Cape Town-based investment portfolio manager, Allan Gray has bought a significant volume of naira bonds, issued by the Nigerian government.

The treasury bonds were bought after the Central Bank of Nigeria decided to remove the peg on local currency which caused it to slump 37%. By doing so, Allan Gray went in the direction opposing most investors’.

After a second quarter of economic slump, the Federal government was forced to declare recession, which it hadn’t experienced since 1991. However, though Nigeria’s economy seems to be slowly recovering its balance, investors have turned their backs to its bonds, concerned over low profit and losses caused by inflation. This trend emerged after the government adopted an ambitious budget due to which it is struggling to pay salaries and finance infrastructure projects.

However, Allan Gray, contrarily to most investors, does not find the situation that troubling as it bets on the long term. According to its analysts, it is normal for previous investors to move away from naira bonds given their respective situations. They believe nevertheless that Nigeria’s situation will not last forever, and history has already proved them right. 

In 2015, the portfolio manager took a bet on Zambian bonds which were then the worst-performing in the world. Now, local currency (kwacha), which was down due to global commodity slump and political uncertainty is back on its feet and Zambia’s treasury bonds are sought after by many investors from steady economies who yearn for high yields.

South African Allan Gray says that the Nigerian securities, with yields around 20%, offer enough compensation for the risks of further currency depreciation and an economy recession. The firm is not the only one to think that way. A review of the yields and values curve for the benchmark bond (NIGERIA 6.38% 7/12/2023) shows that investors’ interest in naira bonds is rising. Indeed, Nigerian securities with a rate averaging 16% are trading at more than 100% of their when-issued value.

Idriss Linge