Nigeria’s low-yielding interest rate environment which has been worsened by the rising inflation rate has investors with higher appetite for investment with profitable returns attempting to hedge against risks.
The low return on investment in Africa’s largest economy means return on investment is at a negative real interest rate.
From 2019 to date, the interest rate on government short-term instruments has plunged by 8 percentage points from 12.27 percent in January 2019 to 3.45 percent in the same period of 2020, according to the Central Bank of Nigeria.
Yields on 1-year Treasury bills and 10-year bonds are currently 3.4 percent and 9 percent, respectively, signalling a negative return on investment as the rates are well below inflation rates.
Inflation rate jumped to 12.58 percent in July, the highest in 27 months, and there are predictions that the rates could even rise higher before 2021, further eroding purchasing power.
Despite the economic uncertainties, it is not all bad news as there are some viable investments you could make during this period.
Read also: Rising unemployment, inflation make Nigeria’s optimistic non-oil revenue projection worse
Here are some investment opportunities analysts have identified.
Stock market
Analysts think this might be a good time to invest in the stock market.
“Equity market might be a good investment as the market is severely undervalued,” Ayorinde Akinloye, a research analyst at CSL Stockbrokers Limited, said.
“From the GDP numbers, the banking, telecoms and agricultural sectors have shown strong performance this year so investors may want to expose themselves to these sectors,” Akinloye said.
MTN Nigeria has gained 12.38 percent year-to-date, which signals a strong performance.
Banks have been performing well, especially after the Central Bank reduced the interest rate on savings deposits to a minimum of 1.25 percent per annum from 3.75 percent.
On Tuesday, Ecobank gained the most with 6.4 percent, the biggest jump in three months.
United Bank for Africa (UBA) was also up 4.8 percent Tuesday while Access Bank climbed 3.23 percent. First Bank was up 3.06 percent while Stanbic IBTC gained 1.25 percent.
Zenith Bank and Guaranty Trust Bank rose 0.6 percent and 0.39 percent, respectively, on the day.
Mutual funds
Analysts say this might be a good time to invest in mutual funds which are less risky.
A mutual fund is a professionally managed investment scheme, usually run by an asset management firm, that pools funds from a group of people and invests their money in securities such as bonds, short-term debt and stocks.
Some of the best performing mutual funds are listed below.
Stanbic IBTC Bank is one of the best providers of mutual funds. Stanbic IBTC Mutual Funds are financial instruments that allow a group of investors to pool their monies with a predetermined investment objective.
Stanbic IBTC has 43 percent share in the total equity-based funds in Nigeria and 40 percent in money market funds. The unit price of its equity-based fund was N7,677 as at August 21, 2020.
Assets and Resource Management Co. Ltd equity-based fund called ARM aggressive growth fund is the second-best performing fund. The fund has 19.85 percent share of the total equity fund and the unit price as at August 21, 2020 was N98.14.
United Capital Asset Mgt. Ltd equity-based fund is also performing well with a share of 11.03 percent and a unit price of N0.67.
FBN money market funds are also performing well in the money market, with its shares rising to 27.98 percent on August 21, 2020 from 27.91 percent on August 14, 2020.
Eurobonds
This might also be a good time to invest in Nigeria dollar-based Eurobonds.
Eurobond refers to a bond type that is issued in international currencies.
“Eurobonds give excellent yields. As oil price continues to recover, the price of Eurobonds will continue to go up and an investor can make good positive returns holding Eurobonds in this crisis period,” said Emeka Ucheaga, CEO at EUA Intelligence, a Lagos-based investment advisory company.
Eurobonds currently offer an interest of 7-9 percent on long-term investments.
“The factors that led to the second devaluation in local currency in May and June are still prevalent, there is a strong possibility for further adjustment in currency,” said Gbolahan Ologunro, banking analyst at Lagos-based CSL Stockbrokers.
“Oil prices are still below 2019 levels and the last report on capital importation by the National Bureau of Statistics shows a decline in capital inflows, signalling that naira is still going to remain under pressure in the medium to long term. Dollar-based investment remains a key way of hedging against naira uncertainties,” Ologunro said.
Commodities
While investors are avoiding risky investments, they could also pour money into safe havens like gold which recently rose to its highest value since 2001 before declining.
Spot gold fell 1.4 percent to $2,033.89 per ounce in August, after hitting a record high of $2,072.50.
Spot gold is currently $1,970.90 per ounce but there are speculations that it could rise higher before year end.
Edward Meir, an analyst at ED&F Man Capital Markets, said in an interview with CNBC that gold could still end the year at $2,200-$2,300.
