Rising Inflation, Plunged Yields Ruffle Investors, Analysts
Rising inflation, and plunged yields in the fixed income market has ruffled investors, and analysts as average increase in general price has been estimated to lift further.
Average yield on instruments in the fixed income market are below the nation’s inflation rate, thus turning real returns negative for investors.
The lower yield environment plus the fact that http://www.cbn.gov.ng had placed ban on some high net worth individual from buying open market operation (OMO) Bills created has strong liquidity.
This period, bags of money are looking for opportunities with better return profiles, analysts told MarketForces, though they said moderation may be in view.
Yet, they are uncertain about timing, this uncertainty aspect makes investment decision a difficult task for investors.
No investor can put price tag on uncertain element in investment decision, analysts said but they however understand that the equity market risk has similar feature.
Since the ban on OMO bills players, Investors’ money keeps seeking where to earn higher return, assets under management (AUM) are underperforming.
Recently, FSDH tasks Pension Fund Administrators to garnish their investing appetite with little more risk to reflate returns on retirement savings accounts.
Nigerian assets managers’ participation in the stock market has been considered quite low for the size of funds with pension assets custodians.
Sonnie Ayere, Dunn Loren Merrifield Chief in discussion with MarketForces Africa corrected an impression. Ayere said there is risk and return trade-off.
He explained that investors don’t expect to earn premium by investment in Treasury Bills – such investment instruments were not design to cover inflation rate.
Investment in Treasury Bills is for liquidity purpose.
Like FSDH, Dunn Loren Merrifield boss tasks institutional investors, especially Pension Funds Administrators to adjust their portfolio to earn more for their clients.
A number of equity research reports have indicated that inflation rate for the month of June will surge.
The estimate is hinged on scarcity of foreign exchange, disruption in the supply chain and COVID-19 impacts on the economy.
Headline inflation for May had settled at 12.40%, more than three times offered rates on short term Nigerian Treasure Bills.
A further increase in inflation would widen negative return on government instruments, which would also impact the earnings capability of the Nigerian banks.
In the past, Treasury Bills and other OMO instruments had acted as safe haven money spinning vehicle for Nigerian lenders, offered as much as 16%.
Segun Agbaje, the Group Managing Director at the Guaranty Trust Bank had said he would rather buy those bills and make money for shareholders than lending same to customers.
However, the CBN, having recognised lenders decisions to keep the local economy starved, the monetary authority raised loans to deposits target ratio twice.
In the fixed income market now, strong liquidity still keeps rates down, but investors are already asking for more.
The fact that foreign investors are yet to be able to exit the Nigerian economy keeps the market going.
However they are participating more in long dated instrument, analysts said.
More than ever, analysts are unsettled as inflation continues to rise, the situation that pundits have attributed economic policy design.
This has been fuelled by COVID-19 on the streets, and corporates are using the opportunity of lower interest environment to restructure their finances.
As inflation rate moves faster than yields on Bills, both investment and savings would be negative for economic agents, says LSintelligence in an email.
The firm said savers would lose value, and T-Bill investors would only seek to cover risk free interest which is currently under the inflationary curve.
Financial experts pointed that the trend around the recent increase in general price of goods and services has implications for the financial market.
“We see this development as a disturbing development especially to the asset managers, particularly the pension funds administrators (PFA), who try to benchmark their returns to the inflation rate”, WSTC said.
According to analysts, the real return of all government securities from 90-day bills to 10-year bonds are currently in the negative territory.
“Given that the Pension Fund Assets (PFAs) place majority of funds of about 60%-70% on government securities.
“It means that returns on pension savings will suffer. Hence, we believe that a redirection of funds to the equities market is inevitable.
“Although we are cautious about the sustainability of the low yields in the economy due to the fundamentals that do not support, we maintain that the monetary policy authorities might not be willing to make adjustment any time soon.
“Consequently, we see asset managers taking up some risks by investing in other asset classes, particularly equities”, WSTC analysts said.
Analysts recalled that 2019 closed amid rising policies adjustment targeted at stimulating growth and increase government revenues.
On the monetary front, the Central Bank of Nigeria rolled out economic policies that aims at stimulating performance of the economy.
The regulator used various directives to ensure Banks channel more credit into the real sector.
Just as the fiscal side settled for policy direction to raise government revenues. The finance ministry raised value added tax from 5% to 7.5% on VATable consumption.
It also proposes to exclude some small and medium scale enterprises with revenue below N25 million from being taxed.
Analysts believe that border closure by the Federal Government would generally push inflation upward.
FX Scarcity, Supply Chain Disruption Support Rising Inflation
This is due to the fact that supply side has been constrained as imports side from neighbouring countries through land borders have been stopped.
Analysts at WSTC said they expect to see a continuation of the current inflationary trend in the near to medium term.
“In our view, the rising inflation is expected to stem from an adjustment exercise, relating to minimum wage increase, hike in electricity tariffs, and increase in Value Added Tax (VAT) rate”, WSTC analysts added.
Other issues that might possibly result in a higher inflation going forward include the impact of an extended border closure on food prices.
This also include higher levels of liquidity in the system owing to an improved banking sector credit to the private sector.
“In our 2020 economic outlook, we projected inflation rate to be 11.50% as our best case scenario, and 12.60% worst-case scenario”, WSTC highlighted.
Rising Inflation, Plunged Yields Ruffle Investors, Analysts
