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Lower oil and higher gold could be great for African investments

Falling crude (CLJ16.NYM) prices and the rallying gold (GCJ16.CMX) market could mean bad news for some but good news for many investors in Africa.

Long considered the ultimate frontier market, Africa comes with big opportunities  and  big risks  from its abundant natural resources. That’s especially the case with Nigeria, the continent’s largest oil producer, which has a capacity to produce 2.5 million barrels of crude per day.

But with oil prices depressed to near multi-year lows, Nigeria's economy is facing challenges. Interest rates there are well above those found in most developed markets. The country’s 10-year government bonds are now yielding more than 12%, far higher than near-0% yields found in Japan and Europe.

According to Larry Seruma, managing principal at Nile Capital Management, Nigeria will see even higher yields as the government tries to pay for services. That may tempt some to buy Nigerian debt but Seruma also sees a more important factor to discourage would-be bondholders – the country’s currency risk.

The Nigerian naira (NGN=X) is predicted to be devalued,” he said. “Right now the black market naira is about 400 [naira to the U.S. dollar] and the official rate is about 200. So with those numbers, it's very difficult to attract foreign investors to make an investment into their local yields ... Nigerian yields are probably something you want to be very cautious of in terms of investing in right now.

Despite comments from president Muhammadu Buhari last month that the naira won’t be devalued, Seruma sees it as inevitable given oil’s steep decline.

“For many economies where the crude oil prices have gone down as much as 70%, they have responded by devaluing their currencies,” said Seruma. “Nigeria has not responded. We’ll wait and see, but from a market standpoint, investors are very concerned. They want to be investing in Nigeria after the devaluation has happened.”

Oil’s price plunge isn’t bad news for all of Africa, however.

Seruma sees other countries as benefiting from cheaper crude, which he predicts as staying in a range between $25 and $31 over the next 18 months.

“Africa has many more countries that are oil importing,” he said. “They had tremendous opportunity because of improvements in trade.

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The continent is, of course, also a major exporter of gold. The yellow metal recently made one-year highs and has begun trading above $1,200 per troy ounce.

The biggest beneficiary of firming gold prices is South Africa,” said Seruma. “They still represent over 30% of the global gold trade.”

His favorite investment in the space is Sibanye Gold (SBGL). Shares of the South African gold miner have more than doubled in the past three months and are near all-time highs. “It’s likely to really benefit if gold prices stay where they are or if you see a firm up in those gold prices,” Seruma said.

Those looking to gain exposure to Africa should look to ADRs and Africa-oriented funds, he said, adding his bias toward the southern and eastern parts of the continent, “where we see a political stability, where we see these economies continue to grow at a faster rate.”

“We're pretty much comfortable in that region because of that growth and because the fact they are benefiting from lower commodity prices. So that’s an opportunity going forward.”

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