Fund managers have expressed a divergence of opinions over the best asset allocation strategy that minimises losses and maximises returns in a volatile and unpredictable macroeconomic environment.
This means correlation is rising and investors will have to work harder to achieve diversification. Portfolio managers prefer assets that go up as others go down – a negative correlation – since bond and stocks move in opposite directions.
Analysts at CSL Stock Brokers Ltd, in their 2019 macroeconomics outlook, have recommended a balanced portfolio allocation of 40 percent to equities, 40 percent to fixed income securities, and 20 percent to alternative assets as a hedge against a rise in inflation and a projected depreciation of the naira.
“For the equities market, we envisage H1’19 will be more turbulent than H2’19 as it will be characterised by political noise,” said analysts at CSL Stock Brokers.
“Given limited downside potential in the currency and high potential upside in stock prices, we believe it makes sense for US dollar-based investors to take positions on a one-year view now,” said the analysts.
What the recent selloff may illustrate is that the industry standard of 60/40 model, where a fund manager holds a portfolio of 60 percent in stocks and 40 percent in bonds, can no longer protect volatility in all scenarios.
But analysts at United Capital Asset Management are of the view that alternative assets such as real estate and private equity are better pledges against inflation than fixed income. They prefer an allocation of 30 percent to equity, 30 percent, bonds and 40 percent alternative asset.
“You need something above what inflation will give you. I am still bullish on equities after the election. Investors need to get exposure to Naira. I think the wise thing is to keep cash,” said Kayode Tinuoye, fund manager, United Capital Asset Management.
However, Wale Okunrinboye, investment analyst at Sigma Pensions Ltd, thinks fixed income is probably the best way to go this year, but he is optimistic the market may normalise after the elections.
On the global front, Okunrinboye said the continued rate hike by the United States Federal Reserve means frontier and developing markets will be impacted.
“With the decline in oil prices since last year, it is negative for the Central Bank of Nigeria (CBN) to keep interest rate low,” said Okunrinboye said.
Nigeria faces a challenging 2019 amid a slowing global economy, elevated geopolitical risks and fragile investor sentiment.
Uncertainties surrounding upcoming elections could undermine the ability of the country to attract foreign investments.
The Nigerian economy has been growing sluggishly as GDP is struggling to exceed 2.0 percent with Q3 2018 figure of 1.8 percent.
As at the third quarter of 2018, the current account moved into deficit and the parallel market exchange rate has started to rise.
Inflation for the month of November has inched to 11.44 percent from 11.28 percent in October, the first increase in seven months.
Analysts at CSL Stock Brokers said the country risks a tough 2019 if radical reforms are not put in place. They added that GDP growth will struggle to reach 2.0 percent while they expect Naira to depreciate to a range of between N385-N390 per dollar.
“Inflation is also projected to hit a 15-20 percent range at year-end 2019 and we see the government struggling to finance itself as there’s not much upside to oil price expected,” said analysts at CSL Stock Broker.
The CBN’s policy is to defend the Naira with an external reserve of $43.0 billion.
Analysts at Coronation Merchant Bank see the Abuja-based bank supplying US dollars to the FX market at an average of $500 million per month during 2019.
“We look at Nigeria in the international context of interest rates. Nigeria T-bills rates look competitive in the context of emerging market rates. Which is why the CBN is having success in attracting foreign portfolio investment,” the analysts said.
BALA AUGIE
