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BusinessDay

As T-Bills lose shine in Nigeria, there is a new game in town

ETFs Investment Outlets (July 2020) (1)

Chris Okonji, 28, invested N2 million in a gold-backed Exchange Traded Fund (ETF) in January 2020. Okonji’s investment banker friend, the same that asked him to invest in government treasury bills in 2017, had advised him to buy the ETF.

“I was sceptical about making the investment as I had other plans for the money, but Tunji was the same one who helped me make a killing on Treasury Bills in 2017 so I trusted him,” Okonji, a medical doctor, said.

“Fast forward eight months and that decision to buy the Gold ETF was a masterstroke,” he said.
A strong rally in the gold ETF this year means Okonji’s N2 million is now worth N3.8 million, with the price of the ETF climbing 89 percent since the start of the year. That is unrivalled by any other asset class listed on the Nigerian Stock Exchange (NSE) and translates to a real return (when you factor in inflation rate of 12.82%) of 76 percent.

In the last one year, the so-called “New Gold ETF,” which is managed by the investment arm of South African bank, ABSA Group, and listed in South Africa and Nigeria, has surged 96 percent.

Okonji is one of several investors that are awaking to the gold ETF. Data from the Securities Exchange Commission (SEC) show that the net asset value, a gauge of investor appetite, of the New Gold ETF in Nigeria is up 24-fold to N19 billion as at August 14 from only N769 million at the start of the year.

The New Gold ETF, which is like investing in gold but electronically, rose 8.1 percent Friday to close at N9,980, according to Bloomberg data, having hit a peak of N10,000 on July 28.

Investors are piling into the asset class in search of inflation-beating returns and as a way to hedge against the economic uncertainty.

Gold ETFs globally are riding high on the COVID-19-induced economic decline, lower interest rates and a struggling US dollar that have sparked a rush to invest in safe haven assets like gold.

The outlook for Gold prices would however determine how long the rally in gold-backed ETFs can last and whether now is the best time to invest, according to Wale Okunrinboye, head of investment research at Lagos-based pension fund manager, Sigma Pensions Limited.

“The Gold ETF has been on a tear because of the rally in gold prices,” Okunrinboye said.

“The outlook for the ETF will depend largely on whether gold still has legs to run and if the US economy can recover quickly,” Okunrinboye, whose firm invested in the gold ETF, said.

Gold prices are up more than 30 percent since the start of the year and hit an all-time high of $2,089 per ounce on August 7. It traded lower at $1,939 as at August 21.

Optimistic forecasts for the yellow metal range from $3,000 to $5,000, while some bearish estimates suggest the metal is already at its peak.

The rapid rise of the gold ETF is synonymous to the rise of treasury bills in 2017, after Nigerians piled into the risk-free asset that was yielding as much as 21 percent at its peak.

Investment in T-bills more than tripled at the time, before a gradual easing of interest rates saw the asset class fall out of favour for Nigerians seeking high return. The yields on one-year treasury bills are now at around 3 percent, about 1000 basis points below inflation rate.

The gold ETF is not yet as popular as what Treasury Bills were in their hay-days but there hass been a silent meteoric rise. From accounting for just 14.48 percent of total ETFs in January 2020, the gold ETF now accounts for 83 percent.

“The gold ETF carries about the highest return you can get in Nigeria and that is why there has been a surge in demand,” a Lagos-based stockbroker, who says clients are now taking unusual interest in the ETF, said.

“Knowledge of the ETF is certainly rising but still above the head of many Nigerians,” the stockbroker said.
Nigerians are not the only ones piling into gold-backed assets. Investors and hedge fund managers around the world are queuing up to buy gold in the futures and ETF markets, pushing the price of the precious metal higher.

Last week, there were reports of some Turkish nationals considering selling even their houses to buy gold in anticipation of a rally.

In India, the National Stock Exchange in July cancelled trades in a gold-backed ETF run by Axis Mutual Fund following a freak 6,500 percent spike in price.

The negative outlook for the global economy in 2020 due to the COVID-19 pandemic will support gold prices throughout the year, according to analysts.

The asset was also recently canvassed by the NSE as a rewarding investment option that helps investors store the value of their money and hedge against economic uncertainties.

“We recognise opportunities in the alternative investment asset space for the Nigerian Capital Market and are working assiduously with stakeholders to provide more insight into these instruments,” Jude Chiemeka, head of Trading Business Division at the NSE, said.

Michael Mgawaba, head of Exchange Traded Products (ETP) Business, ABSA Regional Operations, said Gold was not only defensive, but it could also be used for risk management and delivers impressive results.
“What distinguishes Gold is its performance during crises; It has been known to have a negative correlation with economic crisis, which means that in an economic downturn, when other investment classes are going down, Gold tends to go up,” Mgawaba said.

The so-called “NewGold ETF” was listed on the NSE by the investment banking arm of South African bank, ABSA Group Limited in 2011. It has gained over 150 percent since then.

How to invest in Gold ETF

Investing in the New Gold ETF is like buying a company’s stock. It is listed like every other stock on the NSE. An order can be placed through your stock broker.
There is no minimum investment, according to a stockbroker who spoke with BusinessDay. The opinion of a professional investment advisor should always be sought before making investment decisions.