GLOBAL INVESTING: Nightmares and fairy tales in frontier markets

Dubai - Fairy tales seldom happen in real life but they do happen in frontier market stock exchanges

Nigeria has been a frontier market nightmare since President Buhari finally devalued the naira, with the MSCI Global X index fund down from $10 to below $4 in the past two years. In the past 12 months, the Nigerian country index fund is down 35 per cent. Yet the reasons that make Nigeria a profitable macro short idea - the oil crash, epic corruption in the Goodluck Jonathan era, Boko Haram terrorist attacks, a banking crisis, recession, capital flight - have now reached their endgame. Saudi Arabia has stabilised the world oil market. President Buhari, the elected ex-military dictator whose economic policies proved so disastrous for the naira, is hospitalised in London. Baba Goslow has handed de facto power to Vice-President Yemi Osibanjo, an ex-Lagos attorney-general with strong links to the southern state Ibo business elite and the powerbrokers of the Niger Delta oil producing region.
If Osibanjo succeeds Buhari as head of state, the NGE could well have at least 40 per cent upside. Fairy tales seldom happen in real life but they do happen in frontier market stock exchanges. Remember my call on Pakistan? Up 400 per cent in five years and up 45 per cent in 2016, when Karachi was Asia's best-performing stock exchange. Nigeria could well be the next Pakistan if the financial markets, the Lagos elite, the military, the Hausa Fulani emirs of the northern states, the World Bank/IMF and Washington embrace Osibanjo as Nigeria's most credible de jure political and economic helmsman. Nigeria is no Mickey Mouse oil or cocoa satrapy but Africa's most populous and most powerful state.
Buhari's anti-corruption crackdown and refusal to devalue the naira facilitated epic capital flight in 2015-16. Yet since Nigeria's economy plunged into recession after the oil crash, imports demand vanished and the current account deficit is a mere 0.4 per cent of GDP even as Nigerian exports are finally competitive again due to the devaluation of the naira. Nigeria has suffered its worst economic recession since the early 1990's slump under military dictators Ibrahim Babangida and Sani Abacha. Inflation has surged to 18 per cent, a 10-year high. Despite Buhari's pledge to float the currency, the central bank is still forced to defend the naira at the 320 level to the US dollar. The black market rate is closer to 500 naira, a symbol of the chronic foreign exchange shortage that has devastated Nigeria's traders. If Osibanjo outlines a credible plan to boost the economy, vanquish Boko Haram, stabilise the naira and clinch an IMF deal, Nigerian equities could just, maybe just, be the next frontier market fairy tale. Stay tuned!
My favourite frontier markets since last summer are Vietnam and Saudi Arabia. After Saudi Arabia received $63 billion in bids for the kingdom's inaugural $17.5 billion sovereign Eurobond new issue, I recommended buying the Saudi Tadawul index at 5,600 as I was certain that the Eurobond new issue would ease its money market/cash crunch. This was the precise moment to bottom fish in Saudi corporate/retail banks, notably Samba and Al Rajhi. The Tadawul index is now above 7,000.
Vietnam's Communist Party was disappointed by President Trump's withdrawal of the US from the Trans-Pacific Partnership and assault on global free trade. If Trump reduces the US naval presence in the Vietnam could be exposed to the Chinese armed buildup - and China has been the traditional enemy of Vietnam for two millennia. The TPP debacle and Trump's protectionist tirades will hit Vietnamese exports to the US, up 17 per cent in the past year. It is significant that Vietnam has a $31 billion trade deficit with the US and is thus in Trump's target sights. The State Bank of Vietnam intends to use mergers to create bigger banking national champions and boost private sector lending. The GDP growth target is 6.7 per cent and Vietnam is a $160 billion export colossus. The doi moi reform policy is still alive. This could make the Vietnam country fund a buy at 12 for a 15 target in 2017.
True, I believe the easy money in Pakistan has now been made in this spectacular frontier bull market. Karachi is not expensive at 12 times earnings and a 4.8 per cent dividend yield on the eve of the MSCI emerging market upgrade. The wave of recent bloody terrorist attacks in Pakistan demonstrate political risk is still a sword of Damocles. Yet the Karachi index was 34,000 when I recommended it in this column last April and is 48,000 now. Wicked!
The writer is a global equities strategist and fund manager.