Fund Managers Bullish on Nigeria, Other Emerging Markets in 2017

  •  Oil rises above $55 ahead of Jan 1 supply cut

Ejiofor Alike and Obinna Chima with agency reports

A number of global fund managers have expressed their preparedness to buy financial assets in Nigeria and other emerging markets in 2017, indicating of a bullish outlook in some of the markets.

But the credit rating agencies have a less than positive outlook for emerging markets.

According to Reuters, the Head of Portfolio Strategy at Makena Capital Management LLC, Michel Del Buono, who oversees $18 billion across asset classes, however, has a bullish outlook for emerging markets.

Del Buono said he favoured investments in things like healthcare, retail and for-profit education in Nigeria, Indonesia and the United Arab Emirates.

“If you’re exposed in the right way and you have a long-term perspective, you should keep a significant weighting to emerging markets,” he said.

The Nigerian economy is in recession. But in an effort to revamp the economy, President Muhammadu Buhari recently presented a proposed aggregate expenditure of N7.298 trillion for the 2017 fiscal year to the National Assembly.

The federal government also recently said it was targeting a growth rate of 7 per cent between 2017 and 2020, through its National Economic Recovery Growth Plan (NERGP).

Since the United States election in November, emerging market stocks have been down by about 7 per cent, based on the Morgan Stanley Capital Index, and the yield spread of emerging market bonds over benchmark U.S. treasuries is wider by 10 basis points, reversing some of the gains seen earlier in the year.

On November 8, the date of the U.S. election, the EMBI Global year-to-date total return was 14.04 per cent, and a week later, on November14, it had halved to 7.60 per cent.

Currencies such as the Mexican peso and the Turkish lira have tumbled 10 per cent or more in the wake of the election.

U.S. President-elect Trump has pledged to impose protectionist trade policies and restrict immigration which would likely damage most emerging market economies.

The Washington D.C. bank lobbying group, the Institute for International Finance (IIF), reported this week that $23 billion had flowed out of emerging market funds since October 4, with $18 billion of that taking flight since November 9.

“The magnitude of outflows has diminished significantly in recent weeks, but the direction has remained persistently negative,” an IIF research analyst, Scott Farnham said.

BlackRock, the world’s largest assets manager, is expecting to reap solid gains from all emerging market asset classes, especially bonds, the firm’s chief fixed income strategist, Jeff Rosenberg said at the company’s recent global outlook summit.

Other global fund managers also see a rebound on the horizon.

Head of Emerging Markets Debt at Baring Asset Management Limited, Ricardo Adrogué, said analysts, including ratings agencies, are confusing structural versus cyclical problems when evaluating emerging markets.

“Our assessment of emerging markets is actually strengthening at the time that developed markets’ institutional framework is weakening,” he said.

Also, lead portfolio manager for multi-asset income strategies at AllianceBernstein, Morgan Harting, said he was especially bullish on the energy sector and is investing in countries like Russia and Brazil as well as companies like Hungarian oil and gas group, Mol Group.

“As we get more economic data to validate that the underlying fundamentals in these economies continue to firm then people are going to get more aggressive in investing in emerging markets,” Harting said.

However, credit ratings agencies S&P Global, Moody’s Investors Service and Fitch Ratings have recently lowered positive credit outlooks and written even more negative outlooks for emerging markets.

Moody’s even highlighted the risk of capital flight and potential weakness in the banking sector.

Managing Director of global fixed income research at S&P Global, Diane Vazza noted worries about geopolitical risk and energy companies not being able to adjust to a longer-term trend of lower prices for oil and gas.

“About a third of (emerging market) corporates have negative outlooks,” Vazza told Reuters. “So we expect additional downward pressure across emerging markets.”

Meanwhile, crude oil prices yesterday recorded post-Christmas gains, as the Organisation of Petroleum Exporting Countries (OPEC) and non-OPEC members prepare to start curbing output on January 1, 2017 to support oil prices.

In the first trading after the Christmas and the public holiday, oil edged above $55 a barrel, drawing support from expectations of tighter supply once the first output cut deal between OPEC and non-OPEC producers in 15 years takes effect on Sunday.

January 1 is the official start of the deal agreed by the OPEC and several non-OPEC producers to lower production by almost 1.8 million barrels per day (bpd).

Brent crude was up 17 cents at $55.33 a barrel, while the US crude gained 30 cents to $53.32.

The global benchmark had reached $57.89 on December 12, the highest since July 2015.

Reuters reported that there was no trading on Monday after the Christmas holiday, while the volume of trade was light yesterday.

Nonetheless, crude may struggle to rally much further before evidence is available of OPEC’s compliance with the cut.

Oil has been supported in the past several weeks as OPEC and non-OPEC members had agreed to lower output by almost 1.8 million barrels per day (bpd) from January 1.

Major OPEC members such as Saudi Arabia and Iraq were said to have informed customers of lower supplies.

However, Libya and Nigeria – which are exempted from reductions because conflict has curbed their output – have been increasing production.

Libya’s oil production rose slightly to 622,000 barrels a day (bpd) on Monday, as an armed faction agreed to lift a two-year blockade on major western pipelines, the National Oil Corporation said.

The company said it could add 270,000 bpd within three months.

Russian oil producer Gazprom Neft said yesterday it planned to increase oil production by 4.5-5 per cent next year, less than it had intended before Russia joined the supply cut deal.

Russia’s oil exports would rise by almost 5 per cent this year to 253.5 million tonnes and a “slight” increase was expected next year, Deputy Energy Minister Kirill Molodtsov said on Monday.

Algeria’s Sonatrach will drill 290 wells in 2017 in comparison with 265 in 2016, the head of the oil and gas giant’s drilling division told Reuters late on Friday.

Steady growth from the U.S. has also been identified as another factor that could thwart OPEC’s goal to tamp down global supply.

The number of U.S. rigs drilling for oil climbed by 13 to 523 in the week ended December 23, marking the eighth straight week of growth and the most since December 2015.

The US Department of Energy expects to begin sales of roughly 8 million barrels of sweet crude from the country’s emergency oil reserve in early to mid-January, according to a notice sent to potential bidders