November 1st, 2012 by Tom Minney
Nigeria’s debt market continues to boom with growing volumes in the local debt market and inclusion in the JP Morgan Government Bond Index-Emerging Markets (GBI-EM) from 1 October as Africa’s second entrant after South Africa, Yesterday (31 Oct) the Debt Management Office (DMO – www.dmo.gov.ng) was reported by local newspaper This Day as saying it had received bids totaling NGN1.7 trillion ($10.8 billion) for Government debt in the 12 months to Sept 2012 and had issued a total of NGN852bn in debt over the period.
Nigeria has been tipped by many leading research houses and banks as one of the most promising African markets for local-currency debt, after strong performance for the naira (NGN) against the US dollar ($) and strengthening bond prices and falling yields.
Demand picked up strongly after JPMorgan announced in a note to clients on 15 Aug that its GBI-EM Index may include Nigerian debt maturing in 2014, 2019 and 2022 in a gradual inclusion starting 1 Oct and finishing by year-end. The bonds, with a market valuation of $3.2bn as of August, may represent about 0.59% in the index. JP Morgan sub-Saharan Africa economist Giulia Pellegrini was quoted in an article on Bloomberg as saying about $170bn of assets are benchmarked to the JPMorgan index. Market estimates are for an inflow of up to $1.5bn into the market by funds tracking the index. Central Bank of Nigeria (CBN) Governor Lamido Sanusi lifted a requirement in 2011 for foreign investors to hold local-currency debt for at least 1 year and this was proving successful in attracting investors and improving liquidity, said Pellegrini.
Nigeria is rated B+ at Standard & Poor’s (BB- Fitch), along with Venezuela and Zambia, four steps below investment grade and the outlook is “stable”. Bloomberg says the daily trading of naira amounts to as much as $200mn, according to Citigroup Inc., compared to about $14bn of South African rand (ZAR) being traded daily, according to a 2010 survey by the Bank for International Settlements. “The country’s external buffers are gradually being restored,” Razia Khan, the London-based head of Africa research at Standard Chartered, wrote in a 18 Sept note to clients. “It is all important that this process continues for Nigeria to be able to safeguard both price stability and growth should these be put to the test by weaker oil prices in the future.”
Nigeria’s sovereign bond market is put at $23bn but secondary market trading is still a fraction of trading in South African foreign debt. Angus Downie of Ecobank says the daily trading in government securities could grow by up to $50m from previous levels of $400m/day with foreign investors likely to remain significant, and his colleague Paul Harry Aithnard, Group Head of Research at Ecobank, says that the ZAR was previously seen as the proxy for Africa, but the NGN is attracting investors looking for an alternative. Samir Gadio, emerging markets strategist at Standard Bank, said: “It’s now seen as a market that can’t be ignored internationally and one of the frontier markets where you need to have a position.”
Yields on Nigeria bonds have been falling as investor interest grows. There has been some profit-taking but inflation prospects are improving and reserves are being grown. However, there is still considerable scope for more deepening in the Nigerian market, and private banks are still avoiding some sectors, including agriculture and small-scale construction. In January 2011 the Nigerian Government issued a 10-year $500m Eurobond at a yield of 7% and carrying a coupon of 6.75%, but by mid-October 2012 the yield had fallen to 4.57% according to the DMO and the closing price was $114.79. Yields are also down on debt from Gabon, Namibia and Ghana.
December 21st, 2011 by Tom Minney
Dateline – Marrakech
FTSE (www.ftse.com) is working on a FTSE-ASEA index with the African Securities Exchanges Association (www.africansea.org), which will help to unlock Africa an investment for larger portfolio investors. According to Imogen Dillon Hatcher, Executive Director, FTSE Group, speaking at the ASEA conference in Marrakech, Morocco, on 12 Dec, the index will make clear how much Africa is outperforming the rest of the world: “A ‘back-cast’ of the FTSE Africa index performs better than FTSE world index by quite a margin”. The index covers stocks on 16 exchanges and is adjusted for investibility, including free float and liquidity.
She said that FTSE Group was restructured on 12 Dec, with the London Stock Exchange Group buying out the 50% share owned by Pearson, owner of the Financial Times newspaper, “as of this morning”. The buyout transaction is set to close in the first quarter of 2012. FTSE calculates and manages over 200,000 indices worldwide, which are linked to over $3 trillion in global assets under management. These include the widely-used global benchmark, the FTSE All-World Index. She said FTSE is the top index group worldwide: “FTSE is known as a partner around the word, FTSE works with you to unlock the investment potential that is your market.” As markets mature, broader ranges of investible tools are needed including a reliable index that can promote the development of a wider range of investment products, including exchange-traded funds (ETFs).
The group had a strong commitment to Africa and already been working with South Africa’s JSE Ltd (www.jse.co.za) since 2002. In December 2010 they signed with the Casablanca SE (www.casablanca-bourse.com) to create FTSE CSE Morocco Index Series with two index products. On 8 November 2011 FTSE announced a partnership with the Nairobi Stock Exchange (www.nse.co.ke) to create new indices. FTSE NSE Kenya Index Series track the performance of the largest and most widely-traded stocks listed on Africa’s fourth oldest securities exchange.
Dillon Hatcher said FTSE China indices form the basis for $14 billion worth of ETFs, including giant funds by iShares. The group had worked to develop the indices with international and domestic managers including Xinhua Finance Ltd. She added: “We know something about building an index” and the ASEA index would “throw the light of transparency onto your markets”.
The work of developing the ASEA index had been led for over a year by Jonathan Cooper, Managing Director Middle East and Africa, working with a broad range of African exchanges. The target was to build an investible index, with clear and transparent rules and methodology. They started with all African companies; then filtered for those whose price information is available on Bloomberg and Thomson Reuters. They looked at securities types, adjusted for a minimum 15% free float (the proportion of shares potentially available for buyers) and did liquidity testing on the securities and then did country weightings. The index now covers 16 countries, which have securities which meet the requirements.
The new index will be reweighted twice a year. Dillon Hatcher added that FTSE would be working with a prospective client base to put forward this pan-Africa index: “We hope funds will come out of this and drive Africa as an investible destination, make sure the index stays fresh and make it sure it stays relevant, as the client base comes to us with ideas, such as sectoral indices.
She also explained how securities markets indices had evolved. It started as a general economic indicator, showing how share prices are moving as an indicator of investors’ expectations of business prospects. Then indices became a tool for benchmarking but were still simple measurement tools. From this they became an underlying framework for more passive asset management such as ETFs, and depending on market these could be simple or ever more complex, depending on the needs of organizations such as asset managers or investment banks. Eventually they would also develop into a tool to assess market risk, with much potential to get involved in top-end investment strategy, where “we are starting to blur the lines between passive and active management”.
She threw down the gauntlet to active managers “We would assert that over time it is very hard for an active manger to beat an index, we have done lots of work with academics.” She said indices bring market benefits including low-cost market access provided they are transparent, rules-based and useful. “All the name-brand indices have to be fit for purpose and they have to do a job. You know they will behave in a particular way.” At other meetings this author has heard exchanges have wondered about the future of securities markets when the volume and value of derivatives and ETFs traded far outweighs the trade in the actual shares.
Commenting on the transaction in which the LSE buys out Pearson, LSE CEO Xavier Rolet commented in a press release: “Fully aligning FTSE with one of the world’s most liquid and most international trading groups is an exciting opportunity. This transaction further delivers on our diversification strategy, expanding the London Stock Group’s existing offering deeper into indices, derivatives and market data products and services. This is a business we know well, and we expect that going forward our customers will directly benefit from greater choice, opportunity and innovation.”