Tuesday, June 6, 2017 4:25 PM /CardinalStone Research
Following the recent rebalancing of the MSCI Frontier Index, Nigeria’s weighting in the index increased to 7.9% from 6.5%.
We review details of the recent announcement by the MSCI ahead of the planned announcement (on June 20) of a reclassification (or not) of Nigeria to ‘Standalone’ status.
Nigeria’s weighting moves to 7.9% - more room to track Nigerian equities
Morgan Stanley Capital International (MSCI) increased the weighting assigned to Nigerian Stocks in its Frontier Markets Index to 7.9% from 6.5% previously.
The increase in the weighting followed the move of Pakistan from the Frontier Markets Index to the Emerging Markets Index.
There are 16 Nigerian stocks in the index and the new weightings are shown in the table below;
A total number of 14 funds worth $969 million currently track the MSCI Frontier Index according to data from Bloomberg.
We think that following the events of the past 1- 2 years, most of these funds sold off Nigerian equities and many are still underweight Nigeria.
Decision on reclassification still ahead, but we expect a positive outcome – Nigeria is currently under review for a potential reclassification as part of the MSCI 2017 Annual Market Classification Review.
The decision to review Nigeria’s status to “Standalone”, from the Frontier Markets Index, came on the heels of the liquidity issues that plagued the country’s FX market.
According to Morgan Stanley, the introduction of restrictions on foreign currency trading in the first half of 2015 as well as the huge scarcity of the green back resulted in a deterioration of market accessibility, and thus consultations with market participants would be held until a decision is taken and announced by June 2017.
However, following the Central Bank of Nigeria’s (CBN) consistent supply of FX to the market, liquidity has improved significantly across the market’s major segments – the interbank, the newly introduced investors/exporters FX (NAFEX) window and the parallel market.
According to FMDQ, total value of transactions at the NAFEX window is about $1.9 billion with average daily value of trades around $80 - $100 million. Also, the parallel market has appreciated significantly compared to the period prior to the CBN’s FX intervention (from NGN520/USD as at February to NGN375/USD today).
In recent weeks, the equity market has witnessed a rebound and has returned 16.7% Ytd following increased foreign participation (now at 45.84% vs. 40.83% in 2016 Ytd).
We are therefore optimistic that Nigeria will be retained in the MSCI Frontier Markets Index when a decision is finally announced later this month.
The announcement could set the stage for a further rally, considering that many of the funds that track the index may still be underweight.
Valuations – Still attractive despite strong rally
We think valuations are still attractive even with the ongoing rally in the market. Nigerian banks for instance are trading at an average price-to-book ratio of 0.7x compared to a 1.4x P/B for its Middle East & Africa peers.
Egyptian banks are trading at an average of 3.2x P/B while South African banks are trading at an average of 1.8x P/B.
Also, when compared to pre- 2014 crash levels, there’s still a decent upside for many fundamentally sound stocks.
See below – comparison of P/B valuations for some banks.
3. MSCI places Nigeria under "Special Treatment" Status
4. MSCI closely monitoring situation in Nigeria, announces market accessibility stance on April 29