Piecing the Puzzle: The Bear Continues To Show its Teeth
When markets go awry, as they have continued to do this year, it’s hard to hide in equities.
Fortunately for investors, there are other asset classes that tend to either hold steady in a downturn or rise when markets suffer. While history cannot predict what will happen in the future, several assets have historically performed well in times of crisis, and appear to be leading the pack.
For many investors, fixed income securities – especially government bonds and treasury bills – are often a source of solace as they represent both a ‘safe haven’ and steady yields that ensure capital preservation, income, and diversification.
Our review of the fixed income market shows why, when it comes to balancing a down market, Federal Government of Nigeria (FGN) Bonds and the Nigerian Treasury Bills (NTBs) are largely considered ideal risk-off assets.
To recap, we point investors towards a few important questions they should be asking their wealth advisors about minimising risks in a volatile market:
- Why should I feel safe?
- Should I be reviewing my fixed income allocation?
- Can we re-evaluate my risk tolerance?
- Are my income-related funds in the right place?
- Am I sufficiently diversified?
- What opportunities can be had amidst current market movements?
Bird’s-Eye View: The Week Ending June 14, 2019
Activities in the Treasury Bills (“T-Bills”) secondary market were essentially bullish in the light of relatively strong system liquidity (N370.8bn long) and the absence of OMO auctions by the Central Bank of Nigeria. Consequently, yields across all tenors declined circa 48 bps week-on-week to close at 12.42% (from 12.9% the preceding week):
MATURITY | TENOR (DAYS) | RATE P/ A (%) | YIELD P/ A (%) |
22-Aug-19 | 66 | 9.30 | 9.46 |
3-Oct-19 | 108 | 10.70 | 11.05 |
17-Oct-19 | 122 | 10.60 | 10.99 |
5-Dec-19 | 171 | 11.00 | 11.60 |
16-Jan-20 | 213 | 11.50 | 12.33 |
20-Feb-20 | 248 | 11.50 | 12.47 |
16-Apr-20 | 304 | 11.50 | 12.72 |
OMO Auction | c.100 | 10.00 | 10.28 |
OMO Auction | c.200 | 11.00 | 11.71 |
OMO Auction | c.350 | 11.70 | 13.18 |
At the Primary Market Auction (“PMA”), the CBN fully allotted N129.64bn worth of T-Bills, up against a total subscription of N265.0 billion, with all three tenors enjoying oversubscription:
AUCTION DATE | 13-Jun-19 | 13-Jun-19 | 13-Jun-19 |
ALLOTMENT / ISSUE DATE | 14-Jun-19 | 14-Jun-19 | 14-Jun-19 |
TENOR | 91-Day | 182-Day | 364-Day |
OFFER AMOUNT (N) | 15,000,000,000 | 30,000,000,000 | 84,640,724,000 |
TOTAL SUBSCRIPTION (N) | 15,200,957,000 | 39,023,715,000 | 210,809,645,000 |
ALLOTMENT (N) | 15,000,000,000 | 30,000,000,000 | 84,640,724,000 |
RANGE OF BID RATES (%) | 9.6500-12.1500 | 11.1900-12.6664 | 11.7800-15.0000 |
STOP RATES (%) | 10.0000 | 11.9499 | 12.3400 |
PREVIOUS STOP RATES (%) | 10.0000 | 11.9500 | 12.2000 |
BID-TO-COVER RATIO | 1.0x | 1.3x | 2.5x |
ALLOTMENT RATIO | 1.0x | 0.8x | 0.4x |
TICK: Yields are expected to be pressured in the coming week, as the CBN plans to re-commence liquidity mop-ups, considering impending total inflows from maturing instruments (T-Bills and OMO maturities) worth N107.3bn. Investors may wish to take advantage of longer-term Treasury Bill maturities in addition to OMO offerings expected during the week. For investors wanting to maintain relative control during market fluctuations, trading in the short-end of Treasury Bills may be the better option. Simply put: if you want to stay safe, stay short.
Federal Government of Nigeria bonds: Activities were barely bullish in the domestic bonds market, thanks to an uptick in demand along the shorter end of the yield curve, which saw average yields contract by 21 bps week-on-week to settle at 13.8% (compared to 14.0% the previous week):
BOND MATURITY | TENOR (YEARS) | YIELD (%) | COUPON RATE (%) | PRICE (NGN) |
JULY-21 | 2 | 14.10 | 14.5 | 100.67 |
JAN-22 | 3 | 14.20 | 16.39 | 104.60 |
MAR-24 | 5 | 14.10 | 14.20 | 100.28 |
JAN-26 | 7 | 14.35 | 12.50 | 92.24 |
MAR-27 | 8 | 14.36 | 16.29 | 108.77 |
FEB-28 | 9 | 14.63 | 13.98 | 96.80 |
JUL-34 | 15 | 14.56 | 12.15 | 85.40 |
MAR-36 | 17 | 14.54 | 12.40 | 86.63 |
APR-37 | 18 | 14.50 | 16.25 | 111.01 |
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TICK: In the face of increasing outflows from Emerging Markets (EM) – due to increased anxiety surrounding global growth – a sustained bullish trend is expected to persist in the very short-term, particularly on short-term instruments with attractive yields. Investors may wish to selectively pick instruments with higher yields across the curve, to enable a quick response to market changes
The Art of the Deal: 6 Questions to ask During Volatile Markets
With the market’s current instability, investors may feel a little uneasy about the gyrations, and begin to raise questions about their portfolios. Here are some of the key questions to ask your Financial Advisor or Wealth Manager:
1- Why should I feel safe? People with a formal investment plans should get their financial advisors to do an in-depth review of their plan in order to confirm that the investor’s goals are still on track. The appropriate investments should be based on when the person will consume the money they have invested. For example, parents with a child about to enter university should ideally have the cost of several semesters parked in a safe vehicle, such as a money market account.
2- Should I be reviewing my fixed income allocation? For nervous investors to sit out the current equity volatility, it may be ideal to increase one’s allocation to short-term debt, while avoiding riskier corporate debt instruments in both the high-grade and high-yield sectors (since these corporate bonds may be punished, unless trade and economic outlooks stabilise).
Forecast: Average Treasury Bill & FGN Bond Yields
TREASURY BILLS (PRIMARY MARKET) | FGN BONDS (SECONDARY MARKET) | |||||
| 91-DAY | 192-DAY | 364-DAY | JAN-22 | FEB-28 | APR-37 |
JUN-19 | 10.26 | 12.69 | 13.87 | 14.46 | 14.33 | 14.39 |
JUL-19 | 12.09 | 14.52 | 15.70 | 16.29 | 16.16 | 16.22 |
AUG-19 | 11.93 | 14.36 | 15.54 | 16.13 | 16.00 | 16.06 |
SEP-19 | 11.83 | 14.26 | 15.45 | 16.03 | 15.90 | 15.97 |
OCT-19 | 11.92 | 14.34 | 15.53 | 16.11 | 15.98 | 16.05 |
NOV-19 | 11.95 | 14.38 | 15.56 | 16.15 | 16.02 | 16.08 |
DEC-19 | 12.23 | 14.66 | 15.84 | 16.43 | 16.29 | 16.36 |
3- Can we re-evaluate my risk tolerance? Typically, questions about risk tolerance are included in formalised financial plans, but are often only asked when the markets are performing well. The current volatility may help investors get a better appreciation of how risk tolerant (or averse) they really are. Investors should know exactly how much risk they are taking, so that they can also realise how much reward they should be expecting.
4- Are my income-related funds in the right place? People with long-term investment horizons can handle bouncy markets, but retirees need to preserve capital. At times like these, retirees need to have access to capital that they can draw down on. A ‘bucket strategy’ that involves keeping one to two years of money in very liquid accounts (cash or other conservative investments) comes in useful. Retirees, for example, can easily draw income from short-duration bonds.
5- Am I sufficiently diversified? Diversification across equity, fixed income and other investments can help investors ride out market volatility. Some areas of the market will perform better than others at certain times, and diversification keeps people focused on investing for the long term and pursuing their financial goals, regardless of any distractions.
6- What opportunities can be had amidst current market movements? With the market swings, people with a long-term investment horizon should review how they can benefit from any price drops. The current environment could be a good entry point for investors with a longer view to look at certain debt securities. If investors have been waiting for a time to buy, this may be it.
Conclusion: Own Assets That Hold up in Bad Times
In every bear market there are certain segments of the markets that get hit much harder than others. While it’s extremely difficult to forecast these ahead of time, an instant preventive measure is to diversify within markets as well as across asset classes (including a portfolio allocation of 10 – 30 per cent in alternative assets) . Research has shown that over time, diversification brings the greatest return at the lowest risk, while protecting the investor from the unknown.
*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.
