Exotix Partners, a global finance and investment firm, has added Nigeria T-bills to its top-5 global picks in frontier markets debt, Africa Global Funds has learned.

In its latest review, Exotix has assigned a new “Buy recommendation” on Nigeria T-bills where the firm expects solid double-digit returns in USD terms, on the basis of “anticipating only modest Naira weakness” (and possibly even appreciation given likely currency overshooting).

Stuart Culverhouse, Head of Research, Exotix, said: “Specifically, we recommend 12-month bills with a yield of 22.4%. This compares to a YTM of 4.7% on the shortest sovereign US$ bond (2018) and 6.8% on the longest (2023).”

In the short space of six months, Nigeria has floated its exchange rate, reversed a policy of negative real interest rates and given investors a clear message that market-oriented policies are once again part of its long-term development plans.

Although it will take some time before credibility can be restored to pre-Buhari levels, the investment case is now re-opened – and for those willing to act early, quite compelling, according to Exotix.

“The magnitude of the changes since January 2016 is striking: the exchange rate has moved from being firmly fixed at NGN199.00/US$ to freely floating at NGN318.50/US$; the MPR (policy rate) has been raised by 300bp to 14.0% (and counting); local T-bill yields have risen from 0.7-8.8% to 15.8-22.4%; and the spread between the official and parallel market exchange rates has halved from 44% to 22% with a further narrowing expected (by us),” said Culverhouse.

“To put these changes in context, consider that the exchange rate is now undervalued by 15% in real terms, while real interest rates (using the 12-month T-bill yield as a benchmark) have gone from -1.0% to +6.0%, among the highest in our EM/Frontier universe,” he added.

Culverhouse said that the rapid change in policy orientation and fundamentals has made carry trades into Nigeria attractive– both by the standards of Nigeria’s own history, and by those of EM/Frontier at present.

“The prospective returns on an investment into 12- month T-bills are over 33%, if the naira returns to our fair-value estimate of NGN290/US$. For those with a more bearish outlook on the currency, it would take a move to NGN390/US$ before the gains on the same 12-month T-bill trade are erased,” he said.

Exotix’s other top four global picks include Venezuela, Ecuador, Kenya und Ukraine.

In regard to Kenya, Culverhouse said: “We think that Kenya stands out as a relatively solid credit in the African space, with the potential to offer continued improvement on fundamental metrics.”