Wealth Management in Transition Periods

Our financial well-being is not isolated from our macroeconomic environment. Inflation, government’s fiscal policies, the Central Bank’s monetary and FX policies and other relevant factors must be carefully considered when managing one’s finances. These factors directly affect returns from money market investments, personal income tax (and disposable income), foreign exchange rate (and prices of goods – since most locally manufactured goods have a high percentage of imported inputs), customs duties (and prices of imported goods /machinery), banks’ lending rates (and cost of borrowing by manufacturers and service providers – which in turn affects costs of their goods and services) etc. Government agencies have a direct impact on our personal wealth so not only must we be interested in who is in power, we must know how to maneuver around their various policies.

Planning the future is difficult; planning during transitions makes the task even more challenging. In Nigeria’s financial sector, we are facing two important transitions. Firstly, the national elections. We may have a new government with new fiscal policies or have the same government but with new ministers who then introduce new policies. How would budgets be funded? Through limitless borrowing like the current government or through a hike in tax rates? Would 5% VAT continue to be maintained or it would be jerked up to compare with those of peer countries? How about fuel subsidy? Would petrol price be deregulated? Secondly, the first term of the current CBN Governor’s tenure is about to expire. Would the tenure be renewed as allowed by the law or would Mr. Emefiele be replaced? If he is replaced, what would the new Governor do? Would he accede to the clamour to bring down interest rates? Would inflation be a priority to him? Would he defend the value of the Naira as tenaciously as Mr. Emefiele? All these issues and more impinge on our financial well-being, so how then do we plan in this season of transition?

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The obvious answer is “flight to safety.” A significant number of the Foreign Portfolio Investors in Nigeria has already fled to safety. They have monetised their investments in both the Stock and Money Markets and moved their monies back to their home countries or other “safe” jurisdictions; awaiting the outcome of the two transitions and the policy directions that would follow. But we are local; how should local investors manage at this time? How could we too “fly to safety?”Safe investments are those that maintain their values and avoid value erosion during times of uncertainty. We can already see value erosion in the stock market, so definitely it is a no-go area as it may not have reached the bottom yet. When the stock prices stop falling and begin to inch up again, we can take advantage and return to the market. Generally, the two safest investment classes in times of transition are money market instruments and real estate. Due diligence must be done on the issuer of the money market instrument. Please avoid hype and adverts. Conduct independent investigations from third parties and industry players. Due diligence in real estate transactions cannot be overemphasised. We must never rush into real estate deals. Careful investigation must be conducted on the vendor and the property at the relevant government agencies and from neighbours of the property. Rights to transfer Titles must be reconfirmed.

The major difference in the two types of safe investments is their liquidity. Whilst money market products are near-cash instruments and could easily be converted to cash, real estate investments are illiquid – conversion to cash is painfully slow so they cannot be relied upon in an emergency. Therefore, in choosing which investment to make, it is important to consider tenor of your investment. If short term, stick with money market instruments, if medium to long term, consider real estate. Alternatively, you could invest in FGN bonds with medium/ long term tenors; these give the double benefits of long term and liquidity.

Some people prefer to undertake amateur FX trading and keep their money in US Dollar Cash during transitions. The outcomes of such investments have been inconsistent – for every success story, there is an equal failure story. FX trading is not reliable for flights to safety; the risk of value erosion is quite high.

Whatever investment we choose, let’s keep our wealth protected in this transition period.