Nigeria ETF in Focus on Ongoing Election Concerns - ETF News And Commentary

The Nigerian economy is presently in a tough juncture having been stymied overall. If an acute oil price slump was not enough for its foul play against this key oil-exporting nation from the second half of last year, a postponement of the general election from February 14 to March 28 wrecked havoc in its economy, stock market and currencies.

Nigeria, Africa’s largest economy, has always been infamous for terrorism with the group Boko Haram planting bombs and executing abductions across the country. The government is unable to stop these antagonistic activities which in turn is contributing to political instability and waning economic growth. Apart from politics and regional strife, falling oil prices and sliding currency are putting a lock on exports, creating further instability (read: 3 High-Risk Country ETFs to Avoid Heading into 2015).

Thanks to these issues, the Nigerian bourse is one of the worst performers in the world this year, with a pure play Nigerian ETF, namely – Global X Nigeria Index ETF (NGE) – being the second worst performer in the emerging market pack, behind only Turkey ETF (TUR). NGE is down about 14.3% so far this year (as of March 9, 2015) and over 35% in the last one year (read: Can Turkey ETF Survive Political Woes?).

While piles of woes have been forming over the past few months, the latest round of blow came in the form of terrorist attacks and the government held up presidential elections by six weeks, referring to a dearth of soldiers. Now, most analysts and investors are apprehending ‘post-election violence’, if at all the election takes place on March 28.

Incidentally, the terrorist group Boko Haram has a strong hold in the Northern part of Nigeria and is trying to extend its reach. So, the six-week deferral has been decided on to prepare the Nigerian army to fight against the likely unrest in the northeast during the election.

Per sources, foreign investors dumped Nigerian stocks worth 846.5 billion naira ($4.5 billion) last year which was about 65% higher than the sell-off occurred in 2013. Apart from the oil rout, the lack of confidence in a smooth election led investors to flee the country’s stock exchange.

Citing oil issues, Nigeria has already cut its projection for economic growth in 2015 to 5.5% from the previously projected rate of 6.4% in December.  As per Reuters, oil explains about 15% of Nigeria's GDP while it comprises about 75–80% of government revenues (read: If Oil Prices Keep Falling, Avoid These 4 Country ETFs).

Now, the political tension has added to the woes. Thanks to these setbacks, Nigerian currency Naira has lost about 9.3% against the greenback so far this year (as of March 9, 2015) and about 20% since July 1, 2015, more precisely, since the oil tumult stared.

We expect the market mood over Nigerian stocks to remain surly given the heightened political risks. This is the reason why NGE is likely to exhibit a wild ride as long as the nation does not come up with an investor-friendly election outcome and ensure no post-poll violence. Below we highlight the ETF in detail:

NGE in Focus

NGE tracks the Solactive Nigeria Index to provide exposure to Nigerian equities having an asset base of $21.8 million. The fund trades in a paltry volume of about 55,000 shares a day, while charges 68 basis points as fees (see all Africa-Middle East Equity ETFs).

The fund provides a concentrated exposure to a basket of 24 stocks. NGE is heavily concentrated in its top holdings, with the top three firms occupying roughly two-fifth of total fund assets. Sector-wise, Financials dominates the product having a little less than half of the total fund exposure. Consumer Staples is the second largest sector in the fund with about 35% exposure.

The best part about this fund is it is relatively less invested in the energy sector which is presently in a tight spot. Though the fund has added gains in the last one-month period on firming oil prices, the gains could be short-lived as investors get jittery about its deferred election.

Bottom Line

Having said all, we would like to highlight that lately the Central Bank of Nigeria (CBN) confirmed the strength of Nigerian banks after conducting a stress test and assured “that the banks have adequate capital to absorb unexpected losses.”

So, from that point of view, the recent sell-off can be considered as an entry point to NGE given the fund’s tilt toward the financial sector and less focus on waning energy. However, to do so, investors need to have a hard head for risks as we currently have a Zacks ETF Rank #5 (Strong Sell) on NGE with a Medium risk outlook and it is the only Africa-Middle East equity ETF presently having a strong sell rating in the Zacks universe.

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