Nigeria sidesteps EM rout with $7.9m inflow to bonds last week


US-based investors are buying Nigeria’s domestic debt amid a rout in emerging markets that has snowballed into five straight weeks of outflows, according to data obtained from the Bloomberg terminal.

As investors pulled the most money in more than a year from US-listed exchange-traded funds that buy emerging market stocks and bonds in the week ended June 22, net inflows of $7.9 million flocked to Africa’s largest economy.
All of those flows went into Nigerian bonds, nil to stocks, the data showed.

Total assets held by investors in the US-listed Nigeria ETFs stood at $437 million in the week under review, rising 508 percent from the week before.

South Africa, on the other hand had net outflows of $211 million which were largely from bond funds. That cut total assets held in Africa’s most industrialised economy by 10.3 percent to $12 billion in the week under review.
Nigerian bonds are attracting fund flows because “they provide some of the most attractive opportunities for carry trade in emerging markets and investors are latching on to that,” said Tajudeen Ibrahim, head of research at Lagos-based investment bank, Chapel Hill Denham.

Carry trade is a trading strategy that involves borrowing at a low interest rate and investing in an asset that provides a higher rate of return.

The US benchmark 10-year bond is yielding around 3 percent while Nigerian bond yields are trading anywhere around 13 percent, putting the carry trade return on naira bonds at around 10 percent, with the naira relatively stable against the dollar in recent months.

Global money managers are bullish on Nigerian securities, enticed by double digit yields, which, while down from almost 17 percent in August, are still among the highest in the world.

Money managers are also confident the OPEC member will be able to keep the naira stable, due in part to oil prices having climbed around 60 percent in the past year.

“The near-term outlook for the naira is stable thanks to higher oil prices and that is boosting investor sentiment towards Nigerian bonds,” said Wale Okunrinboye, head of research at Lagos-based pension fund managers, Sigma Pensions.

The naira has tightly hovered around N360 per US dollar at a window for foreign investors in stocks and bonds which was created in April 2017 to ease a dollar crunch.

It exchanged for N361 per US dollar on the so-called NAFEX window Monday, according to data by trading platform, FMDQ.

The naira has barely budged since a devaluation last year, and held its own as other emerging currencies began to tumble in April.
The central bank is keen to keep it that way, at least until February’s elections, according to guidance given by Governor Godwin Emefiele at the last monetary policy meeting in May.
“Investors are losing money in other emerging markets as their currencies falter. That is causing them to rotate to relatively safer havens like Nigeria,” Okunrinboye said by phone.
Nigerian bonds have returned some 8 percent in dollar terms this year and are the only local-currency debt in emerging markets not to have made losses this quarter. Meanwhile, stocks have had to endure a rather turbulent ride, as investors grow cold feet towards equities ahead of the upcoming 2019 presidential elections.

That explains why stocks saw zero inflows last week, according to Ayodeji Ebo, managing director at financial advisory firm, Afrinvest Securities.

“More foreign investors will look to reduce their exposure to Nigerian equities amid the volatility associated with a pre-election year,” Ebo said.

The stock market rose 0.34 percent Monday, but had a negative year to date (ytd) return of 0.66 percent, only the second time that stocks are down year to date after Friday’s 1 percent decline.

“Trading activities in the market today was characterized largely by sell-offs across the different sectors. Many heavily weighted counters in the consumer goods sector slipped, along with others in the banking space. However, the gain on DANGCEM helped to drive market return into positive region. We expect some gains in the consumer goods sector in the coming days as the low prices offer bargain trading opportunities for investors,” according to stock analysts at Meristem, a Lagos-based investment house.

Outflows from U.S.-listed emerging market ETFs that invest across developing nations as well as those that target specific countries totalled $3.38 billion in the week ended June 22, compared with losses of $2.78 billion in the previous week, according to data compiled Bloomberg.
This was the biggest weekly outflow in over a year.


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