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Investment Tips

This is why retirement pension savers should be worried in 2020

Nigeria’s pension fund investors and pension savers should be afraid and worried in 2020.

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Pension Funds Performance

Nigeria’s pension fund investors and pension savers should be afraid and worried in 2020. On the average, the RSA pension fund category netted about 13% return in 2019, so did the Retiree Savings Account category of pension funds.

While that is a commendable performance in a year where the Nigeria Allshare index lost about 16% of its value, that same feat may not be repeated in 2020. Did I hear you ask why?

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Nigerian Pension funds

Falling Interest Rate

One thing that characterized the Nigerian Economy and the Nigerian capital market in 2019 was the fast decline in yield or interest rates towards the end of the year. The Nigerian 10-year Bond Yield, which opened the year 2019 at 15%, is poised to close the year at around 11% or less and other tenors are currently trending at single-digit interest rates.

Nigerian Treasury bills and Commercial Papers are even worse. According to the latest FMDQ Daily Quotation List, a Commercial Paper with 191 days to maturity traded at 6.19% while one with 282 days to maturity traded at 5%. A case of inverted yield.

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An analysis of the most recent Pension Assets Report released by the Nigeria Pension Commission shows that 46.66% of total pension asset is invested in FGN Bonds, while 22.82% is invested in Treasury Bills, instruments that are directly impacted by trends in interest rate.

[READ MORE: Nigeria’s Pension Asset increased by N228 billion in October)

Lower interest rates mean lower returns from such investment types. Though the coupon rates on the FGN bonds that the pension funds are already invested in will not change, (unless the bond issuers decide to refinance such bonds), they, the pension funds, will be adversely affected if majority of the bonds mature in 2020.

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In that case, the pension funds will have to face the reinvestment risk of finding bonds with similar coupons. A tall order indeed. Unfortunately, the inverse relationship between bond prices and interest rate will mean that at the point of reinvestment, such bonds will cost more to buy. With Treasury Bills and Commercial Papers being short-dated instruments, the effect of the falling interest will be felt more in those types of instruments as they are prone to mature within the year under the current low-interest-rate regime.

Rising Inflation

[READ ALSO: Pension funds are in trouble as inflation erodes asset values by 100%)

One statistic that means a lot to retirees and pension plan savers is real rate of return. Real rate of return is the nominal rate of return less inflation. In a layman’s language, it is the rate of return that shows what your investment return can purchase, given current price level.

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With inflation inching upwards in Nigeria, and interest rate going the opposite way, pension plan savers may be subjected to double “punishment” or double jeopardy. According to economists, falling interest rates are prone to causing inflation, if that happens, pension plan savers may be in for the worse.

What to Do to Remain within Plan

In a situation like this, those saving for retirement should think of what to do to remain within their planned retirement objectives. There are two broad sources of pension plan asset: contribution and income. Those two combine to lead to increase in pension assets. When one falls, the other has to increase, otherwise, pension assets will decrease. Therefore, to maintain your retirement savings objective in light of the potential for a decrease in income or return, you have to increase your monthly contribution.

I did a piece, not too long ago, on the need for additional voluntary contribution; now is the time to embark on that if you do not want to be caught “pants down” with some deficit in your retirement savings account balance in 2020 and beyond. To double your money in 10 years, for example, you need about an average annual return of 7%. As the rate of return decreases, so does the number of years required to double your money increase, if you do not increase the contribution.

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This is why you should make voluntary contributions to your pension fund

Eurobond Mutual Funds to the Rescue

Pension Plan Managers should go to work, by looking for alternative sources that can help them increase return for their clients and investors, as long as it is within the regulatory permission granted them by the Pension Reform Act of 2004, or the like.

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One of such investments is Eurobond or Dollar denominated mutual funds. Though return on those mutual funds is driven by interest rate, they have the potential to insulate the effects of falling interest with changes in exchange rate. With the Naira slightly depreciating against the dollar continuously, investing in Eurobond mutual funds may be a way to stay afloat.

Patricia

Uchenna Ndimele is the President of Quantitative Financial Analytics Ltd. MutualfundsAfrica.com and mutualfundsnigeria.com (both Quantitative Financial Analytics company website) is a leader in supplying mutual fund information, analysis, and commentary on African mutual funds. We provide reliable fund data; and ratings information that will add value to fund managers, the media, individual investors and investment clubs.

9 Comments

9 Comments

  1. Esosa Bob Osaze

    January 1, 2020 at 2:23 pm

    Which is a better option, the PFA- driven program withdrawal or the insurance company driven annuity for retirees?

    • Julius Oguntulu

      January 1, 2020 at 11:37 pm

      I think annuity is better. The initial percentage increase over programmed withdrawal is high and this value is earned for life. What happens to your fund is longer your business. Your business is how to manage the pension being paid to you.
      In the case of programmed withdrawal, the value may increase or decrease and this value also depends on the amount in pension account. As withdrawal is made, the total amount also reduces. So what happens if there is nothing to withdraw? There is likelihood that there may not be increase in amount of pension to be paid under program withdrawal in 10yrs.

      • Anonymous

        January 2, 2020 at 12:40 am

        And if the individual dies after the 10 year guarantee, what now happens to his next of kings?

        • Anonymous

          January 3, 2020 at 8:25 am

          In the case of annuity, after 10 years guarantee. The next of kin get nothing from the insurance company. Disappointment will be staring at him on his face.

      • Passer By

        January 2, 2020 at 3:50 pm

        I beg to differ. It is a question of choice and goals, peculiar to each situation.

        The initial percentage increase you refer to is only an apparent increase. One can also see such a spike in the programmed withdrawal structure by refusing to receive a lump sum but merging that with the monthly contributions.

        Also, while the annuity product is marketed to be earned for life, there is a guarantee period for receiving that value. After that period, which is 10 years, if the individual should pass on, there would be absolutely nothing left for the beneficiaries of the individual.

        Your supposition that value in the pension account decreases with each payment is quite right but is also one-sided. Pension funds do not sit idle, they bring in income on a regular basis and this is added to the contributions. Furthermore, there is a minimum pension guarantee to be put in place for those whose contributions run out before they pass on.

        So it depends on choice. The key thing is to strive to reach a point where either option provides only benefits to you. Contribute more. That can not be overstated. There was a post about Additional Voluntary Contributions. Read it and apply it to your life. Demand a better service from your PFA. Call them and demand to speak to someone knowledgeable. Discuss with that person and get clarification. They are obliged by every business metric to provide it to you. If they don’t, go to another PFA. Transfers should be possible soon enough.

        There is really no better option from an objective standpoint. They are both products that depend on what you have done. So do your part well and both products, whichever you choose, will serve you well.

      • Anonymous

        January 2, 2020 at 9:56 pm

        The programmed withdrawal option is far the better option because there is death benefit for next of kin after 10 years unlike Annuity where the insurance company takes everything after 10 years, also Programmed withdrawal has higher rate of returns on investment and safety of funds

  2. Blessing Adakole

    January 1, 2020 at 9:02 pm

    Intrested

  3. Damilola Ogunlaja

    January 2, 2020 at 6:21 pm

    The option of program withdrawal is flexible and transparent as you will still be in the know as to what balance you have per time I. e statement of account . After giving you a lump sum at retirement, the rest of the funds will be Reinvested and little by little your balance is topped up. The next of kin could also have access to the funds when the account owner passes on.

    Annuity gives a guarantee of 10years which means when the account owner passes on before 10 years, the next of kin will have access to the balance within the years. If after 10 years the account owner passes, then the rest of the funds will be for the insurance firm and not the next of kin. Annuity is a pull of funds where your money is being invested. Access to the account details is not given at anytime but you are likely to get about 5-20% higher pay on monthly basis than the program withdrawal.

  4. Valentine Aputazie

    January 2, 2020 at 6:46 pm

    Those in programmed withdrawal risk their God given life.Valentine Aputazie,Leadway Assurance.

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Cryptocurrency

How to become a successful Bitcoin trader

Major steps that are needed if you want to become a successful BTC trader.

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BTC Whales, Bitcoin is scarce, entities, individuals hold for long term

A BTC trader is simply an individual who seeks gains from differential changes in the market price of BTCs. The main objective the BTC trader has in mind is buying prices alow and selling when the flagship currency gains higher. BTC trading can thus be very lucrative and has become one of the fastest-growing careers in the financial spectrum. 

Data obtained from a leading BTC analytic firm, Coinmarketcap showed that the market capitalization of BTC currently stands at over $170 billion. This further illustrates that in 2013 BTC moved from $13.30 to its present-day value of over $9000, meaning that early bird BTC traders had gained over 67,600% since it began. 

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Consequently, this article will show major steps that are needed if you want to become a successful BTC trader. 

Explore Research Data From Nairametrics by Visiting Nairalytics

Self-Control & Discipline  

Adebayo Juwon, an FTX consultant for Africa, spoke to Nairametrics in an exclusive interview, explaining in detail the need for a BTC trader to be very disciplined and have a security-conscious mindset. He said; 

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“Firstly I must note that trading is not for everyone, to be a successful crypto trader, self-discipline is a prerequisite to achieving one’s goal. The crypto market is very much volatile than what the traditional traders are used to, hence more risk and reward. 

“A crypto trader must be security conscious; you’re responsible for your account security in the crypto ecosystem, as hackers are preying on whose account is less secured.” 

READ ALSO: CBN provides guidelines to address credit, liquidity risks, others  

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Risk Management 

A successful BTC trader must be able to understand the relationship between reward and risk management. This entails high understanding levels about the degree of randomness in BTC market and the risk involved in taking such risk. As a successful BTC trader, you are required to understand when its best to trade BTC as market conditions change from time to time. 

Adebayo Juwon, FTX consultant for Africa also added vital points on why a BTC trader should never ignore risk management. He said; 

“Also, to be a successful crypto trader, one must have good risk management in place, in a highly volatile market your profits can be zapped away in minutes. Risk comes in different ways in the crypto market, there are lots of scam projects with the good marketing team, they tend to attract investors also, it’s very important to do your own research in the crypto space, and rely less on market sentiment.” 

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READ MORE: Tether mints 80,000,000 USDT to unknown wallets within 24 hours

Timing 

Recall that some days ago Nairametrics, revealed the best time many BTC traders prefer to take their trading positions in the BTC market, thus preferring to trade around the American trading session because of the high price swings that occur at the start of New York stock market trading time -about 2.30 pm GMT. This means there were higher chances of making more money at the start of  American trading sessions than other trading sessions (London and Asian trading session).  

 

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Basic fundamental and Technical analysis skills 

Every successful BTC trader must keep track of macro fundamentals going around the BTC community because such information more often determines the market price of Bitcoin.  Either rumours or news have exponential effects on the BTC market and often create lucrative trading opportunities. 

Chris Ani, a professional BTC trader in a phone chat interview explained to Nairametrics in detail, the major attribute every successful BTC trader must possess, including the need to have basic trading skills. He said; 

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 “To prevent yourself from becoming a slave to the market, you must be trading small enough size on your trades that you are not emotionally attached to them. Trading opportunities wait for no one. 

“You have no idea when and where they will appear. Whenever they appear, you have to be ready with your trading plan.  You must also master technical and fundamental analysis and most importantly the one that works for me, understand the seasons and market structure so as to know when to trade, allow big wins run, or rather exit the market in order not to lose your money.” 

Finally, it’s very important to understand that no matter how good you get at BTC trading, you will often make mistakes and lose money. Always remember, trades that go bad are part of what will make you successful in the long term. Success in BTC trading simply means you are winning more relatively than losing. 

 

Patricia
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Investment Tips

What bad stocks have in common with bitter relationships 

The feeling you get from marrying the wrong partner is similar to that felt after buying the wrong stocks.

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I have always argued that stocks cannot be summarised into one statement for a newbie, until recently when a friend told me that it could.  

“Simply put, buying stocks can be likened to relationships, he said.  

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did not immediately agreebut over the next few minutes, he explained to me what he meant, and drew several analogies to back his claims.  

While he is no expert, I understand that he has drawn his conclusion from his experience buying stocks for himself over the past 5 years, so I took his points seriously. These points have been summarised in this article. 

READ MORE: Cocoa prices melt lower as COVID-19 weakens demand 

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When it crashes, there is no telling how far it can go  

My friend mentioned of some company’s stock he bought in 2016 in the hope of selling short-term. At the time he bought, there was a dip and he expected things to pick up within some months so he could sell-off.  

Two years later, the stock price had plummeted 50% down from the price at which he bought. Without saying, he became a long-term investor because he was not ready to sell off at a loss.  

 

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How does this liken to being in a bad relationship?

As the value plummets, you keep hoping it will rise again and then before you know it you are stuck for the long haul. Same thing can happen with a wrong partner. You remain there hoping things will be better but it gets worse. 

It could happen sometimes that a company’s stock market price comes crashing and it never goes back to where it was againThe factors which triggered its fall, may not even be able to return it to its starting price.  

 

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The stock price is not indicative of the company’s profitability 

For some reason, there are company stocks market prices that remain low year after year despite the billions declared in profits, and the dividends paid out to shareholders.  

Sometimes, the stock market price could still slump even when the company has positive records in its financials. Market experts are not always able to explain this, but it remains true. Some of the most profitable stocks are undervalued.  

 

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You can never take stocks at face value

That a stock has been on an upward trend in the last few months does not mean it will remain so. One must always consider several other factors before purchasing a stock.  

While it is important to look at past performance, there are other things that could point to the likely future of such stocks. 

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Say, for instance, the company has just announced a new board chairman who was implicated in some fraud cases in the past. It doesn’t matter how well the stocks have performed in the last 365 days, or the chairman’s competence, the stock prices are most likely to slump due to loss of investor confidence.  

There was a recent case where the CEO of an internet service provider company was alleged to have been involved in sexual harassment, and was eventually pressured by shareholders to resign. The pressure came not necessarily because they thought he was guilty, but because of the implications on the company.  

You have to probe to discover the real qualities.  

 

The most expensive stocks are not necessarily the best. 

If you ever heard a stock described as under-priced or over-valued, then you should understand that the price you pay is not necessarily suggestive of the value.  

Some great stocks, with good potentials, high liquidity, good company profile and adherence to corporate governance ethics, are not as expensive as they should be. While some other stocks are ridiculously overpriced, even when they do not have as much promise. Some of these overpriced stocks could still be basking in past glory or just positive media hype.  

This explains why investors must conduct due diligence before putting in their hard-earned money. Sometimes the media hype around a company’s stock might not be giving you all the information you need to make a decision, so you necessarily have to go the extra mile.  

Subscribe to newsletters from financial news websites if you need to, take courses if you have to, but ensure to learn all you can.  

Remember price is what you pay for the stock, but value is what it is really worth, and there is no law stating that one must justify the other.  

READ MORE: Global stocks records astronomical gains in Q2 2020

When you get the wrong stocks, you get stuck! 

You know that feeling when you are sure that you have made the wrong choice, but also know that there is no way out? That’s the feeling you get when you marry the wrong partner, as my friend said. And that’s the same feeling you get when you get the wrong stocks.  

You simply get stuck.  

No returns. No dividends. Probably, no way to sell either because no one else is interested in buying from you. And if you do succeed in selling off at this point, you would most likely be doing so at a loss.  

If you study trends in the stock market, you will see some dormant stocks that have remained stagnant for long periods of time. No rise in share price, no fall in share price, and no share is being traded either.  

READ ALSO: Best time to make money trading BTCs

It is not a nice position to be in, and that is why you want to be sure of the company, its management, and board members who take the decisions before you decide to buy or not, even more so when you are a long-term investor.  

And even then, with the wrong stocks, you could suddenly find that your proposed short term investment of 6 months will run into years because you keep waiting for things to pick up before you sell.  

Patricia
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Investment Tips

Where to invest using PE, PEG

Investors should always look at the sector P.E. and compare that with individual stock P.E.

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Uncertainty strengthened as foreign portfolio investors pull out funds, chess board

Assuming, you the investor is interested in buying shares in the banking space, you have about 100,000 to invest and you want to buy the best stock that will give you the greatest return at the lowest price. You have two banks in your investment universe; you prefer Bank A and Bank Z. Bank A sells each share for N10 and Bank Z sell each for N5

Table 1.

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Share Market Price N:K
Bank A 10.00
Bank Z 5:00

 

Which would you buy? Well that easy, I would buy Bank A why? because it is cheaper. With N100,000 I can buy more shares of Bank A than Bank Z.

Hold on, not so fast.

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The market price of any stock relates to the expected future earnings of that stock. For instance, Bank A’s share price of N10 means the Present Value of the sum of expected earnings that will accrue to Bank A over the life of earnings is N10. Hence you cannot simply compare the price of Bank A to the price of Bank Z, you must compare Earnings of both banks to determine which is “cheaper”.

READ MORE: Access Bank Plc reports profit of N40.9 billion for Q1 2020

So, to compare earnings, we use a ratio called the Price to Earnings Ratio (P.E.). Earning here is the earnings per share, which means we divide total earning by issued shares. Again, we assume a total of 1m shares issued by both banks. To calculate PE, first get earnings per share, so if bank A posted earnings of 1,000,000, and we have issued shares of 100,000 then Earnings per Share is (1,000,000/100,000) or 10. The P.E. for Bank A would be (10/10) or 1.  A P.E. of 1 means the share price is 1 times the earnings of Bank A, very good. (lower P.E. is preferred). Let’s also assume Bank Z has a P.E of 0.5

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Now if we look at table 2 which now compares prices to earnings, we can see the PE of Bank Z is lower than the PE of Bank A. This means Bank at price of 10 is trading at 1 times its earnings when compared to Bank Z which is trading at o,5 its earning, thus we can say that Bank Z is “cheaper” than Bank A because we are buying at a lower multiple of earnings

Table 2.

Share Market Price N:K P.E. Ratio
Bank A 10 1
Bank Z 5 0.5

 

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READ MORE: Nigerian Stock market records sixth consecutive losses, investors lose N15.55 billion

We can also say that if a company has a high price relative to her earnings, then that company is a Growth Stock.  If, however the price relative to the earnings is lower, then the stock is a Value stock. A high growth sector like IT or biotech will have a faster growth and relatively higher PE ratio than a company in the utility sector with predictable steady earnings growth. Investors should always look at the sector P.E. and compare that with individual stock P.E.

P.E. is known as a trailing ratio because it is based on the past. Company can give forward guidance on earnings and that is used to create a Forward PE ratio. What if we wanted to compare both banks but this time instead of looking at past earning, we want to investigate the future and ask which bank we should buy using expected earnings as our main guide. To do this, we have to input expected earnings into the mix

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Let us assume Bank A is buying a smaller bank, and that will give her more branches, leading to higher growth in the future. Let’s say this will; lead to a 20% growth in earning year by year. Bank Z is not as aggressive and earning will increase, only 10% does this change the current recommendation?

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It does and it introduces us to another ratio called the Price to Earnings Growth Ratio (PEG). The PEG is the P.E. of the Stock of the company divided by the growth rate of its earnings. We have already calculated the P.E. Ratio, so the PEG for Bank A is (1/20) or .05. This is an exceptionally good measure indicating the stock is undervalued. A PEG less than 1 generally means undervalued, more than 1 means overvalue

Patricia
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