Co-Managing Partner and Chief Executive Officer, Comercio Partners Asset Management, Tosin Osunkoya in this interview speaks about the performance of Nigerian economy and what may likely happen in 2023. Excerpts
What is your assessment of the Nigerian economy in 2022 especially in terms of your projections or expectations for the year?
At the beginning of the year, we had a slightly bullish outlook for 2022 on the back of the recovery from Covid, we thought that the supply shock or demand supply imbalance will moderate, and we will begin to see economic activities picking up in 2022.
However, what nobody thought about was the Russia-Ukraine war and the fact that Covid was still a problem in China. These twin factors and their impact on global energy and food prices left Africa feeling the brunt. Both countries are major suppliers of agricultural products, particularly wheat, to Europe and the rest of the world. The outbreak of the conflict exacerbated already brewing inflationary pressure on global food prices. And because Africa is not immune or isolated from what is happening globally, one way or the other, they would be affected and that in a sense includes Nigeria as well.
What has happened from February till date is that all or most of the countries are fighting inflation. So, countries are not thinking about how to promote or stimulate economic activities, their major focus has been how to address inflationary pressure. Therefore, as a Central Bank Governor, you look at price stability and how to stimulate the economy. But if you are caught between these two, you will need to tackle what hurts the economy the most. And in the case of the United States, which is the biggest economy in the world, what hurts them and still hurts them right now is inflationary pressure; the prices of goods and services are moving up, and they need to address that and that filters into so many other countries. In Europe as well, the European Central Bank (ECB) is fighting inflation. Nigeria, as well as other African countries, is fighting inflation. In Ghana today, inflation is about 50 per cent, so no country is exempt.
Similarly, inflationary pressure has affected asset prices, it has brought down the purchasing power of the average citizen, whether as a citizen of Kenya or Ghana, or even an American citizen, it has affected their purchasing power because when the prices of goods and services move up, what you have as disposable income cannot buy as much as you should be able to in an ideal economy. Inflation, this year, has been the bane of most markets.
So how would you assess the performance of the economy in light of these issues?
You could look at the performance of the economy in two ways and I will take a cue from what I had said earlier which is, you examine the performance of the economy in terms of its Gross Domestic Product (GDP). Nigeria has done fairly well relative to some other countries in terms of its GDP. Our GDP grew by 2 to 3 per cent in 2022.
But on the other hand, Nigeria has not benefited from the rally in crude oil prices. Nigeria, as an oil producing country, like Saudi Arabia, Russia, Norway and even Angola should have benefitted from the high crude oil price. However, we haven’t taken advantage of the high crude oil price because our production has been struggling. Our crude oil production level is about 1 million to 1.2 million barrels per day. Ideally, we should be producing at a capacity of 1.8 million barrels. And that in a way will affect accretion of foreign earnings into our external reserves. If we were producing up to capacity, we would have seen our external reserves move up to $40billion or above $40billion and that could support our currency. Because of our currency challenges, this year alone, our reserves have dropped by 40 to 50 per cent and this has affected Micro, Small and Medium Enterprises (MSMEs). It has also affected the purchasing power of the ordinary citizen in the country because you have imported inflation. If your currency depreciates and you are an import dependent country, you suffer a lot. An import dependent country will want their currency to appreciate because that makes their goods a lot more competitive. America, Japan, are exporting countries. When they export their goods in an environment where the currency is relatively weak, it makes their products a lot more competitive. But if you are a country that imports a lot of your goods, your import bill rises, your currency depreciates and this affects the price, and that means you are actually importing inflation into the country.
Therefore, in 2022 we suffered a lot in terms of currency depreciation and inflation. Inflation started this year around 15% to 16%, now we are above 21 per cent. Consequently, this year has been a very challenging year and we have not experienced any significant Foreign Direct Investment (FDI) or Foreign Portfolio Investment (FPI) coming into the country. FDIs have been stunted obviously because it is the eve of an election year, so you see a lot of investors shying away from coming into Nigeria. Even those that are short term horizon investors that come into the equities or fixed income market to buy or play around the market in one, two, or at most three months, and get out, are not really keen on coming into the country because of the currency situation and the liquidity scarcity in our FX market. We have a lot of them queuing up to buy forex to repatriate out of the country, which discourages a lot of them from bringing forex into the country. So, it’s been a myriad of challenges in 2022 if you ask me. The only thing I can say we can boast of is the growth in GDP and the non-oil sector’s significant contribution to the growth in GDP.
Would you describe 2022 as a good or bad year for the investment community and what is the basis for your answer?
I think it depends on where you sit on the side of the aisle. For some people it was not a good year especially if you had any dollar denominated asset. If you had a dollar denominated asset and the asset is not as a result of you converting Naira to Dollar. If you had converted Naira to dollar, you could say conversion of Naira to Dollars has helped to cushion the effect of the assets you invested in either US equities or Eurobond or some other foreign denominated assets out there.
Most of the foreign denominated assets out there, have actually been deflated by almost 40 to 50 per cent. So, most people have lost money in some of those dollar-denominated assets in terms of pricing of those assets. But because you have converted naira to dollars to buy those assets, you could, net to net, be okay.
In terms of local investment however, most of the local investment especially the traditional asset classes have not done well. The equities market started the year very well but by the third quarter and fourth quarter, we started seeing a reversal of that upward trend. At a time, the equities market year to date was about 14 per cent. Now, it is about 2 to 3 per cent year to date. That means you have lost a lot of money during the course of the year. So, what has happened is, towards the close of the year, we saw yields on treasury bills coming up, as well as FGN Bonds. This could move you into 2023 with a positive sentiment of getting a good deal on your money in local investment. One asset class that I hope you have positioned yourself very well is properties. So, properties in the year, ironically, have done well. If you have properties, and you bought them in choice or prime areas, you would have made up to 20 or 30 per cent during the year, which I think is a very decent return if you have investment in Naira.
But investments in dollars have not really done well. I mean investment in traditional foreign assets such as U.S. equities, Eurobond, et cetera. I will give you an example, for U.S. equities, most Nigerians are comfortable with the big tech companies, the likes of Tesla, Google, Amazon or even Metaverse, that is Facebook. These shares have depleted in assets and have nosedived between 30 to 70 per cent in 2022. If we are talking about the upside, I know that Meta has experienced 70 per cent depletion in value, Tesla has experienced about 60 per cent as well, Amazon maybe about 30 or 40 per cent. So, if you had invested in some of those U.S. equities when their prices were high you would have lost a lot of money in terms of the value or percentage, you would also have lost some of your portfolio. Eurobond is the same thing as well. If you had invested in the likes of Ghana for instance, or even in Nigeria, a 10-year instrument in Nigeria when we started this year was trading around 8 or 9 per cent but there was a time it actually got to 15 per cent. So, from 9 or 10 per cent it went up to 15 per cent, you would have lost about 34 per cent of your portfolio if you had bought at 9 or 10 per cent. So traditional assets in terms of Eurobond and equities year-to-date, have lost about 40 to 50 per cent. The only compensating factor would be the fact that when you invested in those instruments, you converted naira maybe at N600/$, we opened the year at about N575/$ and now it’s about N740 to N750 per dollar, you would have gained from the depreciation of the Naira.
But I think that going into 2023, by and large, what has happened is because of the rise or the continuous hike in interest rate by the Fed, Nigeria is not absolved from what is happening globally. So, the U.S. government, because they need to tame inflationary pressures, they continue to hike interest rates. The last one they did yesterday, about 50 basis points, takes their Fed Fund to about 4.5 per cent and they are looking at a terminal rate of about 5.0. Due to these increments, you see capital moving away from developed countries or moving away from emerging countries or frontier markets into the U.S. market, because they are comfortable buying U.S. treasury bills at those rates. A 10-year US treasury was trading initially at 4.1, 4.2, 4.3 per cent, it is back down now to 3.5. Most investors feel comfortable moving their money into the U.S. because they know that the risk there is minimal compared to Africa or to Nigeria.
Inflation and forex scarcity were major challenges to the economy and Nigerians in 2022, do you see a moderation or worsening of these challenges in 2023?
I think 2023 is going to be an interesting year. I think inflation will begin to moderate. I think moving into the first quarter of 2023, we will peak inflation and will begin to see moderation for two reasons.
One reason will be that the base effect will come into play. Then energy prices and food prices will begin to moderate. I think that there are nuances between Russia and Ukraine trying to soft pedal. Though nobody has come forward to say that “oh we are dropping our war tools”. But I think it was last week that Ukraine sent another shipment of grains into Europe. So obviously they are thinking or saying, yes there is still war, but we still need to earn money to survive. So, I think we would begin to see that moderation coming into 2023.
I also think that the Fed or the U.S. government will begin to taper the incessant hike in interest rate. Consequently, you will see asset prices beginning to move up. There will also be a rally on Eurobonds, as well as on U.S. equities. And when that happens, even in the local country, there will be some form of respite. I foresee the traditional assets class moving up as well.
The local equities in Nigeria, I think, will pick up and I will tell you why. You have an interest rate on our government securities in double digit right now, between 14 and 15%, so the banks technically will benefit from that. Secondly, because of the redesigning of the currency and after the announcement, some of the money that was outside banking circulation. has come into the banks. That means the deposit of banks will go up. When the deposits of banks go up and it is a rising interest environment, it accounts for some reward for the banks. So, I see the banks’ earnings moving up as well. And when the banks’ earnings move, the movement in the banking sector will filter into FMCG or into Oil & Gas. Therefore, I see Nigerian equities doing well in terms of earnings. I see Q1 2023 numbers doing better, I see Q2 showing better numbers as well. When that happens, you will see the capital market moving up because of the good numbers coming out of Q1 and Q2. You might see the fixed income market easing up in terms of yields because of the liquidity we are experiencing in Q1. We will see trillions of liquidity coming in Q1, and you will see those monies going after the bond market. And when the bond market goes down, people will naturally move into the equities market. So, I see the equities market doing well in the first two quarters of 2023.
In terms of inflation, I think inflation will moderate. In terms of exchange rate, what I see, as we move towards the election, will be the parallel market trending towards N800/$, I hope it does not break at N800/$. But I think that it is not going to stay there. I think there is going to be a retracement because it is a one-off event, there is no real demand backing it up. The demand is a temporary demand because of the election. Consequently, after the election, I think it is going to come down depending on what the FG or the CBN decides to do, I think there is going to be a retracement. Most of what will happen will be driven by speculators.
Do you see the FX scarcity continue throughout next year?
I think the FX scarcity will continue into the first two quarters. But I think in Q3 and Q4, there will be some stability; we may not see it going below N700/$. There has been a level now because even in the last few weeks, we saw FX rate retracing back below N700/$. But there is technical support around N700/$.
Some people still think that the currency at N700/$ is a good buy and the reason why they are saying that is because they are looking at the long-term outlook of the currency. The long-term outlook of the currency is that to be honest, Naira will continue to depreciate. We are not a producing country. We are heavily dependent on importation. So, our import bill will continue to be on the rise. What could give respite to this is the Dangote Refinery coming on stream and the FG having the will to suspend fuel subsidy. If they suspend fuel subsidy, it will in a way reduce the pressure on currency and on the Naira. And since Dangote Refinery, hopefully is going operational, fuel that we have been importing can be done locally, which takes out the burden on the Naira. If that is not done, we will continue to see the pressure on the Naira.
The supply of FX into Nigeria is also very germane. If we don’t have FDIs and FPIs coming into the country, we will continue to suffer. So, the silver bullet is not just Dangote Refinery, the silver bullet is Nigeria attracting FDIs and FPIs. There was a time when we were experiencing about $5 billion FDI and FPI, which has completely gone down to about $500 million or $1 billion. And you could see that, because the Fed and other central banks are doing quantitative tightening, money is not moving around as it should. But the money moving around is not even coming into Africa, particularly into Nigeria because the investors do not see a clear line of direction or picture of where the country is going. So hopefully with the new regime of government coming in, the first thing I will expect them to do is to put in policies that will attract FDIs.
Europe today is complaining that they are heavily reliant on Russian Gas from Nord Stream. Nord Stream has about 1200 km pipeline from Russia into Germany. Nigeria now is talking to Morocco to see how they can build a 5,600km gas pipeline into Europe. If that is taken seriously, it will not happen overnight because it took Russia about 10 years to complete theirs. And these are countries that are very serious and highly organised. So, if we are saying we want to build something like that, I hope we can build it in five to ten years. The point is that we need investment to come into the country. I am not sure that NLNG will build that, they need to invite other investors to build that. When that happens, it is going to bode well for Nigeria because that will attract foreign investments, foreign earnings because we are now an alternative to Russian gas for Europe. I hope that would happen and if it does, we will begin to reap a lot of benefits. And the production of our crude oil is also coming up, Forcadoes has reopened, and we are doing about 400,000 to 600,000 barrels now. I think we should gain some accretion to the external reserves.
Hopefully, there will be a new government come May 29, 2023. What are your recommended first 100 Days policy priorities for the incoming administration?
I think for the first 100 days I will look at three major issues the new government should deal with. One is security. Security has also affected harvest in the North and because the North controls or influences our food production and distribution, it is important for them to tackle that in a way that will help food prices, and that could moderate your overall headline inflation. Another thing they need to tackle is restoring confidence not just to the local market but to foreign investors as well. The foreign investors have lost confidence in Nigeria in terms of policies and in terms of the direction of our currency. And not only them, but also the local investors or wealthy citizens have lost confidence in our currency and that is why you see them converting Naira into Dollars. You need to deal with that immediately. They need to come up with policies that will restore confidence to the local investors and foreign investors. When that is done, you will see that there will not be any capital flight, and when I say capital flight, I am not talking about foreign investors taking money away but local investors taking money away. There must be policies that will drive local investment in Nigeria. And when that is done you will see foreign investment coming in.
Then the last one I think is, there must be a strategic plan and they need to map that plan out, that this is what we intend to do in the next three to five years. Power, I think, is still germane to everything we have been talking about. If you want to address power, you must be clear how you address power because without power you cannot support SMEs. Most economies depend on SMEs. Today we celebrate BMW from Germany, Samsung from South Korea, Range Rover from England, but initially they were SMEs but over the years they have built a brand. So, we need to start promoting our SMEs and empowering them. And empowering them means that you need to give them that power, the infrastructure that will support their businesses.
It is not enough to just do intervention because the CBN, and the FG through all their schemes, have been empowering and supporting them. But when they support you with cash, what you need for your business to thrive is much more than cash, you also need infrastructure, the market that will drive demand for whatever product or services you are offering. When you don’t have that infrastructure and they give you cash, this only means you are adding to the debts that you have because the market is not there. They not only need to support them by giving them cash by way of intervention, but they need to address the infrastructure problem namely power and every other infrastructure that we need to address. And that would drive demand, when that drives demand, we will see these SMEs thriving.
Besides the anxiety and uncertainty among investors about the general election, what opportunities do you see in 2023 for investors to make money and strategies should they adopt to leverage these opportunities?
Warren Buffet says, “you get greedy when others are fearful, and you get fearful when others are greedy”. We are in a moment when people are fearful, and we see a lot of people selling their assets because prices are going down. This is when investors with cash will begin to pick some of those assets that have gone to year low, all time low or a decade low. In doing this, you need to partner with professionals like Comercio Partners that can handhold you and tell you which of those assets you should buy into.
I think stop losses in some of these assets are being bridged and when stop losses are bridged, you see organisations and individuals who have risk management parameters saying, “this is my allowable loss limit, let me just sell and get out of this market because I don’t know where it is going”. But when that happens it opens up opportunities for some other investors to buy but you can only buy when you have cash.
They will tell you that cash is trash but now cash is king. So, you need to ask yourself, “the cash I have now, which of the assets should I go into?” If Tesla today has depleted by 50 to 60 per cent, you ask yourself how further down it can go especially when the Fed will begin to taper by Q1, Q2 next year. It means this is the best time to go into Tesla. Let us take GTB or Zenith Bank or Presco or Okomu Oil or even MTN in our local market, they have done well but their prices have nosedived. Their prices right now are very attractive. But the reason people are not buying now is because people are scared. So Warren Buffet says that you should be greedy when people are scared, so this is the best time for you to pick those stocks.
When you look at the dividend yield on GTB and Zenith, these two stocks right now are trading around 20 to 21 per cent, the dividend they pay out is around N2.7 to N3 this year. That gives you effectively a yield of 10 to 12 per cent, which is an interesting yield. So, you look at that, you look at Okomu and a few other shares I think will give you a good dividend yield in 2023 and you are buying them at a very low price. In 2023, for you to take advantage of those opportunities you must have cash, fresh cash. I am not talking about you trying to sell your position and coming back, no, it must be fresh cash. That cash will give you the opportunity to buy at a very cheap price. At Comercio Partners, what we have been advising our partners, especially in some of those assets is, the entry point is also important, so right now Fed has increased interest rate by 50bps, and we think at the next meeting they might increase by 50 or 25bps. At Comercio Partners, we tell you to chill and wait for the time to buy. This is why I said you must always have a professional handholding you.
In 2023, I will tell you about areas where you should invest in. Fixed income local market is number one, you should invest in it. Equities in the local market, look for some of the good names to invest in. I think that in dollars, the currency will remain stable between N750 and N770 per dollar, so if you look at it, that means depreciation is less than one or two per cent and that continues into the year. However, you look for local assets that are cheap to buy. You can buy the fixed income, you can buy local equities, you can also buy properties as well.
If you are buying properties, go to the middle-class areas to buy the properties. Properties will always lag, they don’t immediately react to inflation or depreciation of currency, they lag. So, you need to begin to cherry pick those landed properties that you want to buy now, build and sell later. If you move into Sub Saharan Africa, SSA Eurobonds, look at Angola, Kenya and then Nigeria, you should buy a bit of all those three countries. You could also buy Egypt as well.
In terms of US equities, look at the tech stocks. I think the tech stocks will begin to pick up in 2023 into 2024. What I think will happen in 2023 will be the fear of recession. When there is a recession, you have quantitative easing coming in. We have been having quantitative tightening, but when the central banks of the developed countries begin to sense there is a recession, they will begin quantitative easing, which means they are bringing money into the system. You can imagine buying your assets cheap and the governments of these countries are bringing in money, the prices of those assets will go up. You need to be positioned for that. The discussion around quantitative easing will start when they begin to see that the growth in GDP is going below 2 or 1 per cent. That means that they are now concerned about recession.
So, when they begin to put inflation under control, the next challenge will be recession and I see that happening toward the end of 2023 into 2024. When that happens, we will advise our investors to start buying some of those assets when the conversation is shifting from inflation into recession. You don’t go into the conversation when we are already in recession because by that time everybody is aware of what is going to happen. The timing has to be perfect. When people are selling now because of inflation you know that there is going to be a shift in the curve from inflation to recession and you can only buy when you have cash. So, at Comercio Partners, we begin to advise our clients, when we see the growth in GDP of the US, China, UK or some other market in Europe begin to taper down, to buy some of those assets.
