing director of Afrinvest West Africa.
“But now I would easily expect that if I go to any of the big hotels in Lagos and just sat around the restaurant I would
see three different investment banks all having lunch.”
Foreign interest has focused mainly on bonds in the last two years, though a fall in yields on government paper has
switched investor attention to frenzied activity in the banking sector.
The central bank fired the starting gun in June 2004, when it raised the minimum capital requirements for banks more
than tenfold. A wave of initial public offerings and mergers followed as bigger fish swallowed the minnows. Guaranty
Trust Bank brought Nigeria back to the international capital markets for the first time in a decade this year by offering
$350m of five-year eurobonds, but the eye-popping action has been on the Nigerian Stock Exchange (NSE). The
NSE all-share index has almost doubled to 51,000 points in the past year. Total market capitalisation has increased
to N7,8000bn from N2,9000bn in the same period, with banks making up more than half the total.
Despite signs of interest from hedge and private equity funds, Niwgerian money is the driver. Pension reforms are
creating an estimated $2.5bn of new savings each year, a big catalyst in channelling local funds into the market.
A flood of new retail investors from within the country and the wealthy diaspora have also joined the scramble for
banking stock offers, spurred on by advertisements with “share hotlines” suspended above ubiquitous traffic jams in
Lagos. Since the start of this year, Fidelity Bank and First City Monument Bank shares have jumped more than 300
per cent, while stocks such as Zenith Bank, Oceanic Bank International, Diamond Bank, and Access Bank have all
risen more than 100 per cent. Other sectors have recorded more modest gains, apart from Dangote Sugar and UTC
in the food and beverages sector, which more than doubled in value this year.
The obsession with banks may not be healthy. The rush has made it harder for sectors such as food and beverages
or oil and gas to raise money on the market for investments needed to stimulate wider economic growth. With the
country still crippled by power shortages and a lack of basic services, with the oil-producing Niger Delta still volatile,
and with the new leadership still untested, there are also question marks over more optimistic assumptions on
Nigeria‟s growth prospects.
Short-term risks may be even higher. A growing herd of private investors is taking bank loans to buy more banking
stock using yet more banking stock as collateral. Already, analysts at Afrinvest estimate that about 10 per cent of the
total market capitalisation on the stock exchange may consist of loans leveraged into equity, a higher figure than on
many comparable markets. A shock such as a corporate scandal or a plunge in oil prices could cause a stampede to
get out, straining banks who extended credit to speculators
“It could lead to a meltdown,” says Bismarck Rewane, director of the Financial Derivatives Company Ltd. “The most
conservative people that I know are saying „unload my entire portfolio, I want to go into the equity market.‟ My sister-
in-law doesn‟t know the difference between a stock and a bond, yet now she‟s sold property to go into it, she‟s going
to start crying.”
Copyright The Financial Times Limited 2007