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The decision by the Central Bank of Nigeria (CBN) to ban many investors from the OMO auctions has had a huge effect on local bond yields, with short term rates almost halved since October.

Nigeria update

Inflation is sticky at 11-12% and not expected to come down anytime soon.

Nigeria update

Equity market in 2019 has been anything but exciting at -10% including dividend, and are trading at or close to 10y PEx and PBx lows.

Zimvest

Average daily turnover is muted around USD 9m (Back in 2013-2014 USD at 25-30M was the norm).

Standard chartered

GDP growth expectations are bleak; IMF expects 2.5-2.7% annual growth (2019-2024).

Standard chartered

We saw a pick up interest in November (after the new OMO guidelines) when both turnover and stock market spiked, especially the financial sector which continues to deliver profit growth. But all banks (except Access) are still down 15-25% YTD.

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The banks are now on average trading at PE 3.2X FY20e, PB 0.7X FY20e and an estimated dividend yield of 10.2% and almost 10% EPS growth.

Local pension funds have halved their equity exposure to 5% in September 2019 from 10% in beginning of 2018, investing pension inflows outside the stock market (graph from @efghermes).

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In the Nov 27 Nigerian Bond auction, Total subscribed interest was USD 1465M for USD 415m offered, 3.5x.

Conclusion

There is a lot of money looking for returns and willing to accept negative real returns investing in bonds, rather than investing in the stock market at bottom, valuations where dividend return is expected in some cases are at, or higher than inflation.

Hint: Doubling equity portion of pension fund holdings to 10% (still low for a long term investment portfolio in my opinion) =165 days of average daily trading. And subscribed interest in the Nov 27 bond auction also equals 165days average daily trading.

ABOUT THE FUND MANAGER

Mathias Althoff is a portfolio Manager at Tundra Fonder, he has over 15 years of emerging/frontier markets experience following equity markets, company strategies and company valuations as well as cultural history.

His other specialities include portfolio management, equity valuations, investment advice, macro research and strategy. Prior to working as a portfolio manager in Tundra, he worked as a Manager, Asian Equities in the Carnegie Investment Bank and HQ Bank respectively.

Tundra Fonder (Tundra), with AUM of over $400mn (Mar 2018), is a Swedish asset manager specialising in frontier markets. They manage funds with local research offices in Asia and have one of the largest investment teams dedicated to frontier markets in the world.  Tundra has been approved by the Swedish FSA to manage mutual funds and alternative investment funds as well as discretionary mandates. Tundra is a member of The Swedish Investment Fund Association and SWESIF.

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