Investment: When Inflation, Devaluation Destroy Naira Value

Investment: When Inflation, Devaluation Destroy Naira Value

Investors are looking for catalysts that will drive alpha returns on investment but it appears it is a tough ride stemming from the negative impacts of the coronavirus pandemic on global economic space. No market appears to be spare.

Treasury yield is falling in the United States for example while inflation worries build up. The cryptocurrencies market trades with a heavy bloodbath. Foreign exchange speculators in countries with weaker local currency values are however smiling staying in the game.

Inflation worries, lower purchasing power and steep unemployment appeared to have destroyed the middle-class economy. Now, it is either you are rich or poor.

At an inflation rate of 17.75% in June 2021 returns on fixed income instruments is negative while stock market volatility is affecting prices.  

Investment: When Inflation, Devaluation Destroy Naira Value

Where are Nigerians investing their money?

Individuals and/or corporate with long dollar positions are shielded from Naira asset risks. Even banks with enough dollars reported gains that boosted their performance scorecard in the first quarter.

Nigeria’s investment space is a hot space CBN pro-growth stance keep rates down. Key players in the banking sector have had their earnings cut. Rates on fixed deposits are abysmally low and unimpressive.

In the Nigerian bourse, things are no different but that doesn’t mean stockbrokers are not making some kills for their clients. Money, as they say, goes to where it is treated well – no emotion except investing mistakes or errors.

In the first half of 2021, the average yield in the Nigerian Treasury Bill market increased to 6.58% as of June 30, 2021, from 0.46% at the beginning of the year, analysts said in their separate reports.

This is a further increase from 4.13% registered at the end of the first quarter of 2021. Despite all these market apocalypses, currency trading still provides better earnings. Though, very much risk just like taking a position in the cryptocurrency space.

FSDH said in a report that this was a direct fallout from the liquidity management strategies of the Central Bank (CBN) in the form of open market operations (OMO) auctions, the introduction of CBN Special Bill, intermittent debit on banks’ cash balance and government debt programs.

In the face of rising inflation and increasing appetite for debt, FSDH analysts predicted that yields in the Treasury bill market will continue to rise.

Read Also: Nigerian Banks Will Not Remain Resilient in Performance – FSDH

However, the pattern saw in the fixed income market showed yield repricing slowed down as subscription level at the CBN auction which often determines spot rates stayed strong.

Meanwhile, from the beginning of the year to date, the government has borrowed a total of N1.83 trillion from the Nigerian Treasury Bill market.

As anticipated, yields in the open market operations (OMO) space are fast recovering, said FSDH in a quarterly review.

The investment firm revealed that average open market operations yields increased to 9.87% on June 30, 2021, from 0.58% at the beginning of the year.

This is also a further increase from 6.45% at the end of the first quarter of 2021. Analysts hope that yields are expected to increase following the high inflation rate and the government’s need to attract foreign investment inflows into the country.

In the equity space, the stock market closed 2020 on an impressive note, despite the fallout from COVID-19 as analysts noted that this was partly a result of lower yields in the fixed income market.

The NGX-ASI closed the year with a 50.03% gain while the NGX Market cap expanded by 62.50%. However, following the recovery of yields in the fixed income market, the equity market has been witnessing selling rallies.

Stock market capitalisation took a reverse gear to N20 trillion after a significant rally. Consequently, FSDH analysts said the equity market recorded a loss of 5.87% in the first half of 2021 while the market cap contracted by 6.18%.

This translated to a loss of N1.3 trillion in the first half of 2021. On a sector basis, the loss in the equity market has been driven by losses on the Industrial (8.09%) and banking (6.92%) indices despite a 39.07% gain in the Oil & Gas index.

Besides the advancement of yields, FSDH analysts concluded that the unimpressive financial statements across many listed companies have contributed to the sell-off sentiment in the market.

Investment: When Inflation, Devaluation Destroy Naira Value