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HomeBusinessNaira undervaluation by 30% signals potential for equity rally, says Renaissance Capital

Naira undervaluation by 30% signals potential for equity rally, says Renaissance Capital

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Renaissance Capital Africa has pointed out that the Nigerian naira remains significantly undervalued compared to its long-term average, estimating the undervaluation to be around 30% at the March 28 exchange rate of N1,303/$.

In its latest report titled “Thoughts from Renaissance Capital Africa,” the firm said the undervaluation presents potential opportunities for investors in the Nigerian equity market.

The report highlighted a recent strengthening of the naira, noting a 20% gain in equity values since the end of February as the naira appreciated from 1,600/$ to approximately 1,300/$.

Renaissance Capital Africa anticipates a further rally in the equity market, suggesting that Nigerian equities are currently among the most attractively priced in the past two decades.

According to the report, monetary policy in Nigeria has become more sensible, instilling confidence among portfolio investors that inflation will eventually begin to decline. This confidence is reflected in the recent appreciation of the naira.

The analysis revealed that Nigeria’s 25-year average exchange rate has moved from 900/$ to 1,200/$, with the current average rate standing at 912/$.

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Despite this, the naira remains undervalued relative to its historical average, presenting favourable conditions for potential currency appreciation.

Looking ahead, Renaissance Capital Africa outlined potential scenarios for the naira’s trajectory. It suggested that a surge in inflation in March and/or April could erode some of the currency’s undervaluation, bringing it to around 20–25%.

However, sustained efforts by the Central Bank of Nigeria (CBN) could drive the naira stronger, potentially reaching 1,100/$ and prompting a re-rating of the equity market.

While the report acknowledged risks such as a worsening current account, higher-than-expected inflation, and security concerns, it also highlighted positive factors, including rising oil prices and production, which could bolster investor confidence and improve Nigeria’s external position.

Overall, Renaissance Capital Africa portrayed 2024 as a turnaround year for Nigeria and other key frontier markets, emphasising the country’s commitment to sensible monetary policies and market-driven currency rates.

This positive trajectory, combined with reforms and debt management efforts, is expected to enhance Africa’s standing among global investors after a challenging decade.

(Edited by Oludare Mayowa; omayowa@globalfinancialdigest.com; Newsroom: +234 8033 964 138)

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