Nigerian Equities At 20-Year Low, Naira Undervalued By 30%, Says Renaissance Capital Report

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Renaissance Capital Africa says at the March 28 level of N1,303/$, the Nigerian naira is still largely undervalued to its long-term average, to the tune of 30 percent.

In its “Thoughts from Renaissance Capital Africa” report released on Tuesday, the firm stated that holders of equities had already seen gains of 20 percent since the end of February, as the naira strengthened from 1,600/$ to around 1,300/$.

It stated, “We expect a bigger rally to come. In US dollar terms, Nigerian equities are around the cheapest they’ve been in 20 years.”

Stressing that monetary policy had become sensible again, Renaissance Capital Africa explained that portfolio investors could now invest with some confidence that sooner or later, inflation will start to fall.

With Nigeria’s 25-year average rate moved from 900/$ to 1,200/$ in last month’s update, through to this month’s model update, the average rate, it said, was now back at 912/$.

The firm stated, “So at the March 28 level of 1,303/$ the NGN is 30 percent undervalued to its long-term average.  That’s the cheapest in Africa (just decimal places cheaper than Egypt) and only the Japanese yen is cheaper among 80 currencies we look at.

“We expect a surge in March and/or April inflation to erode that to perhaps 20-25 percent undervalued.  If the NGN stabilises at 1,269/$ – and if inflation was 20 percent in March 2025, this would take the average rate up to around the same level by March 2025.

“As such, the naira could stay here all year – which is much better return in one-year bonds yielding 18-19 percent than owning US treasuries at 4-5 percent.

“Alternatively, the CBN could drive the NGN spot rate stronger, perhaps to 1,100/$ – and then encourage a weaker monthly trajectory for the currency.  So, a 10-20 percent nominal NGN move stronger from here is plausible, and we ought to get a re-rating of the equity market too (as in Pakistan and Kenya).”

On the other hand, it said a worsening current account, higher than expected inflation, and insecurity were obvious risks, stating that if inflation surges to 50 percent in the next few months, then much of the undervaluation of the naira will disappear.

Renaissance said, “If inflation stayed at 50 percent into next year, the naira would become overvalued at 1,300 and would need to sell off again to become competitive. The 18 percent yield on one-year bonds would not look so attractive if we lose 20 percent on the currency.

“There are fiscal risks that could lead to higher inflation.  The government has an expensive liability via fuel and electricity prices.  The fuel subsidy may have been officially removed in 3Q23, when the fuel price went to around N550 and the exchange rate was more like N700-800/$.”

But on the positive side, it pointed out that the strengthening currency did make the headline fuel price less loss-making for Nigeria.

Also positive for Nigeria, it said, was the first quarter rise in oil prices. “If that could be combined with a rise in oil production too, a bigger current account surplus will make investors more confident, help FX reserves pick up and again improve investor confidence in the story,” it stated.

Renaissance stated that at the beginning of February, when the naira weakened to 1,600/$, there were not many believers in the theory that at a weak enough currency level, money would flow back to Nigeria.

However, it explained that it did also require a 400bp rate hike backed by an additional 200bp hike from the CBN, its biggest ever move.

The report stated, “But the shift has begun. Nigeria is about to give investors a positive return from investment. While we’ve seen this before (e.g. 2017-19) this time it is happening within a new market construct of sensible monetary policy and a floating currency rate that seems credible.

“What Nigeria is doing, when combined with the positive direction of Kenya and Egypt, too, is helping change global perceptions of Africa after a very tough decade indeed.

“Governments are showing they will undertake painful reforms, they will allow currencies to reflect market realities and these big economies will meet their debt obligations.  It is a vital message to send after 2022 painted a more negative picture of the continent’s ability to manage higher global interest rates.”

According to the group, Nigerian equities are about the cheapest they’ve been in a generation, while the currency is the cheapest in Africa. “2024 is a turnaround year for Nigeria and other key frontier markets,” it added.

Emmanuel Addeh

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