FRONTIERS-Nigeria: a lottery you might just win

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* Equity valuations, debt market growth attractive

* Risk of another asset bubble

* Regulation improving from a low base

* Credit, power hinder real economy

By Nick Tattersall and Chijioke Ohuocha

LAGOS, May 26 (BestGrowthStock) – The view of Lagos from the top of
the Eko Hotel must be familiar to many of the fund managers and
strategists who jet in to Nigeria periodically, scouting for
investment opportunities.

In the distance, rows of bright lights reflect on the water
like the skyline of any oceanside city. Elsewhere, dots of
yellow flicker like fishing boats on the waves.

But Nigeria is full of paradox and the view is no exception.

The “skyscrapers” are in fact the living quarters of
towering container ships importing everything from toothpicks to
cement. The “fishing boats” are bars and shacks on the beach,
their lightbulbs powered by erratic diesel generators.

From the roof-top bar, some read the vista as a story of
great potential — Africa’s most populous country, swollen with
oil wealth, an untapped market with massive infrastructure needs
and all the financing opportunity that brings.

Others see a cautionary tale — a nation so hobbled by
corruption and mismanagement it struggles to turn on its own
lights, despite more than half a century of oil production.

Either way, with a fast-growing population of more than 140
million and the ninth-largest proven oil reserves in the world,
emerging markets investors can no longer afford to ignore it.

“I can remember years ago … nobody would come to Africa
with me,” Jonathan Auerbach, co-founder of New York-based stock
broker Auerbach Grayson, said during a recent trip to Nigeria
with more than a dozen fund managers from around the world.

“Investing in Nigeria today is like buying a lottery ticket
with a very high percentage chance of winning,” he said, adding
that at less than $40 billion, Nigeria’s stock market was valued
at less than half U.S. investment bank Goldman Sachs (GS.N: ).

“You know what that tells me — Nigeria is so cheap.”

ANOTHER ASSET BUBBLE?

Some analysts say Nigeria’s stock market (.NGSEINDEX: ), the
second biggest in sub-Saharan Africa after Johannesburg, could
rally more than 40 percent this year. Foreign funds are starting
to return after a lull during the global credit crisis.

An unprecedented $4 billion bailout of nine banks last year
and ongoing reforms to the sector make bank stocks particularly
keenly watched in a nation where just 23 million people have
bank accounts.

The sector, which accounts for more than 60 percent of stock
market capitalisation, has risen more than 24 percent this year
already, albeit from a very low base.

Sentiment is being driven largely by optimism over a planned
state “bad bank” which could soak up around 1 trillion naira
($6.7 billion) in non-performing loans, and by low interest
rates which have seen asset managers switch into equities to
beat low returns elsewhere.

The rally comes despite anaemic growth in banks’ underlying
business — since the bailout, bank credit to the private sector
has remained flat at around 0.3 percent from growth of 25
percent at the peak of the stock market boom in 2008.

“This market has moved up too quickly,” said one insurance
fund manager who has 14 billion naira under management.

Investors brave enough to buy Nigerian equities three years
ago were rewarded with one the world’s best stock market
returns. Those who failed to exit by the second quarter of 2008
found themselves exposed to one of the worst.

Banks buying up their own shares, high levels of margin
lending, and a general belief among inexperienced retail
investors that the market could only go up built up an asset
bubble that inevitably burst.

The collapse of the Nigerian market came almost in tandem
with the global credit crisis and many Lagos financiers — as
well as some of those in government — are quick to blame events
in Nigeria on the withdrawal of foreign investors.

But in reality, lax regulation and malpractice on the part
of some, if not many, banks had a large role to play.

“If you look at the history of what’s happened over the last
cycle there was a certain level of collaboration between brokers
and banks … with respect to share manipulation and so forth,”
said Sonnie Ayere, head of investment firm Dunn Loren
Merrifield.

“There is a lot of work being done at the (Nigerian)
Securities and Exchange Commission … to prosecute whatever
companies are actually found guilty.”

On regulation at least, Nigeria appears to have learned some
lessons.

THE QUIET TECHNOCRATS

Central Bank Governor Lamido Sanusi delivered the first blow
last August, shattering the complacency of bankers, brokers and
regulators, members of a cosy elite who had become too close and
long believed themselves immune from prosecution.

Sanusi’s “Friday massacre” — the first instalment of what
would become the $4 billion bailout — set BlackBerries buzzing
not because of its financial scale, but because of the might of
the egos and empire builders felled by his axe.

Bad debtors, including politicians and top businessmen, were
named in national newspapers. The softly spoken central banker,
clad in trademark bow-tie and frameless spectacles, pledged that
those guilty of misconduct would be prosecuted.

Sanusi has since promised further reform including
abandoning the universal banking model to separate core lending
from capital market speculation, echoing similar plans mooted in
the United States. He has also vowed to burst any new asset
bubble by “starving it of oxygen”.

He has never professed any interest in standing for public
office and his stellar private sector career — to which he
could always return — has allowed him to rise above the vested
political interests that hampered some past regulators.

Many investors hope the new Securities and Exchange
Commission head, Arunma Oteh, is cut from the same cloth.

A former vice president of the African Development Bank who
has spent much of her career outside Nigeria, Oteh has also been
insulated from the political pressures at home.

She has promised tighter regulation and surveillance to
protect investors against the kind of market abuse that
contributed to last year’s asset bubble.

“What we saw with the global financial crisis is something
that has allowed us to understand better the value of
regulation,” she told Reuters.

Stock Analysis

FRONTIERS-Nigeria: a lottery you might just win