Safer Investments Are Having A Big Moment
Global stocks are seeing a slight rebound in the week leading up to the end of November, easing investor concerns after turbulent weeks of declining oil prices, the prospect of an economic slowdown and global trade tensions [from the US-China face-off] rattled markets. Stocks had continued to slide as a selling frenzy swept across markets, fuelled by additional factors including tensions in the European Union over the Italian fiscal stand-off and Brexit, rising US interest rates, and a massive drop in tech shares. Unfortunately, analysts do not expect the rebound to last.
And Nigeria is not exempt from the slump, amidst peculiar shocks brought on by local political tensions
While it is undisputed that returns on equity surpass yields on fixed income investments, the current bearish run in the Nigerian equities market has investors turning to much more appealing money market and fixed income instruments, despite the relatively lower earnings they present.
In the current slow-growth, reasonable-yield environment (treasury bills and government bonds climb, while stocks dip), interest rate equilibrium is becoming an increasingly important concept for investors. Whatever your risk profile is, our suggestions in this article for money market and fixed income investing are designed to offer a reasonable spectrum of capabilities, even under the most challenging market conditions.
High yields stutter: Stock Market Nigeria
Coming off a high on January 19, 2018, Nigerian equities have entered bear territory – considered by Traders to be a market that has declined by 20 per cent from its last peak. The Nigerian Stock Exchange All Share Index has fallen to 32,058.28 this November, bringing the decline since its January 2018 high to more than 21 percent. This is largely due to worsening political tensions in Nigeria and an emerging market sell-off that have seen investors avoiding assets in Africa’s biggest oil producer.
These trends mark a sharp turnaround from the first few weeks of the year, when Nigerian equities were the best performers in the world (see table above, ‘World Beaters’), reaching an all-time high of 45,092.83 in January of 2018.
In spite of a slight uptick in market performance in recent weeks, leading investment analysts believe that overall investor sentiment will remain negative in the short to medium term, with recovery possibly occurring in the long run, post-election February 2019 .
Safe haven, pockets of opportunity:Money Market, Fixed Income
Financial theory advises that investors cannot expect more return without more risk. But equally, more risk is no guarantee for increased returns. This leaves income-seeking investors with a dilemma: they can either accept lower (but safer) yields, or take on more risk in their portfolio which could either achieve higher income or adversely erode their principal investment. To help address this challenge, we present two optimal yield-focused instruments that optimise for a balance of yield, return and risk attributes.
TREASURY BILLS
Effective yields on the Nigerian government’s one-year treasury bills soared more than 450 basis points to 16.6 per cent in October, the highest level so far in 2018.
Backed by the guarantee of Federal Government, with a maturity not greater than a year, Treasury bills (T-Bills) are currently considered one of the safest investments. In addition to attractive yields, T-Bills offer a host of benefits that include capital preservation, liquidity (discounted to receive interest upfront, and can be sold off before maturity premised on market dynamics of demand and supply), interest tax exemption, use as collateral against a loan, and portfolio diversification to minimise volatility risks of other asset classes.
The opportunity cost of investing in low-risk instruments (T-Bills) is the higher returns that might have been earned elsewhere in riskier assets such as stocks. However, to be put in proper perspective, Nigerian Treasury Bills command superior returns when compared to global markets:
Effective yields on the Nigerian government’s one-year treasury bills soared more than 450 basis points to 16.6 per cent in October, the highest level so far in 2018.
Backed by the guarantee of Federal Government, with a maturity not greater than a year, Treasury bills (T-Bills) are currently considered one of the safest investments. In addition to attractive yields, T-Bills offer a host of benefits that include capital preservation, liquidity (discounted to receive interest upfront, and can be sold off before maturity premised on market dynamics of demand and supply), interest tax exemption, use as collateral against a loan, and portfolio diversification to minimise volatility risks of other asset classes.
The opportunity cost of investing in low-risk instruments (T-Bills) is the higher returns that might have been earned elsewhere in riskier assets such as stocks. However, to be put in proper perspective, Nigerian Treasury Bills command superior returns when compared to global markets:
Global comparison: Treasury Bill yields (indicative for 22 November, 2018)
COUNTRY
| 90-day tenor | 180-day tenor | 1-YEAR (364-day tenor) |
Nigeria | 12.438% | 13.555% | 15.74% |
Japan | -0.270% | -0.220% | -0.160% |
Germany | -0.732% | -0.676% | -0.655% |
France | -0.685% | -0.632% | -0.560% |
United Kingdom | 0.740% | 0.762% | 0.775% |
Canada | 1.700% | 1.91% | 2.120% |
United States | 2.355% | 2.506% | 2.666% |
Italy | -0.307% | 0.170 | 0.608% |
India | 6.850% | 7.110% | 7.380% |
Russia | 7.580% | 7.830% | 7.360% |
Brazil | 6.364% | 6.535% | 6.745% |
South Africa | 6.40% | – | – |
Uganda | 10.500% | 11.700% | 11.900% |
Egypt | 19.635% | 19.790% | 19.873% |
Source: Investing.com | Numeris Media research
GOVERNMENT BONDS
Nigeria’s Debt Management Office (DMO) conducted its usual monthly bond auction on November 21, offering N115 billion (the highest this year) across the 5-, 7-, and 10-year bonds. The apex bank finally sold N1.1 billion, N4.27 billion, and N34.15 billion on the respective bills at stop rates of 15.2%, 15.5%, and 15.8%.
Stop rate on the 10-year bond was 50bps higher than at the October auction (15.3%), showing a steady increase, from 13.5% at the January 2018 auction to 15.8% at the November auction. This is in line with the wider trend of rising interest rates in Nigeria, following sharp sell-offs by foreign investors concerned about imminent elections and global trade developments.
Leading up to the upcoming Bond auction on Wednesday, December 12, 2018 – where the DMO is expected to raise N100 – 130bn across the 5-, 7- and 10-year instruments – investors anticipate a further uptick on current yields indicated below:
Global comparison: Government bond yields (indicative for 22 November, 2018)
COUNTRY
| 5-YEAR | 7-YEAR | 10-YEAR |
Nigeria | 14.727% | 15.301% | 15.689% |
Japan | -0.098% | -0.042% | 0.098% |
Germany | -0.235% | -0.009% | 0.373% |
France | 0.090% | 0.305% | 0.766% |
United Kingdom | 0.952% | 1.103% | 1.414% |
Spain | 0.604% | 1.160% | 1.659% |
Canada | 2.292% | 2.332% | 2.363% |
Australia | 2.264% | 2.455% | 2.663% |
United States | 2.885% | 2.977% | 3.068% |
China | 3.135% | 3.380% | 3.381% |
Italy | 2.775% | 3.233% | 3.490% |
India | 7.690% | 7.810% | 7.826% |
Russia | 8.380% | 8.510% | 8.650% |
Brazil | 9.140% | – | 10.150% |
Turkey | 16.500% | – | 19.790% |
Uganda | 17.048% | – | 17.300% |
Egypt | 18.439% | 18.163% | 17.850% |
Source: World Government Bonds | Numeris Media research
Conclusion
Ultimately, investing is about exploiting potential, and generating the highest possible returns. When investing, risk and return go hand in hand. The higher the earnings potential, the greater the price fluctuations in most cases. While Treasuries may be one of the safest havens for one’s investment, a more rounded asset allocation strategy (AAS) – consisting of a balanced portfolio that includes major asset classes (shares, bonds, cash and property) – will better meet any investor’s long-term risk/ return objectives. The reason is simple: when one class underperforms, another might compensate by doing better.
*Disclosures: This material does not provide individually tailored investment advice. It has been prepared without regard to the individual financial circumstances and objectives of persons who receive it. ARM Investments (ARMI) advises investors to independently evaluate particular investments and strategies, and seek the advice of a financial advisor or wealth manager. The appropriateness of a particular investment or strategy will depend on an investor’s individual circumstances and objectives.
*For financial or wealth management advice, please contact ARM Investment Managers: