Lagos - After a bumper year for Nigerian stocks, investors are selling riskier assets and moving money into short-term debt because of uncertainty over government spending and the future leadership at the central bank.
Nigeria has been growing as an investment destination. Foreign bond holdings swelled fivefold in the past year to an estimated $5.4 billion (R55.6bn), thanks to its inclusion in the JPMorgan index and a stable naira.
Central bank governor Lamido Sanusi, who is due to stand down in June next year, has been the driving force behind currency stability and in pushing inflation down to a five-year low of 7.8 percent in October. Inflation inched up to 7.9 percent last month.
Investors worry that Sanusi’s successor may not follow his tight monetary policy stance, while an expected spike in government spending before elections in 2015 adds to currency risks, prompting a wait-and-see approach by many investors.
“The uncertain transition at the central bank and the pre-electoral climate in 2014 will weigh on sentiment,” said Samir Gadio, the emerging market strategist at Standard Bank.
Domestic pension funds and asset managers are cutting exposure to stocks and moving into treasury bills to preserve gains in the main share index, which is up 41 percent this year.
The stock index eased off a five-year high in June and has been largely flat for a month after hitting a resistance level around 39 000 points.
The shortest-term three-year bond was sold last week at 12.9 percent, higher than the 12.55 percent it sold for last month. The one-year treasury bill, yielding 11.66 percent, has been attracting the most demand.
“We have switched to the short end of the [yield] curve,” said Adeniyi Falade, the managing director of Crusader Sterling Pension, which in the past three months has increased the weight of bonds and short-term debt in its portfolio from 60 percent to 70 percent and cut exposure to stocks.
“We’re trying to match asset maturity with uncertainties around the exit of the central bank governor and forthcoming elections,” Falade said.
“Net outflow in Nigeria would put pressure on bond yields… Overall, foreign investors are likely to move towards the short end of the yield curve to reduce risks associated with currency weakening,” Angus Downie, the head of economic research at Ecobank, said.
“The lack of information on potential candidates to replace Sanusi is a concern,” Downie noted.
“It’s possible his replacement could be keen to loosen policy given relatively low inflation.” – Reuters