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Morgan Stanley Sees Nigeria Bond Return After 2014 Exit

Morgan Stanley Sees Nigeria Bond Return After 2014 Exit

By Paul Wallace | From Bloomberg News

Morgan Stanley, which sold all its naira government bonds last year, said it may start buying again in the second quarter if Nigeria devalues the currency and lifts foreign-exchange trading restrictions.

“We believe that Nigerian policy makers will allow for the necessary policy adjustments” after presidential elections on March 28, Jens Nystedt, portfolio manager and head of sovereign research at Morgan Stanley Investment Management’s emerging markets debt team, said in an e-mailed response to questions on Wednesday. “There will likely be an attractive opportunity in Nigerian assets at some point during the second quarter.”

Trading restrictions imposed by Nigeria’s central bank to protect the naira, which has fallen 18 percent in the past six months, crushed liquidity and mostly kept the unit within a band of 198 to 200 per dollar since mid-February. The currency of Africa’s biggest economy and oil producer rose 0.3 percent to 199.05 at 3:50 p.m. in Lagos. Non-deliverable forwards suggest it will weaken to 259 in a year and naira bonds are the second- worst emerging-market performers this year.

Morgan Stanley Investment Management, which oversees $400 billion of assets, joined other investors including Aberdeen Asset Management Plc in cutting holdings of naira bonds last year as collapsing oil prices battered the country. The postponement of the elections by six weeks last month amid worsening attacks in the northeast by Islamist group Boko Haram further dented confidence.


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Right Scenario

“It would be unwise to go fully back to market weight or overweight” before the vote when the currency “hasn’t fully adjusted,” said Nystedt. “At current oil prices we still consider the naira overvalued. At this stage, foreign-exchange forwards are pricing in a scenario that looks to us about right.”

JPMorgan Chase & Co. said on Jan. 16 it may remove Nigeria from its local-currency emerging-market government bond indexes tracked by more than $200 billion of funds after earlier central bank measures limited dealing in the naira and made it difficult for foreign investors to sell local bonds. New York-based JPMorgan will make its decision by mid-June and Morgan Stanley wants more clarity on Nigeria’s inclusion in JPMorgan’s GBI-EM indexes before it buys naira debt again, said Nystedt.

Foreign holdings of domestic government debt have fallen to 14 percent of the total from 27 percent since 2013, according to Standard Chartered Plc. Nigerian local sovereign bonds have lost 9.1 percent this year, the most among emerging markets after Brazil, according to Bloomberg indexes.

While Morgan Stanley expects Nigeria to be kept in the indexes, liquidity in the bond and foreign-exchange markets has been “much reduced,” said Nystedt. “The risk is that there is a significant overhang in dollar demand once dollars are made more freely available.”