Where to invest N1m right now
For most people, saving N1 a day isn’t enough by itself to make them rich. But the fact that you can end up with tens of thousands, or even hundreds of thousands or millions of naira, from a N1-per-day investment just shows the power of small, consistent effort.
“The first rule of an investment is don’t lose (money). And the second rule of an investment is don’t forget the first rule,” Warren Buffett once said.
Nigeria’s business environment is being plagued by FX liquidity concerns, insecurity, policy flip-flop, weaker consumer pockets, and lack of infrastructure, which are discouraging long-term capital commitments.
Broadly, there are three major investible instruments: equity, money market, and fixed income securities.
Before you invest in stocks, bonds, Treasury bills (T-Bills), exchange traded funds, foreign exchange, and even cryptocurrency, you must consider your investment objective, risk tolerance and source of fund, and age.
Lizzie Kings-Wali, chief executive officer of Blackstone Capital Limited, said: “Equity market is likely to have a bumpy ride throughout the election cycle, especially as yields on fixed income rise and Naira gets more volatile.
“You may have noticed the steady uptick in yield in the fixed income environment, including primary market, where even the yield on the FGN Saving Bonds has steadily climbed above 9 percent for the three-year note.”
According to her, Eurobonds funds are a good option for those who seek to hedge FX risk of naira volatility and seek exposure to a rising yield environment.
“Albeit, for those who do not mind taking the risk of the equity market, I would suggest they target to buy when it gets lower, especially value counters in the banking sector, which I think should see the most volatility and portends the highest upside, as the banks (especially Tier-1 names) should benefit from the naira depreciation and rising rate environment,” Kings-Wali said.
Yinka Abenuwagun, an investment analyst at Value Alliance Asset Management, said: “Investing is not straightforward for everyone because every portfolio is created based on the risk appetite of the investor.
“For someone with a high-risk appetite, 25-50 percent of the N1million can go to equity, 20 percent to the money market (commercial papers, treasury bills) and 30 percent to bonds (example; corporate bonds).”
He advised low-risk appetite investors to put 10 percent in equity, 85 percent into fixed income as they are the most stable and 5 percent in bonds.
Abenuwagun said: “For medium-risk investors – they are people willing to take a bit of risk but not as much as those with high risk, 30 percent of the capital can go to equities, 30 percent to bonds and 40 percent to money market (20 percent a high yield fixed deposit and 20 percent to commercial papers).
“Market is a cycle that goes up and turns down; we are at the point where the market might turn downwards as we are approaching election period. FX issues and macro issues will have a negative impact on the equity market for the rest of the year; so entering now might be a bad time for a low-risk investor.
“Real estate is a highly volatile sector because of the uncertainty that comes with real estate, but there are different investments that come with real estate such as Real Estate Investment Trust Fund. The capital is not enough to buy a property as it requires huge capital.”
According to Sola Oni, a chartered securities dealer, there are warning signals that every investor must watch out for in order to avert avoidable risk.
He said: “This explains why some investors smile to their banks often, irrespective of the mood of the market, while others go on endless fasting and prayers for losing money daily.
“It is settled in financial management that there is no investment without risk elements. Government bonds, called gilt edge and crowned as risk-free, are merely theoretical. Although the risk level is significantly low, compared with ordinary shares, that does not remove risks entirely.”
According to Oni, a government bond, with all its benefits, is subject to inflation risk, interest rate risk and opportunity cost risk, among others.
He said: “But risks are more pronounced in corporate bonds, of which the biggest are default and liquidity risks. While default risk refers to the possibility that the company may not be able to redeem the bond’s principal at maturity, liquidity risk is a lack of demand for the bond when the bondholder is willing to sell.
“There are key issues that every investor must monitor, prior to purchase or sale of shares. They are usually referred to as red flags. Every investment decision is impacted by red flags and failure to watch out for them may turn a profitable investment to mere gambling.”
Oni said a company’s management should be examined before investing in such an organisation.
He said: “For instance, an investment game-changer of all times, Warren Buffett, will never purchase shares of a company whose management lacks integrity, skills and competencies.
“Before an investor buys into shares of a company, he must study the trend of earnings. Shrinking profit margins and decelerating sales growth are signals that the company’s business model is probably failing. The share price of such a company is vulnerable to volatility. Let me quickly add that volatility is part of every stock market. But understanding how to play around it separates men from boys in the art and science of investments.”
Nigeria’s Monetary Policy Committee recently raised the Monetary Policy Rate by 150 basis points to 13 percent, in line with the hawkish policy stance being adopted by policy authorities in both developed and emerging markets to combat inflation and increase the attractiveness of local securities. Nigeria’s April inflation rate printed higher at 16.82 percent, compared to 15.92 percent in March.
In the Nigerian equities market, bearish sentiment prevailed in the week ended June 3 as the All-Share Index declined by 2.18 percent week-on-week to 52,908.24points; while the year-to-date return decreased to +23.86 percent. On a sectoral basis, the sentiment was broadly negative as all indices, except NGX Insurance recorded week-on-week loss. Also, the sentiment in the fixed income secondary market was mixed, as average T-bills yield increased by 11 basis points to 4.69 percent, while bond yields declined by 6bps to 11.16percent.
Nigeria’s GDP grew by 3.1percent year-on-year in first-quarter of 2022, compared with 3.9 percent in fourth-quarter 2021.
“Looking ahead, the Central Bank of Nigeria expects steady GDP growth but at a subdued pace, due to headwinds associated with unfolding domestic and external shocks to the economy. These headwinds include the effects of the ongoing Russia-Ukraine crisis as well as persisting supply chain disruptions in major trading routes. Furthermore, China is confronted with the spread of COVID-19, and its zero-COVID policy is leading to the total lockdown of manufacturing hubs/cities,” Chinwe Egwim, chief economist at Lagos-based Coronation Merchant Bank said in a recent economic note.
“We expect the hawkish tone to cause significant disruptions across all asset classes. We see scope for a surge in money market and bond yields in the coming months. In addition, we expect a negative reaction in the equities market as investors sell off equity exposures in response to rising yields. However, we expect companies with solid half-year (H1) 2022 earnings performance will remain attractive to investors particularly in July,” said United Capital research analysts in their May 25 note.
The United Capital analysts said last week that despite the rate hike by the MPC, “which ideally makes the fixed income space more attractive to both local and foreign investors, Nigeria’s extended FX crunch continues to deter foreign investors’ interest in the Nigerian capital market, raising concerns for foreign portfolio investment inflows.”
“Also, risks associated with the political environment in anticipation of the general 2023 elections outweigh the benefits of the rate hike,” they added.