Nigerian banks have now become the cheapest stocks to buy in Africa as a dollar shortage in the country discourages foreign investors.
Four of the five African stocks with the lowest P/E ratios of companies worth $500 million or more are Nigerian lenders, according to Bloomberg data. The banks are United Bank for Africa (UBA) Plc, Access Bank Plc, FBN Holdings Plc and Zenith Bank Plc, while Johannesburg-traded steelmaker ArcelorMittal South Africa Ltd. completes the quintet.
So far, investors have managed to beat the returns of the Lagos stock market by buying higher yielding debt sold by the government to finance the widening budget deficit.
However, the CBN’s forex restriction policy is worrying foreign investors and causing low valuations.
Usoro Essien, an analyst at Rand Merchant Bank, told Bloomberg, “the currency’s illiquidity has frustrated many foreign investors, so the apathy isn’t just on banks, but the market in general.”
The Nigerian stock market fared well in 2020, ending the year as the best-performing stock market with a 50% rally as local pension funds banned by the state from trading their most lucrative short-term debt poured money into equities.
That liquidity has since largely dried up, with the 151 member benchmark index falling 2.3% this year, with an index of the country’s largest banks falling 3.7% from Monday’s close.
Domestic investors may be drawn back to the undervalued stock market if fixed-income returns prove unattractive, but that probably isn’t enough incentive for non-residents, Essien said. “For the foreign investor, the most important thing is the ability to exit at will.”