By Dan Keeler
Nigeria has consolidated its position as the most-watched frontier market in the latest WSJ Frontiers/FSG Frontier Market Sentiment Index as an increasing proportion of multinationals put the country on their watch list for potential future investment.
Nigeria has held the top spot since the index was launched in June 2014 despite having endured a rough ride for the past few months.
Based on a study of around 200 multinational companies, the index, created exclusively for WSJ Frontiers by Washington-based consultancy Frontier Strategy Group (FSG), tracks which frontier markets major European and American firms are focusing their attention on. It also reveals trends in corporate thinking by tracking the rate of change in corporate sentiment among FSG’s clients, which include companies such as Cisco , Merck and MasterCard.
Corporate sentiment is calculated as the percentage of companies that include a country on their watch-list. If 50 of the 200 companies are watching a particular country, the sentiment index score would be 25%.
Nigeria’s travails have primarily been caused by its heavy reliance for foreign exchange and tax revenues on oil, whose price has slumped by more than 50% since last June. Presidential elections are due next month, too, and the outcome is far from certain. Continuing attacks by rebel group Boko Haram are also having a negative impact on perceptions of Nigeria.
But for corporations looking beyond the short-term turmoil, the country’s problems may provide an opportunity to buy into Africa’s biggest economy at a discount. “Nigeria is about to enter a world of hurt but these are the times when you can really make a difference – both from investors’ point of view and corporates’,” says Matt Lasov, FSG’s global head of advisory and analytics.
Lasov argues that the sharp devaluation of the naira will push up prices of imported products, encouraging Nigerians to buy more locally produced goods. “Companies that produce locally will capture a huge amount of market share,” he says.
At the same time, the currency’s decline will make it cheaper for foreign firms to acquire Nigerian assets. “The reason the country’s gaining more attention while other oil exporters’ [appeal to corporations] shrinking is because companies are opportunistic,” Lasov adds.
According to Nnamdi Chiekwu, a partner at New York-based corporate finance advisory firm Namdex Group, foreign companies are taking a long view on Nigeria. “The political uncertainty is putting everything on hold,” he says, “but companies that can afford to wait it out will find great opportunities there.”
The trends in corporate attention illustrate starkly the impact lower oil prices are having on other oil-dependent frontier markets. The three worst performers in terms of change in sentiment in this quarter’s survey are all oil exporters: Angola, Saudi Arabia and Venezuela.
Although lower oil prices are arguably beneficial for a significant proportion of frontier markets, the confusion and anxiety over the impact of the precipitous fall in prices hit the sector’s equities hard. In the fourth quarter of 2014 the benchmark MSCI FM index plunged by 14%. Over the prior three quarters, the index had notched up a gain of almost 18%.
The general level of corporate interest in frontier markets reflected a similar pattern, with a majority of the countries covered in the WSJ Frontier Market Sentiment Indexseeing a decline in corporate interest over the quarter. Sentiment declined toward 37 markets out of a total of 68 during the fourth quarter. In the preceding quarter 48 of the 68 markets experienced an increase in corporate attention.
Overall, though, the magnitude of the changes in corporate sentiment towards frontier markets was remarkably low, ranging from +2.62 percentage points to -2.78 percentage points. The previous quarter’s range was +8.68 percentage points to -7.45 percentage points.
Vietnam, with a gain of 1.98 percentage points, climbed to second place on the list. Like Nigeria, the country is a perennial favorite among frontier investors but has seen some turmoil over the past year. China’s mooring of a floating oilrig in contested waters off Vietnam triggered a spate of anti-Chinese demonstrations that threatened to undermine the country’s growing appeal as a manufacturing base. The unrest doesn’t seem to have dented Vietnam’s appeal among multinationals, though, and almost three in 10 now include it on their watch list.
Vietnam’s appeal is reflected in the continuing steady growth of foreign direct investment in the country. According to Asian Development Bank estimates, net FDI last year rose to $7.1 billion from the prior year’s $6.9 billion. In 2015 the bank expects that to rise again to $7.3 billion.
Vietnam is not the only market in the region to attract more interest. Cambodia, Myanmar and Laos were all in the top five of countries that saw the greatest improvement in sentiment.
Central and Eastern Europe’s frontier markets were also among the top gainers, a refreshing change for countries such as Serbia, Croatia and Bulgaria that had been some of the worst performers in previous surveys. Absolute sentiment toward CEE countries remains weak, however. Ukraine is the region’s highest placed country, ranking 25th on the list after a 1.26 percentage point rise in the number of companies focusing on it.
Alison Graham, chief investment officer at frontier market fund manager Voltan Capital Management, says companies taking a long-term view are likely to be keeping an eye on developments in Ukraine: “Ukraine is relatively small with low population growth but the agricultural sector there is globally important. I imagine the big agriculture companies would definitely be looking really closely at it.”
As CEE has begun attracting more attention, South Asia seems to be losing its appeal. All three South Asian frontier markets — Sri Lanka, Bangladesh and Pakistan — were among the 10 countries that experienced the steepest declines in corporate sentiment.
Lasov contends that Sri Lanka’s appeal may have been dented by the presidential election that took place last week. He may have a point: While they applauded the peaceful conclusion of the election, ratings agencies have raised some concerns about the impact it will have on Sri Lanka’s business environment and economy.
Nikhil Bhatnagar, who covers Asian equities at brokerage Auerbach Grayson, is blunter. Noting that the new president has promised to reduce the Sri Lanka’s reliance on China, he questions the country’s fundamental economic structure. “The Sri Lankan model [is] nothing but a massive vendor-financed Chinese infrastructure build-out,” he says. If China’s investment eases back, it could have an impact on Sri Lanka’s GDP growth, which could sap companies’ enthusiasm for investing there.
Hiran Embuldeniya, Managing Partner at Sri Lanka-based Ironwood Capital Partners, which late last year raised $30 million to create the country’s first private equity fund, says he has not seen any decline in interest from financial investors. “Last year was one of the most positive in terms of net foreign purchases,” he explains.
And although he concedes that corporations could be holding off until it is clear how the presidential election will affect the business climate Embuldeniya says companies are still looking for opportunities. “It’s not an avalanche of investment but it certainly hasn’t dried up either,” he adds.
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