Nigerian investors are faced with difficult choices as interest rates have crashed, according to Guy Czartoryski, head of research at Coronation Asset Management.
Czartoryski said the investors have two alternatives of either to wait for rates to rise again in future or to accept more risk in order to increase returns. But to do that, he said they need to increase their understanding of risk.
Coronation Research on Monday published its report on the Nigerian investment landscape titled ‘Navigating the Capital Market: The Investor’s Dilemma’.
The revolutionary report studies the Nigerian investment landscape over a 10-year period and finds how Nigerians have managed to preserve their capital over the long term. Some of the conclusions are surprising. For example, it has been remarkably easy to beat inflation over the last 10-years by buying Federal Government of Nigeria Treasury Bills. However, with the crash in interest rates in the first half of 2020, this era has come to an abrupt end.
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By contrast, equity market returns have not preserved capital for investors over the long term, even when adding back the generous dividends paid to investors. By looking at the internal profitability of stock exchange-listed companies, ‘Navigating the Capital Market’ identifies which stocks are the ones most likely to generate satisfactory returns for their owners, and back-tests the results.
The report takes a new approach to setting investment return benchmarks. Instead of targeting inflation, which is the conventional benchmark, it recommends that investors should aim to beat the effects of Naira devaluation against the US dollar, and obtain the risk-free return they would have in US dollars.
This suggests that they should ask for Naira risk-free fixed-income (or Treasury bill) return of 14.7 percent per annum over the long term. And, when it comes to equities, Coronation Research calculates that Nigerian investors should demand a return of 20.5 percent per annum. These are high benchmarks, but they show what is necessary to preserve the value of investors’ hard-earned money.
Coronation Research’s investor feedback shows that Nigerian investors have two concerns. The first is inflation. The second is not to lose money in investment schemes. And with fixed-income and bank deposit rates at record lows, and far below the rate of inflation at 12.4 percent, investors are being tempted to take risks again. Yet the priority now is for them to understand what those risks are, and how they can be managed. ‘Navigating the Capital Market’ is their guide to these challenging times.
Coronation Asset Management Limited, incorporated on 2 October 2015, is registered with the Securities and Exchange Commission (SEC) to provide fund and portfolio management services to institutions and individuals.
It offers full-fledged investment services across various asset classes to the entire spectrum of investors: major institutions, smaller niche institutions and corporates, public sector family offices, cooperatives and high net-worth individuals.
