According to the Renaissance Capital Africa research, Nigeria is expected to see a rise in oil prices and a strengthening of its currency in 2024.
According to its most recent report on the economy review, the Nigerian naira is still 30% undervalued compared to its long-term average on March 28 at the rate of N1,303/$.
In addition, the research organisation said that following February’s 20% advances, the stock market is poised for success.
The company said in its “Thoughts from Renaissance Capital Africa” report, which was made public on Tuesday, that since the end of February, investors have already realised returns of 20% on their equity investments as the naira appreciated from 1,600/$ to about 1,300/$.
It stated that “We anticipate a larger rally to occur. Nigerian stocks are about as cheap as they’ve been in 20 years, measured in US dollars.
Renaissance Capital Africa emphasised that monetary policy had returned to sense, and portfolio investors could now make investments with some assurance that inflation would eventually begin to decline.
Nigeria’s 25-year average rate was reported to have returned to 912/$ in this month’s model update, having been altered from 900/$ to 1,200/$ in the previous month’s update.
The firm stated, “So at the March 28 level of 1,303/$, the NGN is 30 per cent undervalued to its long-term average. That’s the cheapest in Africa (just decimal places cheaper than Egypt), and only the Japanese yen is cheaper among 80 currencies we look at.
“We expect a surge in March and/or April inflation to erode that to perhaps 20-25 per cent undervalued. If the NGN stabilises at 1,269/$ – and if inflation was 20 per cent in March 2025, this would take the average rate up to around the same level by March 2025.
“As such, the naira could stay here all year – which is much better return in one-year bonds yielding 18-19 per cent than owning US treasuries at 4-5 per cent.
“Alternatively, the CBN could drive the NGN spot rate stronger, perhaps to 1,100/$ – and then encourage a weaker monthly trajectory for the currency. So, a 10-20 per cent nominal NGN move stronger from here is plausible, and we ought to get a re-rating of the equity market too (as in Pakistan and Kenya).”
On the other hand, it said a worsening current account, higher than expected inflation, and insecurity were obvious risks, stating that if inflation surges to 50 per cent in the next few months, then much of the undervaluation of the naira will disappear.
Renaissance highlighted that, “If inflation stayed at 50 per cent into next year, the naira would become overvalued at 1,300 and would need to sell off again to become competitive. The 18 per cent yield on one-year bonds would not look so attractive if we lose 20 per cent on the currency.
“There are fiscal risks that could lead to higher inflation. The government has an expensive liability via fuel and electricity prices. The fuel subsidy may have been officially removed in 3Q23, when the fuel price went to around N550 and the exchange rate was more like N700-800/$.”
