Why it makes sense to start Investing in Dollar Assets

Investing in dollar asset, Savvy investors who have paid keen attention to recent news have two facts and one speculation: Nigeria’s naira is wobbly and the Central Bank of Nigeria is fighting tooth and nail to support the currency. The guess is that a devaluation is in offing.

While no one knows for sure what would follow, a wait-and-see approach in 2016 bit hard on investors who sat on their hands. Lagos-based EUA Intelligence estimates that the last devaluation of the Naira saw a 30 percent gain in the value of dollars.

The Central Bank of Nigeria has stated its commitment towards stabilizing the naira amid foreign investors demand for higher yields to invest in the Nigerian debt market.

Fitch warns that “Inflation at about 11% already raises the risk of an overvaluation of the real effective exchange rate,”

The international rating agency says the situation could put more pressure on the naira and increase the risk of a sharp adjustment following an oil price shock.

Investing in dollar-backed assets or simply having the greenback sitting in your account is one measure of financial fitness as it is a hedge against value erosion from weaker naira.

Even though Nigeria’s financial market has not deepened to offer a lot of products, there are interesting options that retail investors can avail.

Setting up domiciliary accounts: One of the right moves to take if you are want to hedge against a weaker naira would be liquidating part of your asset and buying dollars to hold in your bank account.

The amount of naira asset to sell so you can hold dollars would depend on your preference, risk appetite and net worth.

Your money in the bank would earn some interest too and offer a buffer in events of a sharp decline in naira.

Entering Futures and Forward Contracts: Typically entering futures and forward contracts is another way to prepare for the erosion of wealth that follows a devaluation.

The CBN and FMDQ have a platform for Naira-settled OTC FX Futures product which was introduced in 2016, with the Central Bank of Nigeria as the pioneer seller of the OTC FX Futures contracts.

Naira-settled OTC FX Futures are contracts where parties agree to an exchange rate for a predetermined date in the future, without the obligation to deliver the underlying US Dollar on the maturity/settlement date.

That is, upon maturity, both parties are assumed to have transacted at the Spot FX market rate.

The OTC FX Futures contracts are cash-settled in Naira and the differential between the contract rate and the NAFEX (Nigerian Autonomous Foreign Exchange Fixing) rate on the maturity day determines the settlement amount, i.e. the gain/loss inherent in the contract.

You should, however, consult with your financial adviser before taking these kinds of decisions.

Investing in Dollar Mutual Fund: Mutual funds provide an excellent way to earn attractive yields whilst investing in assets (an investment vehicle) whose value would not erode with a weaker naira.

Take for instance investing N1000 in a stock when the exchange rate is, say, N50/$. This means the dollar worth of your investment is $20.

If the stock rallies 100 percent to N2000 within a year but naira (hypothetically speaking) devalues to N200/$, the value of your stock is just $10, half its worth the year before.

Dollar Mutual funds can afford you the opportunity to earn returns on your investment and at the same time protect its value in dollar terms.

Fintech Dollar-backed Savings and Investment Product: A popular Fintech company recently launched a product that allows everyone and anyone invests in Dollar-denominated Eurobonds floated by the Federal Government and Bluechips.

Disclaimer: BusinessDay is neither suggesting the naira would be devalued nor is recommending any investment class or platform. Information provided should be discussed with your professional financial adviser to understand the implication of such a decision.