Investment choices in 2020

Happy new year to all our readers. May the new year be prosperous for us in every way.

For the Nigerian investor, the investment climate is quite challenging. Value Added Tax will soon go up on most of our favourite goods and services. The Customs Service at international airports has become more bullish in collecting duties on luxury items, which include some of our designer watches and handbags. Tax Identification Number will soon become a condition for maintaining a bank account, so those entrepreneurs who paid less taxes than is due, will no longer be able to keep their untaxed income.

As more cash is leaving our pockets, less cash may be coming in, if we do not actively plan against this. Interest rate on money markets has nose-dived; treasury bills (TBs) average 3-4% per annum and bank fixed deposits earn even less. Inflation is still in double-digit, so if we put money in money market instruments, whilst the nominal value may increase, the real value of the investment is eroded. Meanwhile, borrowing customers are yet to enjoy the low interest regime because CBN has kept their own “lending” rate, the MPR, at 13.5%.  Looking at the stock market, which is usually the alternative to the money market, it did not fare better. The NSE shrank in 2019, the second year in a row.

How then does the savvy investor grow her portfolio in these times?

In investing in the money market, we need to look beyond the primary market to the secondary market. The primary market for treasury bills is when CBN brings new treasury bills to sell for 90, 180 or 360- day tenures. A person who bought 360-day TBs at a higher interest rate may run into financial constraints on day 120 and need cash urgently. He takes the TBs to his bank to sell on his behalf. This sale is done in the secondary market. CBN would not take them back. A new owner buys the 360-day TBs and for the remaining 240 days enjoys the higher interest rate. So, instead of going to the primary market to buy TBs at 3%, let us explore the secondary market where we may still get 9% return. The same principle applies to corporate and government bonds.

Even though the whole NSE shrunk in 2019, there were some stocks that did well and returned high yields to their investors. As individual investors, now is the time to focus on dividend payout and not so much on capital gains. As we know, returns from stock market investments come in two forms: dividend – which is the investor’s share of the company’s profit; and capital gains –these accrue when the sale price of the stock appreciates in the market. So, a person with 10,000 units of a N100 stock that appreciates to N120 has her wealth grown from N1.0million to N1.2million. In the times when the market is shrinking, capital gains are uncommon, so let’s invest in dividend stock, knowing that the market will ultimately reverse itself and grow and in the long run we will enjoy healthy capital gains. But, as the market was shrinking, some equities bucked the trend and grew. With in-depth analysis, we may be lucky to find these ones and invest in them.

Private equity is another avenue to explore. Many SMEs are growing and delivering above average returns to their investors. Consider investing in well run SMEs but only after doing a thorough due diligence on the business and the owners/managers. Also, ensure you have a binding investors agreement. Private equity helps to improve community wealth as it empowers local entrepreneurs to create jobs and grow the GDP.

Real estate never depreciates, they say. So, if you are investing for the long term, consider real estate. It is not a short-term investment as it is extremely illiquid, that is very difficult to convert to cash. But in the long term, it is highly profitable. I was recently told of a friend who bought 18 plots of land for N360,000 in 2006, that is, N20,000 each. In 2016, she sold 8 plots at N360,000 each. Last week, someone was offering to buy another five plots for N5m. Even with inflation, naira depreciation and opportunity cost of money, that investment is a highly profitable one. And there are many more like that in the real estate sector waiting for us to exploit them.

The challenging investment climate is no reason for us to lose income. Let us explore less obvious paths to build our portfolios. Happy investing.



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