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Nigeria Offers Investors A Unique Opportunity For Strong Growth

Summary NGE is weighted heavily towards the consumer defensive and financial services sectors, which are poised to benefit from Nigeria’s impressive GDP and population growth (population expected to double by 2045). NGE is down 50% since July of last year due to the oil price crash and the Boko Haram attacks from earlier this year, creating an attractive, unique entry point. The weakness of the Nigerian Naira in 2014 has put downward pressure on NGE, and the central bank is again deciding whether or not to devalue the Naira. Nigeria is currently offering investors a unique long-term growth opportunity at a great value through the Global X MSCI Nigeria ETF (NYSEARCA: NGE ). NGE has been beaten down recently due to the strong U.S. Dollar, the oil price crash, and Boko Haram. Fundamentally, the Nigerian economy has not significantly changed in a way that warrants the ~50% decline in NGE’s price since July of 2014. This has created a great entry point for investors looking for strong growth potential over the long term with a nearly 4% dividend as an added bonus. NGE’s Sector Weights & Nigeria’s Demographics As you can see from the chart below, NGE is heavily weighted towards the financial services and consumer defensive sectors. So when considering an investment in NGE, we need to look at how these sectors are performing individually and their prospects for long-term growth rather than solely looking at how the Nigerian economy as a whole is doing right now. This is because the recent drop in oil prices has had a larger impact on the Nigerian economy than it does the holdings of NGE in particular, which I’ll discuss later in this article. Demographically, Nigeria’s population is expected to double over the next few decades, a gain of over 200 million people, with the majority of this growth expected to be in urban areas . This will drive a huge, ongoing demand for companies currently operating in the consumer defensive and financial services sectors. Together, these two sectors make up over 75% of NGE’s total holdings, making it an excellent long-term investment in my opinion. (click to enlarge) (Source: TD Ameritrade & Global X’s Semi-Annual Prospectus ) Dylan Waller made some excellent observations in a prior article that I want to reference as well. He noted that the Nigerian banking sector holdings of NGE, as of last summer, are experiencing over 50% annual growth as of late with a very low average P/E ratio of 5.8. The basic materials sector is in a similar situation as well. So this is very bullish news considering how heavily NGE has bought into these sectors. Also important to note though that the consumer defensive industry has a rather high P/E ratio and some say it is currently in a bubble. For example, Nigerian Breweries PLC has a P/E ratio of 27 and Nestle Nigeria PLC has a P/E ratio of 28. These companies make up 17.68% and 7.3% of NGE’s total holdings respectively, together comprising the majority of the consumer defensive holdings of NGE. So while it may be beneficial to wait for this bubble to pop, you won’t want to miss this great opportunity waiting for something that may not happen. The Effect of Oil Prices With NGE’s current energy holdings at 7.65% of assets, ~30% lower than energy’s contribution to Nigeria’s GDP, it has been less exposed to oil than the Nigerian economy as a whole. This is good because the Nigerian economy, Africa’s largest oil producer, is in dire need of diversification away from oil. Oil currently comprises about 9.8% of GDP (which due to the oil price collapse, is much lower than it has been historically). If you look at the numbers more closely, non-oil GDP growth averaged at a lower, but still respectable 4.5% in the first 2 quarters of 2015 while the oil GDP averaged -7.47% over the same time period. In the first 2 quarters of 2014, non-oil GDP growth averaged at 7.46%. Some of this loss year over year can be accounted for by the effect oil GDP has on the rest of the economy, but also one must consider the temporary effect of increased Boko Haram activity in 2015, which I’ll discuss later in this article. Oil currently accounts for the vast majority of the Nigerian government’s revenue, so for the government to successfully neutralize Boko Haram and develop infrastructure, oil cannot go below the $40 range for an extended period of time. The longer these low oil prices persist, the more negative the effect they’ll have on the country’s government. Taking all of this into account, if you think that oil will stay above $40 for the foreseeable future, this is somewhat bullish for NGE. I believe that there is not much more downside for the oil related portion of the economy with substantial upside potential for the financial and consumer defensive sectors in the long term. (click to enlarge) (Source: Nigerian National Bureau of Statistics ) The Naira and the Central Bank of Nigeria As you can see in the chart below, in 2014, the Central Bank of Nigeria devalued the Naira significantly. This pushed down the relative price of NGE because the shares are purchased in Naira, but NGE itself is priced in U.S. Dollars. Currently, there are strict currency controls in place, which have temporarily stabilized the value of the currency. President Buhari has been a strong advocate of these currency controls in order to slow the rampant inflation (~9% currently). As of 11/11/2015 president Buhari chose Kemi Adeosun , a strong advocate of not devaluing the Naira, as his Finance Minister. (click to enlarge) (Source: xe.com/currencycharts ) Many critics say that not devaluing the Naira and keeping the currency controls in place decreases foreign investment, making doing international business in Nigeria more difficult. Some banks are estimating the Central Bank of Nigeria will have to devalue the Naira from about 200 per dollar now to 220-230 per dollar sometime between Q4 2015 and Q1 2016, but what the Central Bank of Nigeria will do over the next few months is still uncertain. It’s not totally clear the effect the higher inflation will have relative to the increased international investment that would occur as a result of a devaluation of the Naira, so I will leave this up to the readers to review. Boko Haram and Nigeria Boko Haram attacks have also had a definite effect on the Nigerian economy. GDP will fall as people will move from economically productive areas threatened by Boko Haram into safer areas where they can work. This insurgency also diverts more government spending to the military, at a time where government revenue has fallen significantly due to low oil prices. This means less money can be spent on badly needed infrastructure projects like President Buhari has publicly stated he has a desire to build. President Buhari made national security one of his primary promises on the campaign trail, and has made great strides in the fight against Boko Haram. They are considered to be severely weakened compared to the last few years, and recently have shown decreased interest in conducting attacks within Nigeria. While still very much active, Boko Haram has been pushed into the less economically productive, northeastern corner of Nigeria and now have significantly less influence than they did previously. Below is a chart showing the relationship between NGE’s stock price and mentions of Boko Haram on Twitter as well as on publicly accessible news websites. It can be assumed that when Boko Haram is actively operating, there will be a large amount of mentions on Twitter and in the media. (click to enlarge) (Source: TickerTags.com) For example, you can see the stock price of NGE goes down and mentions go up around early January when the devastating attack on Baga took place, and again in mid July when a series of Mosque bombings took place. Of course, there are many factors that affect the stock price of NGE, but Boko Haram is one that has a definite impact whenever they stage a major attack. Conclusion Nigeria’s extremely fast growing urban population bodes well for the consumer product, construction, and banking industries within Nigeria, all of which are major holdings in NGE. The success the government has had in fighting Boko Haram should be applauded as well, which will go a long way to creating a much more stable country that will bring increased interest from foreign investors. All of this combined with low oil prices and a devalued Naira have created a unique buying opportunity for long-term investors. An investment in NGE is not without its risks though, as the low oil prices, potential Boko Haram resurgence and the short-term impact of a potential Naira devaluation are serious issues that are not to be ignored. In conclusion, there are many factors that point to a bright long-term future for Nigeria, though it is not without risk. I believe the current pricing provides a great entry point, as a series of temporary and unfortunate events have pushed NGE down far too low in my opinion. I see a strong potential for growth here for investors who are patient, with a nearly 4% dividend yield as an added bonus.

Take Your PIIC – Philippines, Indonesia, India Or China

Summary Consider to invest in Asia. Within Asia I believe the best countries to invest in are the Philippines, Indonesia, India, China and Vietnam. All have high growth driven by domestic consumption. All except China have incredibly low household debt to GDP compared to their Asian peers, which will allow them to easily borrow more and build more. The “Asian Century” has arrived and if you fail to invest in it you are missing an enormous long-term opportunity to grow your wealth. In this article, I discuss what I believe to be the top five Asian destinations for investment and why. But first, why invest in Asia? The answer is simply because it is growing more rapidly than any other continent on the planet. By 2030, Asia Pacific is estimated to contribute a staggering 59% of global consumption , up from 23% in 2009. Some key points from DBS on where Asia is heading in the next 25 years: · Asia adds a Germany (in economic terms) every 3.5 years, and will add three Europe’s in 25 years (by 2040), or if Asian currencies appreciate one to two percent pa (as is the norm for developing economies), Asia will add 5 or 6 Euro zones by 2040. · The Asian middle class is set to triple (to 1.8b) in size between 2015 and 2020, and to have increased 615% (6.15 fold) between 2009 (525m) and 2030 (3,228m). · China (59%) and India (16%) will dominate the Asian middle class. · For every addition to the US population, Asia’s headcount will rise by seven. · China’s growth is moving inland, and also towards Central Asia. · Capital will flow to Asia like never before. Why? Businesses want to be where the growth is. Ever hear one say different? In 2039, when Asia has added three Euro zones, it will be creating a Germany every seven months. That’s a pretty big attraction. Inflows mean currency appreciation. Asian currencies will rise against the dollar, euro and yen. · China’s per-capita energy consumption is one-eighth what it is in the US, India’s is one-twentieth. Rising incomes mean Asia’s energy demand will continue to soar. Asian, not G3 demand, will drive the price of energy. Source The World’s largest economies in 2010 and 2050 Source You can read more about the rising Asian middle class in my previous article here . Why Philippines, Indonesia, India and China? I choose these as my top 4 Asian countries to invest because they have high growth (domestic driven), low household debts (see chart below), and a rising middle class (with jobs and wage growth). The best time to buy is ideally when valuations are good (PEs below 15), or dollar cost averaging. Source No1- Philippines The Philippines’ main advantage is their cheap, young and skilled labour force with excellent English skills. The BPO industry is growing around 20% pa (it grew 18.7% in 2014). The Philippines is currently growing around 5.6% pa (with a long term growth rate estimated at 7.3% pa), with the main growth drivers being overseas foreign worker’s remittances, and the BPO (call centre, back office administration) industry. Tourism, manufacturing (electronics, ship building), mining and farming also contribute. This money is being channeled into the property sector, combined with increased lending (household debt is a mere 6% of GDP). Demographics are excellent with around half the population below 25, and salaries are rising at least 6.5% pa, or higher in the BPO industry where staff are paid sign on bonuses. The property boom can run for many years as pent up demand for housing is huge and prices are still low at just USD 3,156 psqm or less in Manila. The banks are making good net interest margins around 3.02 %, and growing their loan books 20% pa, with non-performing loans at a very low 1.8% and double digit profits. Investors can buy iShares MSCI Philippines ETF (NYSEARCA: EPHE ), currently on a PE of 21.17 as of 30 September 2015. No 2 – Indonesia Indonesia has a huge population with strong demographics, a rising middle class, and improving Government. Indonesia GDP was 5.0% in 2014, however it is expected to average 6.8% pa in the long term (see table below). Along with Philippines and India, it has very low household debt, and rising employment and wages. The new Government seems focused to reduce debt and build infrastructure. In October 2015, they announced a USD 5 billion high speed railway from Jakarta to Bandung in a JV with China Railway Group (00390:xhkg) (PE 10.1). Property prices are low at just USD 2,766 psqm, and rising . Investors can buy iShares MSCI Indonesia ETF (NYSEARCA: EIDO ), currently on a PE of 18.19 as of 30 September 2015. No 3 – China China is off course the booming manufacturing hub of the World, but is changing to be a more consumer led economy. This is causing a slowdown in fixed asset investment, and the so called “China slowdown” and “commodities rout”. Their GDP is currently 7.0% and slowing. Demographics and household debt levels are not so good; however, the rising middle class is still huge. The best way to play China is to buy into the consumer sector via a fund or individual stocks. A suitable fund would be db x-trackers CSI300 Consumer Discretionary 1D ETF. Chinese (Shanghai, Beijing) property is not as expensive as India (Mumbai), and is priced at USD 6,392 psqm. Investors can buy iShares MSCI China ETF (NYSEARCA: MCHI ), currently on a PE of 14.56 as of 30 September 2015. Another good choice is db X-trackers Harvest CSI 300 CHINA A-Sh ETF (NYSEARCA: ASHR ). No 4 – India India has perhaps the best growth potential but is expensive on current valuations (PE around 30), so best to wait for opportunity to buy in or average into the market over time. Current GDP is around 7.3% pa, and the long term average is expected to be around 8.0% pa. Indian labour is cheap with strong English and IT skills. Property is growing but expensive in the major cities such as Mumbai at USD 11,455 psqm, which may be a drag on the short term growth (as in China). By 2050, India is expected to be the World’s largest economy (see earlier table). Investors can buy iShares MSCI India ETF (BATS: INDA ), currently on a PE of 30.75 as of 30 September 2015. No 5 – Vietnam Vietnam is my preferred short-term pick as PEs are around 13, so great value now. Long term its prospects are also good, as it is a cheaper manufacturing hub to China and jobs are booming as a result. Household debt is low at around 20% to GDP. Investors can buy db x-trackers FTSE Vietnam ETF (GR). I would avoid Malaysia (household debt to income of 146% ) and Thailand (debt 121% ), based on high personal debts and economies that are heavily dependent on exports. Many frontier markets will also offer good returns for investors but perhaps at greater risk, so invest accordingly. Other high growth countries (listed below) to consider are Nigeria, Iraq, Bangladesh, Vietnam, Mongolia, Sri Lanka and Egypt. Source : Finally, for those that want something different, then consider to invest in either Pakistan (PE 9.2) via db x-trackers Pakistan (03106:xhkg), or Central Asia and Kazakhstan via Global X Central Asia & Mongolia Index ETF (NYSEARCA: AZIA ) (PE of 16.7), as China is pushing infrastructure and growth in that direction.

Oil Price Impact On Single Country ETFs

Single country ETFs demonstrate widely varying dependence on oil price. Canadian, Columbian, Norwegian and Russian ETFs are the most correlated to USO. Chinese and Indian ETFs are among the least correlated. In a recent article about primary beneficiaries of a potential oil price rebound, Zacks Funds identified Russia, Malaysia and UAE with their respective ETFs as the ones that could make a turnaround if the oil price makes a sustained move higher. This prompted me to look at a wider universe of single country ETFs and investigate their performance dependency on oil price. For this exercise I compiled a list of 45 US listed single country ETFs. All of the funds are market cap weighted and I did my best to pick the ETFs with the highest assets under management (AUM) for each country. I then obtained correlation estimates with the United States Oil Fund ETF (NYSEARCA: USO ) using a free online tool InvestSpy. Below is a full results table, calculated utilizing 1 year of historical data: There are a few observations to be made from the correlation coefficients above: It turns out that the most correlated ETFs with the recent oil price movement were the iShares MSCI Canada ETF (NYSEARCA: EWC ), the Global X MSCI Colombia ETF (NYSEARCA: GXG ), the Global X MSCI Norway ETF (NYSEARCA: NORW ) and the Market Vectors Russia ETF (NYSEARCA: RSX ). Each of these four ETFs had a correlation coefficient above 0.50 with USO, which is a relatively high number in the cross-asset class dimension. This probably does not come as a big surprise given that all four economies are significant oil exporters as can be seen from the interactive map provided by The Economist. So in a search for country ETFs that could benefit from rising oil price, these would be the first options I would consider. Some of the countries that one would expect to find at the top of the list are not there. One part of the explanation is that there are a lot of major oil countries without an ETF targeting local stocks. This includes Saudi Arabia, Iran, Iraq, Venezuela and a number of African countries. However, some other key oil exporters like UAE, Qatar and Nigeria make appearance outside the top 10. I believe a big reason for this is the iShares MSCI UAE Capped ETF (NASDAQ: UAE ), the iShares MSCI Qatar Capped ETF (NASDAQ: QAT ) and the Global X Nigeria Index ETF (NYSEARCA: NGE ) were launched only 1-2 years ago and have seen only a limited interest from investors thus far. None of them has more than $50 million in AUM and liquidity is subpar, therefore prices can be stale, consequently pushing down the correlation with other securities. This is something investors should take into account before making an investment decision. Finally, I thought it would be interesting to take a closer look at the countries at the bottom of the list, i.e. the ones least correlated with oil price. It was somewhat unexpected to see China and India at the very bottom of the list. But both countries are net importers of oil, generally benefiting from lower oil prices, which pushes correlation coefficients for the iShares China Large-Cap ETF (NYSEARCA: FXI ) and the iShares MSCI India ETF (BATS: INDA ) against USO lower. For investors with a stronger view on oil outlook, this can be a differentiating factor when comparing developing countries as potential investments. If you have more observations from the correlations table in this article, feel free to share them in the comments to facilitate further discussion. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. Share this article with a colleague