How Nigerian fund managers are investing in response to COVID-19

Nigerian fund managers are cutting their risk appetite and focusing more on short-term fixed income assets as they try to survive the COVID-19 outbreak and the current economic uncertainty.

Others are simply liquidating what they deem risk assets and increasing their cash levels, according to a BusinessDay survey on some of the biggest fund managers in the country.

“The yields on fixed income assets may not be impressive but it doesn’t matter because the focus for fund managers now is return of capital rather than return on capital,” said Wale Okunrinboye, head of investment research at Sigma Pensions Ltd, Lagos-based pension fund manager.

“Fund managers are in a risk-off mode and will be happy to just park cash on an asset that preserves their initial capital,” Okunrinboye said.

Yields on short-term fixed income assets – treasury bills – are anything between 3-4 percent, which implies a real negative return of as much as 9 percent given that inflation rate in Nigeria last printed 12.2 percent.

Fund managers say their clients are happy to take low yields rather than risk losing their initial investment trying to chase better returns.

“At a period of uncertainty such as this, the focus is on wealth preservation, not wealth accumulation,” said Johnson Chukwu, CEO, Cowry Asset Management Limited.

“Cash is king at this moment and that’s why it makes sense to play at the short end of the fixed income space to limit the risks you are taking. This way, it is easier to liquidate assets when you need to take out your cash and it gives you opportunity to constantly evaluate the risks in the economy,” Chukwu said.

Like their Nigerian counterparts, global fund managers are also piling into risk-free money market instruments as a way of preserving capital amid the heightened economic uncertainties brought on by the COVID-19 pandemic.

The IMF and a motley crew of economists have all given scathing forecasts for global economic growth this year as a result of the COVID-19 pandemic.

Bank of America’s April global fund manager survey found that 93 percent expect a global recession this year.

The monthly survey noted extreme investor pessimism in April with cash levels jumping to 5.9 percent, the highest level since the 9/11 terrorist attacks.

In addition, investors think global GDP cuts are largely over but global earnings-per-share cuts are just beginning. The note referred to this as a “rare dichotomy”.

Back home in Nigeria, there are also some problems on the domestic front that contribute to the uncertainty of the pandemic.

Crude oil sales which account for 80 percent of Nigeria’s foreign exchange inflows and around half of the revenue used to fund the annual budget has been hammered by the global lockdown that has grounded airlines and forced factories to close.

Nigeria could see oil revenues fall by as much as 40 percent this year, according to estimates by Bismarck Rewane, CEO, Financial Derivatives Company.

That’s despite efforts of the OPEC+ to shave as much as 10 million barrels daily from current production.
Oil prices have not rallied much since the deal between the Organisation of the Petroleum Exporting Countries (OPEC), Russia and the US. Brent crude, the international benchmark, has flirted at $30 per barrel levels and even fell to $28 per barrel Friday, April 17.

“If oil prices stay this low for six months or more, then there are far-reaching implications for Nigeria’s access to US dollars, the currency, and for its budget,” analysts at Coronation Research said in a note to clients.

Lower oil revenues add to the fiscal woes of the economy and affect everything from exchange rate to economic growth.

The official exchange rate has been devalued by the Central Bank by 18 percent to N360/$ from N306/$, and there are fears the naira could weaken some more as dollar inflows slow on the back of lower oil earnings and reduced investment inflows. Both the IMF and McKinsey Consulting are tipping the economy to contract by more than 3 percent, the biggest decline since 1987.

The equities market, which serves as a reflection of sentiments towards the economy, is down 20 percent since the start of the year.

Foreign Portfolio Investors are also pulling out their cash with bankers saying some 85 percent have left since the economic downturn. That has deprived Nigeria of another critical source of dollar inflows and partly contributed to the stock market decline.