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Expert Perspective

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Investment e.Perspective

Current Issue | April 27, 2017

Sometimes Saying No To An Investment Can Have As Great An Impact As Saying Yes

By: Brendan O'Sullivan-Hale, MBA, CFA, Senior Investment Strategist & Oxford Investment Fellow


Even booms that go bust sometimes leave something of value behind. Britain's railway mania of the 1840s destroyed fortunes but created a large rail network. A legacy of the US tech bubble was a vast internet infrastructure. It is too soon to call China's present troubles a bust, but if that's what it turns out to be, the world's most populous nation will still have a transport system Mao Zedong could never have dreamed of.

And after years of oil prices near $100 per barrel Nigeria's boom is ending, and it has little to show for it but billboards. Over the Third Mainland Bridge, the seven-mile span that connects the Lagos airport to the city's commercial heart, hulking LED screens loom. A three-sided display at a highway junction is adorned with crisscrossing rings like electrons circling an atom's nucleus. On a hillside over the water a digital surface the size of an IMAX screen is rumored to harbor a hideout for a local gang. Driving in from the airport at 6:30 on a Sunday morning, nearly every one of them is a blank dull grey, like unplugged televisions.

Nigeria is the seventh most populous country in the world, but it produces even less electricity than Slovakia. The rumble of diesel generators and their accompanying fumes are the hallmarks of Lagos' affluent districts – in a shopping district on Victoria Island a purveyor of soundproof generators is nestled among the Emernegildo Zegna boutique and the BMW dealership. That Nigeria's private investors would sooner invest in digital billboards than in the energy infrastructure to power them is itself a commentary on the tangled structure and massive corruption of the Nigerian economy. The fact that apparently no one is willing to pay advertising rents high enough to bother switching on the generators is a sad coda to the boom that was.

I was in Lagos at the invitation of a frontier markets specialist I've worked with for a few years, on the theory that after the Nigerian stock market had fallen sharply with oil prices there might now be some stocks worth buying. To the extent this trip was supposed to be a shopping expedition, it was unsuccessful.

It's not that Nigeria lacks interesting investment opportunities, exactly. Successful logistics companies there are all the more remarkable for operating in a country where the roads in and out of its largest port are rutted with car-swallowing potholes. There are gaming operators whose strategy for building trust among a customer base jaded by corruption is to run lotteries based on the numbers from neighboring Ghana. A tomato processor demonstrated extraordinary entrepreneurial energy by relocating his entire business to Lagos after Boko Haram destroyed his first factory in the country's northeast.


But Nigeria's macroeconomic backdrop is so terrible that even at the current depressed levels, most stocks will need to fall further before they compensate investors for the risks involved. The country has capable pharmaceutical manufacturers, but they face a formidable competitor in a market where pharmaceuticals smuggled in from India and Bangladesh are traded in the open air, mere blocks away from downtown Lagos’ office towers. While the oil industry makes up only 14% of Nigeria's economy, oil accounts for more than 70% of government revenues. The lack of diversification of the tax base has created a situation where legions of government workers, including police officers, have gone months without pay – leading to increased incentives for bribe-taking, and one of the odder social interactions of my life. In the affluent Lekki neighborhood we stopped to ask a police officer for directions. He provided them, accurately, and then asked us for a ride.

It's no mystery why the oil boom produced little of value: the country's longstanding culture of corruption allowed outright theft of tens of billions of dollars of oil revenues. But Nigeria's situation is not hopeless. Its new president, Muhamadu Buhari, was elected on an anti-corruption mandate. The government has recently won major victories against the Boko Haram insurgency in the northeast. And it's the kind of place where back issues of the Harvard Business Review are sold by street vendors who wander through Lagos’ legendary traffic jams.

But for now, there's the basic issue of electricity. Any advantage a huge population and low labor costs might confer in competing in the manufacture of low-end goods is negated by the difficulty of procuring power. Every manufacturer we visited included their on-site power generation capability as part of their investor presentation. The tomato processor, remarking on the unreliable power grid, contemplated disconnecting from it altogether. The treasurer of a bank whose 20-story skyscraper is powered by dump-truck size generators in the parking lot across the street lamented the fact that a bank should have to count the price of diesel among its operating expenses.

For us at Oxford, this trip was disappointing in terms of uncovering investment opportunities, at least for now. Still, it validated our approach to frontier markets, which emphasizes deep on-the-ground research. In the case of our 2014 visits to Kenya and Tunisia, that kind of work uncovered opportunities in good companies operating profitably in difficult environments. This time we confirmed that sometimes saying no to an investment can have as great an impact as saying yes.

The above article represents the opinions of the author as of 1.28.16 and is subject to change at any time due to market or economic conditions or other factors.