Nigerian Stocks: High Risk, High Reward?

AFP/Stringer | AFP | Getty Images

With seven expat workers killed in Nigeria this week and three sailors seized by pirates from a British cargo ship off the coast of the country – Nigeria doesn't seem like a very safe bet for investors. But according to one asset manager, the country still offers investors several opportunities, especially in the banking and consumer goods sectors.

Graham Stock, chief strategist at Insparo Asset Management told CNBC, the country is their favorite market in Africa.

"We see returns of 15 to 20 percent on an annual basis, very achievable on the frontier space," Stock told CNBC Europe's "Squawk Box".

Last year the fund made returns of 22 percent from Africa, while Nigeria's all share index surged by 35 percent. This year the Nigerian stock market is already up 17 percent.

Insparo started investing in Nigeria in 2008, right when the Nigerian banking crisis wiped out the capital of the local banking system and liquidity dried up. Nigeria's central bank imposed higher capital requirements in 2009 and cleaned up the financial system.

"It was in response to the proliferation of banks in Nigeria. Before 2007 you had 89 institutions, the bank raised the capital requirement to a billion dollars, and that brought the number down to 24," Insparo's Stock explained.

According to Stock, the problem with the Nigerian banking system is that there are not enough blue chip corporates to lend to and a lack of a robust mortgage market to expand retail lending. But he said that will change with the introduction of new technology such as mobile phone banking and he said the lending outlook was strong.

Among the stocks Insparo likes are Guaranty Trust Bank (GUARANT.LG) and Access Bank (ACCESS.LG), both of which trade at a price to earnings ratio of 6.

Stock said the low penetration of goods and services and the rapidly changing demographics made consumer stocks attractive. Insparo sees an opportunity in urban consumption and the rising middle class. The firm's analysts picked Nestle's Nigerian subsidiary (NESTLE.LG) listed on the Lagos stock exchange as one of their top names.

Stock said Insparo was not into the risky construction business in remote North Nigerian territories, but recommended two cement companies – Dangote (DANGCEM.LG) and Lafarge's subsidiary (WAPCO.LG) – as the development of a big commercial center in Lagos was creating demand for building materials.

Is It Too Late to Invest?

Despite the run up in Nigerian stocks, Insparo believes investors with a long-term investment horizon can still make money.

And Stock said safeguarding investments from the country's relatively higher risk, comes down to smart stock picking.

"Being on the ground a lot, meeting regularly with company management teams and policymakers… We work with local counterparties, the managers of the companies we invest in, the brokers we trade with, they know the way around."