As the nation’s investment climate continues to pose a challenge to stakeholders, a new report on the Nigerian investment landscape says investors must increase their understanding of investment risks to enable them to enhance their returns.
The report by Coronation Research titled, “Navigating the Capital Market: ‘the Investors Dilemma’,” argued that Nigerian investors are faced with difficult investment choices following the unprecedented crash in interest rates.
According to the Head of Research at Coronation Asset Management, Guy Czartoryski, investors are left with the alternatives to either wait for rates to rise again in future, or accept more risk in order to increase returns.
Czartoryski, while explaining the nitty-gritty of the report at a Webinar, Monday, said the report recommends that instead of targeting inflation, which is the conventional benchmark, investors should aim to beat the effects of Naira devaluation against the dollar and obtain the risk-free return they would have in dollars.
This, he said, suggests that investors should request for a Naira risk-free fixed-income (or Treasury bill) return of 14.7% per annum over the long term and demand a return of 20.5% per annum when it comes to equity.
“Coronation Research calculates that Nigerian investors should demand a return of 20.5% per annum. These are high benchmarks, but they show what is necessary to preserve the value of investors’ hard-earned money. Coronation Research’s investor feedback showed that Nigerian investors have two concerns.
“The first is inflation. The second is not to lose money in investment schemes. And with fixed-income and bank deposit rates at record lows, and far below the rate of inflation at 12.4%, investors are being tempted to take risks again. Yet the priority now is for them to understand what those risks are, and how they can be managed. Navigating the Capital Market’ is their guide to these challenging times.
“Navigating the capital market takes a new approach to setting investment return benchmarks. Instead of targeting inflation, which is the conventional benchmark. It recommends that investors should aim to beat the effects of Naira devaluation against the dollar, and obtain the risk-free return they would have in US dollars.”
He continued: “This suggests that they should ask for a Naira risk-free fixed-income (or Treasury bill) return of 14.7% per annum over the long term. And, when it comes to equities, Coronation Research calculates that Nigerian investors should demand a return of 20.5% per annum.”
He pointed out that these are high benchmarks, but they show what is necessary to preserve the value of investors’ hard-earned money. He said the priority presently remains how to understand what those risks are, and how they can be managed, noting that the report would enhance investors’ knowledge of risks in challenging times.
The revolutionary report studies the Nigerian investment scene over a 10-year period and finds how Nigerians have managed to preserve their capital over the long term. Some of the conclusions are surprising. For example, it has been remarkably easy to beat inflation over the last 10-years by buying Federal Government of Nigeria Treasury Bills.
“However, with the crash in interest rates in the first half of 2020, this era has come to an abrupt end. By contrast, equity market returns have not preserved capital for investors over the long term, even when adding back the generous dividends paid to investors.”