Not Just Oil Hampering The Nigeria ETF

Markets Benzinga

Maybe oil is not hampering the Global X MSCI Nigeria ETF ( Global X Funds (NGE) at all not with the United States Brent Oil Fund, LP (BNO) being up 23.8 percent year-to-date and NGE being the only exchange-traded fund dedicated to equities in Africa's largest oil-producing country.

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With Brent prices on the mend, things should be improving Nigeria, Africa's largest economy. After all, Nigeria is a member of the Organization of Petroleum Exporting Countries (OPEC), and the government there depends on oil production and exports to fuel a sizable portion of revenue.

Why NGE Is Off 5%

In reality, things are much different. NGE is off nearly 5 percent year-to-date, good for by far the worst performance among the single-country ETFs tracking equities in OPEC member states. Rising inflation and foreign currency woes are plaguing the Nigerian economy.

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Companies indicated that the weakness of the currency and price rises linked to the scarcity of fuel had been key factors behind inflation. The Nigerian naira has been pegged against the US dollar since March 2015, meaning that importers have struggled to access foreign exchange. Though Nigeria is a major producer of oil, it also relies heavily on fuel imports hence the recent shortages. A combination of these factors has driven prices sharply upwards, according to Markit.

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Earlier this month, Nigeria narrowly escaped a market classification demotion by index provider MSCI. Nigeria is currently classified as a frontier market and demotion from there amounts to something of an index purgatory. Upon further inspection, it appears as though Nigeria dodged that demotion not because the economy there is improving, but because MSCI feared such a move would cause more harm.

Rising Oil Not Helping Enough

NGE wears another ominous badge this year. Of the four single-country ETFs tracking nations classified as frontier markets, the Nigeria fund is by far the worst performer despite rising oil prices.

Alright, so NGE's energy exposure is not large. The ETF devotes just 6.6 percent of its weight to energy stocks, good for its fourth-largest sector allocation. Consumer staples and financial services combine for nearly 80 percent of the fund's weight, indicating global investors are not enthusiastic about the prospects for the Nigerian consumer or its banks.

Compounding matters is the fact the Nigerian central bank is in a tough spot.

The surge in inflation leaves policymakers in a quandary. With year-on-year GDP growth expected to slow again when first quarter numbers are released on May 21st, the central bank is faced with the task of stimulating the economy and controlling inflation at the same time, added Markit.

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