AFKI Market Journal: Easy Ways To Invest In Nigeria

AFKI Market Journal: Easy Ways To Invest In Nigeria

Nigeria is big. It boasts the largest population of any African nation, and it’s the seventh most-populous country in the world. All the more reason to invest in Nigeria.

Nigeria is young. Two out of every three of its citizens are under the age of 25.

Nigeria is increasingly rich. Its gross domestic product per capita has more-than doubled over the past 10 years.

Nigeria is reforming. Improved governance is bringing order to capital markets and industries ranging from oil and gas to banking and insurance.

No doubt, the West African nation remains beset by a host of grave problems — rampant corruption, religious violence, extreme wealth inequality, and inadequate infrastructure, to name but a few.

But an increasing number of investors have put the risks and potential rewards in the balance and decided to put their money to work in the country.

Foreign direct investment has topped $20 billion during the past three years. No other African country attracted more.

And now, with the Nigerian Stock Exchange’s All Share Index gaining 44.6% in dollar terms in 2013, individual investors are looking to get involved.

How to Participate in Nigeria’s Growth

Unfortunately, if you don’t live in Nigeria, the process to set up and fund a local brokerage account can be a hassle.

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But the Nigerian Stock Exchange got a lot more accessible to U.S. investors with the launch of the Global X Nigeria Index ETF (Ticker: NGE) in April 2013.

The NGE exchange-traded fund is comprised of 32 of the Nigerian Stock Exchange’s biggest companies.

The fund’s 10 largest holdings are as follows:

  • Guaranty Trust Bank (10.9%) – Nigeria’s largest bank, it recently bought a controlling interest in Kenya’s Fina Bank.
  • Zenith Bank (9.0%) – A fast-growing commercial bank that prides itself on its customer service.
  • Nigerian Breweries (7.3%) – The country’s largest brewer and proud maker of Star Lager.
  • FBN Holdings (6.9%) – Parent of Nigeria’s oldest bank, it maintains the industry’s most extensive branch network.
  • United Bank for Africa (5.1%) – One of Nigeria’s most expansion-minded banks, it boasts operations in 19 African countries.
  • Nestle Nigeria (5.1%) – The local subsidiary of the global food giant manufactures a portion of its product domestically from locally-sourced ingredients.
  • Afren (5.1%) – A London-based oil and gas company with interests in numerous Nigerian wells.
  • TGS Nopec Geophysical (4.9%) – A Norwegian firm that provides geological data to oil and gas companies working in Nigeria.
  • Saipem (4.7%) – An Italian oil and gas contractor with extensive Nigerian operations.
  • Seacor Holdings (4.0%) – Owns a fleet of vessels that service Nigeria’s offshore drilling industry.

As you can see from this list, the exchange-traded fund is heavily weighted toward large-cap banks and the upstream oil industry. This means that it missed out on the NSE’s best-performing sectors last year – downstream oil companies and pharmaceutical manufacturers.

Still, the NGE has posted an 8.5% return since its inception and a 16.2% gain over the past six months. This figure doesn’t factor in the trailing dividend yield of 1.3%.

Moreover, better returns look like they could be in the offing. The fund’s weighted average return on equity (ROE) is a remarkable 43.0% – a figure made all the more impressive when compared with its 1.8 price/book ratio. It presently trades at a 2.5% premium to its net asset value.

With assets of just over $7 million, the NGE remains quite small for an exchange-traded fund, thus the expense ratio is a shade higher than many of its peers. In an effort to make the fund more attractive to potential investors, management effectively subsidizes operating costs so that they don’t exceed 0.68% of net assets.

If management is able to further diversify the fund’s holdings, such an expense ratio may prove to be a pittance for long-term investors.

Ryan Hoover is an investment analyst with Africa Capital Group and the founder of InvestingInAfrica.net. Contact him at ryan@investinginafrica.net.