I have received a few emails inquiring what investment options are available for 2015. Ordinarily this would have been a straight and easy answer but considering the current economic situation in the country one will have to be circumspect. Asset prices denominated in Naira have depreciated hugely towards the end of 2014 and is projected to continue to do so in 2015. But does this mean no one should invest? Why are asset prices tanking and what are the inherent risks? What options do I have in spite of these risks? In this article, we will attempt to discuss some of these issues.
Risk in 2015
Fiscal Issues – The 2015 Budget is set to be one of the tightest budget in recent years considering the expected drop in government revenue. As oil prices continue to fall, most analysts believe it increasingly makes it difficult for government to fund its budget. This perhaps suggest some form of austerity measures as the Government is one of the largest spenders in the economy and when they don’t spend the economy hardly moves. This is a real issue and is making some investors dump Nigerian assets.
Mitigating the risk – Nigeria has over $60b (N10.8tr) in local debts as at 2014. However, most of these debts are in Naira reducing the risk of borrowing abroad. Nigeria’s percentage of borrowing to GDP is also fairly low compared to similar countries so one expects the government to borrow. If they do borrow, then we may just waddle through the fiscal issues mentioned.
2015 Election – Expectedly many people are a bit apprehensive about the 2015 elections especially as most politicians begin to ratchet up their rhetoric. Pre and Post-Election violence is a real risk and most will rather keep their money in their ‘pockets’ than invest it.
Mitigating the risk – So what if after February 14, the presidential election results are rejected by the losers and violence persist. What could happen? This is worst case scenario and if you believe in a doomsday prediction then you are best if you stay out of investing in anything with a tenor of over one month. But if you feel politicians, who perhaps have an even larger stake in the economy, will allow common interest prevail then your bet is as good as mine.
Fall In Oil Prices – Crude Oil prices have fallen by over 50% since it started dropping in July 2014 leading many to believe we may be seeing oil prices at around $40 for most parts of 2015. This appears bad for Nigeria, considering that over 80% of our revenues is directly or indirectly sourced from crude oil. The Nigerian economy revolves around crude oil and as such many industries may be severely affected. Banks for example ‘are expected’ to record significant impairments due to this and considering they make up a huge chunk of the capital market, stock prices have tanked in tandem.
Mitigating this risk – Analysts expect crude oil prices to remain at least below $50 this year, so based on perception, the worst has happened already. This could unlock a new wave of spending in western and more advanced countries as their citizens will have more cash to spend. This might then trigger a rebound in commodity prices helping local companies rebound. Whilst this may not occur in 2015, 2016 may just be the year were things start to improve. Therefore, it’s either you invest now that asset prices are at historical lows or wait till they start to rebound later in the year
Investing in 2015
So having considered all this, what options are there for one to invest in? Here are a few I have in mind
Treasury Bills and Bonds – The Government is expected to borrow heavily this year and with interest rates expected to remain high, anyone with free cash will be very well placed to ride the wave. Imagine buying bonds at 16% or Treasury Bills at northwards of 13%? Impressive returns right?
Stocks – Stocks are typically the first to be record asset losses in times of economic uncertainty. Nigerian stocks in particular have been badly bruised posting a negative return of 16% for 2014. It continued where it started this year posting the world’s biggest loss last week. So, is this all bad news? Not if you are able to ride the volatility in the markets or have the patience and tenacity it requires to cherry pick stocks. A lot of stocks are so ‘cheap’, buying it now could create massive returns in a few years if not months. Imagine if the elections were to end well and the world economy adjust to the new normal as regards oil?
Real Estate – As people fear for their investments and Politicians race to raise money for the last lap of election campaigns, opportunities may arise for those with interest in real estate. A good Realtor should be able to tell you which houses are up for fire sale. Imagine buying a house worth N100m for N50m and then selling it after 6 months for N100m?
Forex – For those who believe in doom and gloom there are also good investing options out there. If you are not happy about investing in naira or just scared of what might happen this year then you might be better off saving or investing in dollar based assets. If you must, make sure proceeds are deposited in a foreign accounts.