Investors, depositors battle inflation with high yield assets

The Central Bank of Nigeria (CBN) has for six years missed its six to nine per cent single digit inflation rate target. At 14.89 per cent in November, which is 32-month high, inflation upswing has not only eroded savings account depositors’ interest income but triggered new wave of investments in alternative assets. Mutual Funds, Eurobonds and commodities markets are new choices for investors and savings account depositors seeking higher yields to protect their funds from inflation-induced capital erosion. Foreign investors are also buoyed by higher returns in Nigeria which remains an incentive for sustained capital inflows. With Nigerian Treasury Bills (T-bills) yield now below one per cent per annum, savvy fund managers, savers and investors need to work smarter to beat rising inflation with higher good returns on investments, writes COLLINS NWEZE

Michael Mathew-Adams, a 45 year old Lagos-based cicil servant has one passion that everyone around him identifies- saving his money in banks.

Mathew-Adams tells everyone that savings deposit gives him the leeway to withdraw his funds at any time, earn interest with minimal bank charges. He not only has savings deposits in three commercial banks, but has opened one each for his wife, and four children.

“I have come to realise that savings is the best way to preserve wealth. I am also encouraging my family members to imbibe the savings culture by saving for the rainy day,” he said.

But all that changed after investment analysts from Afrinvest West Africa Limited explained to Mathew- Adams what he never imagined. They told him that whatever savings he has in the last one year is being gradually eaten up by inflation.

In an economy where banks pay savers 1.25 per cent per annum interest rate on savings deposit as against 14.89 per cent inflation rate, savvy savers and investors are divesting to alternative assets with higher yields to ward-off inflation-induced capital losses.

The situation worsened after the Central Bank of Nigeria (CBN) Governor, Godwin Emefiele directed deposit money banks to pay 1.25 per cent interest on savings deposit accounts. This represents 10 per cent of the 12.5 per cent Monetary Policy Rate (MPR)- the rate at which the CBN lends money to banks. The new rate was a reduction from 30 per cent of MPR which the CBN sustained for years.

With these developments, Mathew-Adams did not just move to Mutual Funds, where he earns over 8.5 per cent returns per annum, he has commenced a new campaign against savings deposits.

First, he moved N1 million out of his savings accounts across the banks, invested 50 per cent in Mutual Funds and the other half in Dollar Funds.

It is not just Mathew-Adams that is moving huge cash from savings accounts with banks to Mutual Funds. Many civil servants, private sector employees, and even commercial banks, now invest in Mutual Funds and other alternative assets.

After a discussion with one of his closest friends, Stephen Udom, he agreed to invest 50 per cent of his savings in Mutual Funds , and the rest in Federal Government of Nigeria (FGN) Savings Bonds (FGNSB).

The attraction is interest rate that is far higher than what any financial institution could offer for savings and enough to protect investors’ funds from inflation-induced capital losses.

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From L-R: •Emefiele, •Czartoryski, •Unegbu, •Yusuf, •Nzewi, •Finance Minister Mrs. Zainab Ahmed

It said: “Nigeria’s inflation was at 14.89 per cent in November 2020, a 32-month high. The major trigger to the rise in inflation has been the closure of Nigerian land borders since August 2019, which affected the movement of goods. This was aggravated by the slowdown in economic activities due to the restrictions implemented to curb the spread of Covid-19. “

In practical terms, the prices of goods and services increased by 14.89 per cent between November 2019 and November 2020. That means a bag of onions that cost N100,000 in November 2019 increased by N14,890 in November 2020 to cost N114,890.

Findings showed that when the demand for goods and services outweighs the supply, buyers become willing to pay higher prices. Also, when there is increase in supply of money, without a corresponding increase in output or productivity in the an economy, it will lead to rise in prices.

As inflation rises, Mathew-Adams, Udom and millions of other Nigerians that kept their funds in savings accounts got poorer and may not be able to meet their daily obligations because their savings are gradually losing value.

Mathew-Adams said: “I have learnt to invest in alternative assets instead of saving my money in banks. I have also minimized idle cash by investing in financial instruments”.

Director-General, Lagos Chamber of Commerce and Industry, Muda Yusuf, said that structural factors which constrain productivity across sectors, especially the real sector, decline in agricultural output, exchange rate depreciation, higher energy costs, security concerns in key food-producing states and Covid-19 disruptions were major inflation drivers in year 2020.

“These structural-induced factors are beyond the control of monetary authorities and have made it increasingly difficult for the CBN to achieve its primary objective of price stabilization,” he said.

An economist and former President, Chartered Institute of Bankers of Nigeria , Okechukwu Unegbu, explained that inflation tracks the rise in the price of goods and services, which in turn shrinks the naira’s purchasing power.

“When inflation rises, consumers can purchase fewer goods, input prices go up, and revenues and profits go down. As a result, the economy slows down until stability returns,” he said.

The search for better returns on investment is universal. Foreign investors, hungry for higher returns also reckon that Nigeria with a potential yield above seven per cent, remains attractive investment destination.

For the Head Research at Coronation Asset Management, Guy Czartoryski, there is a paradigm shift in investment and savings decisions.

The fund management industry, he said was fast rising with investors putting growing proportion of their savings with Mutual Funds instead of banks despite the risk involved.

Findings showed that Nigeria’s fund management industry is undergoing remarkable growth. Total assets under management (AUM) over the four years 2015 to 2019 more than doubled in inflation-adjusted terms and were up 305 per cent in nominal terms.

The compound annual growth rate (CAGR) in total AUM from 2015 to 2019 was 22 per cent in inflation-adjusted terms and 42 per cent in nominal terms. It would be difficult to find a Nigerian industry that matches this.

Aside Mutual Funds, many investors are seeing value in diversification, especially currency diversification. US dollar bonds funds, though not a large part of the industry’s overall AUM (10.4 per cent) have been growing quickly of late. The CAGR in US dollar bond funds (expressed in their Naira equivalent values) from 2015 to 2019 was 39 per cent in inflation-adjusted terms and 61 per cent in nominal terms.

The Treasury Bill (T-Bill) auctions in October were oversubscribed by an average of 513 per cent and peaked at N821 billion on 28 November 2020. The 91-days, 180-days and 364 days T-Bills closed around 0.34 per cent per annum, 0.50 per cent per annum and 0.98 per cent per annum respectively at the last Primary Market Auction (PMA). Similarly, yields at the FGN Bond auction for November 2020 closed at 4.97 per cent per annum and six per cent per annum for the benchmark 15-Year and 25-Year FGN Bonds respectively.

Czartoryski said Nigeria has left behind, in 2020, a 10-year period when yields on Nigerian Treasury Bills (T-bills) generally exceeded inflation, allowing fund managers to invest clients’ money in risk-free T-bills with little need for sophisticated risk management.

“Banks benefited from this as the primary destination of savings, as did pension funds. However, the fall in T-Bill rates over the past year, combined with a surge in the value of Federal Government of Nigeria (FGN) bonds, demands a new level of risk management. Investment risk is rising as yields fall, and fund managers and investors need to master risk management and learn the benefits of diversifying their investments across asset classes,” he advised.

The T-Bills are short-term securities that help the government to raise funds and support monetary policy management of the Central Bank of Nigeria (CBN). Bonds are long-term debt obligations issued by private or public corporations to fund key projects.

During the period between 2010 and 2019 the average Nigerian Treasury Bill yield was 14.7 per cent and this was, on average, 2.6 percentage points above the rate of inflation. Savers and investors had it easy during this period; essentially all they had to do was to invest in Treasury Bills in order to beat inflation.