Viable investment strategy amidst rising inflation in Nigeria

Making the right Investment choices is important in determining portfolio growth across business options. These decisions are based on the investment’s objectives, risk profile, and expected performance. A well-planned investment increases the chances for returns by identifying the opportunities that come with it even in periods of uncertainties.

While investors and portfolio managers dedicate time to ensure optimal returns, there are macro-economic forces that influence the market. Of these forces, inflation is of concern because it portends the risks of margin decline due to a rise in prices and reduction of purchasing power. In an inflationary environment, organisations are affected by increased cost of inputs for production or delivery, preceding high costs to consumers in a bid to offset the burden.

According to the recent report by the National Bureau of Statistics (NBS), headline inflation in Nigeria for the month of February printed at 21.91% representing 0.09% increase from January’s inflation rate of 21.82% and 6.21% year-on-year increase compared to 15.70% in February 2022; this is the highest we have seen in 17 years. Except in December 2022 when the consumer price index slowed to 21.34% from 21.47% in November, the index has consistently increased since January 2022.

However, this inflationary trend is not peculiar to Nigeria alone, record high inflation rates have been witnessed across major economies of the world largely due to disruption of supply dynamics as a result of the Ukraine-Russia conflict which started in Q1’2022.

For context, inflation rate in the United States of America touched an unprecedented level of 9.1% in June 2022 before slowing down to 6% in February 2023 while United Kingdom’s inflation rate got to as high as 9.6% in October 2022 before gradually easing to 8.8% as at January 2023.

It is pertinent that investors prepare for inflationary periods because it defines price stability and avoids panic. By having a structure to protect funds from inflation, more capacity is built to weather the market volatilities, especially for long-term investments.

According to Joshua Olutola, Head of Brokerage & Trading at Baige Capital Limited (an Inter-Dealer Fixed Income Brokerage firm), the inflation rate is expected to remain elevated in Nigeria in the short to midterm due to unique factors plaguing the economy which will add pressures to costs of producing goods and services such as relative fuel scarcity, potential removal of fuel subsidy and cash crunch making business activities even more difficult to conduct.

Despite these inflationary trends, adopting a portfolio approach to investing will assist investors to weather the storm and reduce value erosion of investments. In line with the investment objectives and risk profile of the investor, a percentage of the portfolio should be allocated to stocks that have the twin advantage of good fundamentals and attractive (double-digit) dividend yields.

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Investors should also take advantage of high yields in the money market space in order to minimise negative real returns on investments; several commercial papers have been issued in recent times which offer decent interest rates for less than one-year duration.

Finally, investors should consider increasing exposures to alternative assets such as real estate, foreign-denominated investments, private equity, commodities etc; some of these alternative assets are not common in Nigeria, however, they offer decent returns on investments as well as diversification benefits due to their lower correlation to traditional assets like public equities, fixed income instruments.

Commodities like currencies, Gold, Iron Ore, agricultural produce etc can even be traded on recognized Exchanges. Historically, Gold has often been considered a hedge against inflation; on Bloomberg, spot price of Gold is up by 4.8% Year-to-Date and a market consensus estimate the price rising even further in 2023. Investments in alternative assets, however, involve sophisticated knowledge of the market and should not be undertaken without understanding the associated risks.