Morgan Stanley bursts excitement on Nigerian bonds
Morgan Stanley has dropped its bullish call on Nigeria’s bonds, just as investors were cheering the newly elected president’s overhaul of Africa’s biggest economy, according to Bloomberg.
In a note titled “No Longer Pumped,” strategist Neville Mandimika said the bonds have become expensive after rallying on President Bola Tinubu’s actions, which have included removing a costly fuel subsidy and revamping a dysfunctional currency system.
The bank turned neutral on the debt weekend after removing its “like” stance, in place since early March.
Nigeria’s dollar bonds surged 5%, outpacing every other developing-nation debt. Authorities let the naira fall after ousting central bank Governor Godwin Emefiele, the architect of a multiple exchange-rate regime that has hobbled the economy.
“While the rally may still have some legs as the market digests the recent policy changes, we think that the next month will likely be less lucrative relative to the past month for long positions,” Mandimika, who is based in London, said in the note.
“A short-term consolidation is coming.”
The risk premium for Nigerian bonds over US Treasuries has narrowed at a quicker pace than other similarly rated high-yield debt, sending it lower last week than Angola’s for the first time in almost a year, according JPMorgan Chase & Co.’s indexes.
Both Nigeria and Angola are rated at B-, six levels below investment grade, by S&P Global Ratings. Morgan Stanley said it prefers Angola to Nigeria in the long end of the yield curve.
“We use Angola as the reference credit given that it has gone through similar exercises of removing subsidies and adjusting its currency,” Mandimika said.
It’s also too early to rotate from credit into Nigeria’s local fixed-income assets, he said. In 2016 and 2017, when the naira was devalued, US Treasury yields were lower, sparking a search for higher returns elsewhere. That led to net inflows of funds into Nigeria’s local market that helped to stabilize its foreign-exchange reserves. US yields highs are currently much higher, curbing the appetite for riskier assets, the strategist said.
“A lot of comparison has been made between this week’s FX adjustment and the 2016 and 2017 adjustments as a way of justifying switching from credit into rates,” Mandimika said. “We think that the comparison is erroneous.”
