Nigerians are increasingly investing in dollar-denominated assets to diversify their portfolios and minimise their exposure to naira depreciation, experts have said.
“The need to hedge against the sustained devaluation of naira has resulted in rising investors’ appetite in dollar-denominated assets,” Ayodeji Ebo, managing director/chief business officer, Optimus by Afrinvest, said.
Investing in dollar-denominated assets entails purchasing foreign assets such as foreign stocks, dollar mutual funds, Eurobonds and dollar fixed deposits.
Nigeria’s dollar funds increased by 48 percent between January and October 15, 2021, according to data from Coronation Research.
Taiwo Oyedele, head of tax and corporate advisory services at PwC, said many Nigerians are seeking opportunities to invest in foreign currency-denominated assets as a means of diversifying their portfolios and minimising their exposure to naira devaluation.
“We have also seen rising interest in investment for citizenship schemes,” he said.
According to him, this trend is capable of fuelling more demands for forex in the foreign exchange market, thereby leading to further Naira devaluation.
The increasing number of companies and online dollar-denominated trading platforms also suggests an increased investors’ appetite for foreign assets.
One of such companies, Bamboo, said it has more than 300,000 users, with about 20 percent being active daily traders, while 75 percent never traded stocks before using the platform. It said in 2021, repeat depositors made up 85 percent of deposits on the Bamboo platform.
Other companies in the Nigerian retail investment space include Chaka, Rise and Trove.
“By hedging your portfolio with dollar assets, your returns in naira terms will increase if the naira depreciates, allowing you to preserve your capital,” Ebo said.
Despite the rise in global oil prices by 37.8 percent year-to-date (YTD) to $103 per barrel (Bonny Light crude, mostly exported by Nigeria) as at April 16, 2022, Nigeria’s external reserves have remained relatively flat, declining by $794.9 million or 2.2 percent YTD to $39.7 billion as at April 12, 2022.
Ebo said this could be attributed to the reduced oil exports as a result of significant oil theft and underinvestment in the oil sector in the past few years.
He noted that the accretion to the external reserves had been poor despite Federal Government’s Eurobonds issuances of $5.25 billion, comprising $4.0 billion in September 2021 and $1.25 billion in March 2022.
“The weakness in external reserves sustained pressure on the naira against the dollar. There has been no reprieve from other sources of dollar inflows, as foreign investors are reluctant to invest; hence the currency has reached a record low,” he said.
Read also: Why naira-dollar exchange rate gap is widening – ABCON
Nigeria’s currency traded at N416.00 and N568.00 per dollar at the Investors & Exporters FX window and the parallel market respectively at the start of the year but has recently weakened to N416.67 and N590.00 per dollar respectively.
Nigeria currently uses a managed float exchange rate system (a system where the Central Bank of Nigeria intervenes by selling or buying currencies to maintain a certain exchange rate range) to stabilise the exchange rate and lessen the impact of volatility.
Deposit money banks have had to ration foreign exchange by suspending individual withdrawals with naira debit cards and lowering limits on international transactions to $20 from $100.
The reduced dollar access has pushed consumers to source FX through unofficial channels, typically at a higher rate, thereby fuelling further depreciation of the currency.
Ebo said, “As the naira continues its free-fall against the dollar, you should consider hedging your portfolio by purchasing dollar-denominated assets (foreign stocks, dollar mutual funds, Eurobonds and dollar fixed deposits) to mitigate the impact of the currency devaluation.
“By hedging your portfolio with dollar assets, your returns in naira terms will increase if the naira depreciates, allowing you to preserve your capital.”
According to him, another benefit of investing in dollar-denominated assets is high return potential. “When compared to putting your savings in a domiciliary account without interest, investing your income in dollar assets such as mutual funds, Eurobonds, or foreign stocks will yield better returns in the form of interest payments, capital appreciation (increase in the value of your investment) or dividends received,” he said.
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