The year 2020 was a rewarding year for local investors in Nigeria, as virtually all asset classes delivered positive returns despite the lows of a raging pandemic.
Local investors with nerves of steel who did the opposite of what many others were doing by investing in naira assets (that is, excluding short duration assets) rather than in dollar assets had a particularly good year that was only topped by bitcoin investors.
“The fad was to invest in dollar assets in 2020, which is a very good thing for diversification and protection against currency devaluation, but the events of 2020 have taught us that we should not completely close our eyes to opportunities at home because they exist,” said Omotola Abimbola, an analyst at Lagos-based investment bank, Chapel Hill Denham.
“You just need to know when/where to position,” Abimbola said.
Anyone who invested in naira assets at the start of 2020 can likely point to a portfolio that looks positively bloated at year-end with returns that would have seemed far-fetched in the bear-market days of March.
Equities and bonds delivered strong returns in 2020 aided by the low interest rate environment, or what economists call dovish monetary policy.
The local stock index returned 50 percent, the highest return among frontier and emerging markets globally. Bonds rallied 39 percent with the 30-year bond hitting 64 percent while the 10-year bond reached 32 percent.
Dollar-denominated assets did not do as well. Nigerian Eurobonds returned 5 percent in 2020 while their sub-Saharan Africa counterparts closed the year with a 9-percent gain.
Meanwhile, the US dollar appreciated 23 percent against the naira.
Bitcoin investors had an even more exciting year than naira investors, with the cryptocurrency returning 160 percent. Gold investors booked returns of 21.6 percent as the precious metal rallied amid the global uncertainty brought on by the pandemic.
Read also: Bitcoin’s market cap surpasses Alibaba, Berkshire, Samsung
What to expect in 2021
With 2020 behind us, the focus of investors is shifting to the outlook for asset classes in 2021, and whether the star performers of the past year will keep their places by the end of 2021.
BusinessDay polled analysts and investment bankers to get their forecasts.
For stocks, performance in 2021 will be based on the direction of interest rates.
Some analysts, who expect interest rates to trend back upwards this year after bottoming in 2020, see little room for equities to perform as strongly as they did last year.
A sharp reversal of rates is likely to trigger a sell-off in equities, considering that the current market price to earnings ratio of 15.2x means Nigerian stocks are now being priced almost at par with some frontier and emerging market peers, unlike when they were considerably cheaper at about 9x.
The current price to earnings ratio is also considerably higher than the five-year average of 11.9x.
While rates may go up this year, they are unlikely to return to the pre-2019 levels, which still bode well for stocks, especially the ones with attractive dividend yields.
Stocks are also expected to benefit from Nigeria’s anticipated exit from recession this year, as it translates to improved corporate earnings.
The economy slipped into a recession in 2020 following two quarters of negative growth in Q2 and Q3, but is widely tipped to exit recession this year by the IMF and World Bank.
Excess liquidity in the market will also continue to favour stocks, especially when there are no better alternatives for short-term cash, according to Wale Okunrinboye, head of research at pension fund manager, Sigma Pensions.
Bonds on the other hand may struggle this year due to expectations of tightening monetary policy by the CBN.
With the global economy tipped to recover this year, safe haven assets like gold are unlikely to rally as much as they did in 2020. Gold prices typically rise in times of great uncertainty about the global economy.
The global economy is expected to expand 4 percent in 2021, according to the World Bank, assuming an initial Covid-19 vaccine rollout becomes widespread throughout the year.
A recovery, however, will likely be subdued, unless policy makers move decisively to tame the pandemic and implement investment-enhancing reforms, the World Bank said in its January 2021 outlook.
