From Wuhan, one of China’s most populous cities, the 2019 novel Coronavirus (2019-nCoV) has now spread to 74 more countries, apart from China with over 92,000 confirmed cases, 3,130 deaths and 48,451 recovered cases (as at 03 March 2020). Expectedly, the Coronavirus outbreak seems to be on everyone’s mind, alarming public health authorities, spooking the global equity markets and sinking stock markets into the red.
China’s importance in a globalized economy has dramatically increased since the 2002-2003 Severe Acute Respiratory Syndrome (SARS) outbreak, the most obvious precedent for today’s crisis that originated in the Guangdong province of China and spread to more than two dozen countries. Then, China comprised less than 4% global GDP; today, China is the world’s second-largest economy, currently accounting for 16% of the world’s GDP and contributing 24% of the global imports.
Therefore, putting brakes on Chinese factories’ output and disrupting global supply chains running through China will unavoidably have a ripple effect on international businesses, world economy and global growth. There are also concerns over consequences of the United States, the world’s largest economy, being forced to implement a lockdown similar to the one imposed by Chinese authorities.
As the novel COVID-19 strain of the coronavirus moves far beyond China’s borders, it is difficult to fully evaluate the scope and severity of the risks on investments. As the Coronavirus spreads, so do fears of a financial collapse. That fear is causing a lot of selling and a lot of losing. Notably, world stock markets have tumbled since the first death was announced on January 11.
While the only confirmed case of coronavirus in Nigeria remains the index case of the Italian citizen confirmed on the 27th February, the country can’t stay unscathed with the happenings in China—a chief trade partner to Nigeria. The Nigerian Stock Exchange (NSE) lost a whopping N308 billion (USD845 million) less than 24 hours after reporting the index case.
Investors lost N209 billion (USD573 million) on Monday 2nd March as the stock market dipped further. The price of oil, Nigeria’s major source of public revenue, has already taken hit as a result of the ongoing outbreak; there could be nothing worse for an already struggling economy, than having her source of revenue negatively impacted.
Markets do not like uncertainty, thus investors are understandably nervous with the spread of the coronavirus disease. We do not know, with certainty, how far the virus has spread and how long it might last; how much fear inhibits travel, consumer spending, manufacturing, and trade; and the capability of public health institutions to stop the spread of the virus. These uncertainties have led to increased volatility in the stock market as investors scramble to adjust their portfolios to factor in the virus’ potential for damage to the global economy and assess its further impact on asset prices.
One major question every investor should strive to answer is: Is my investment short or long term? Another is: Is there evidence linking global epidemics with long-term investment fundamentals?
No cause for alarm
Past experiences show that, in general, epidemic outbreaks tend to have temporary impacts on markets and economies. In fact, markets have short memories regarding epidemics. Markets may initially react to the uncertainty, but global equities tend to rebound after temporary decline. Besides, this isn’t the first new virus we’ve seen, and this won’t be the last. SARS, Zika, Influenza H1N1 and others have all come and gone.
This is not the time for a knee-jerk reaction as global efforts continue to combat the coronavirus epidemic. Temporary phenomenons and markets go through cycles like this. Viruses will get contained and investors will return to corporate and economic fundamentals. One of the most important things an investor can do in the face of market uncertainty is to make sure that investment portfolios are at the right risk levels. Market volatility helps build wealth over a period of time. For investments whose timelines are on the shorter side, such investments are already at a low level of risk. This insulates you from market volatility—whether it’s related to disease outbreaks or otherwise.
The lauded investor Warren Buffett advised investors not to allow coronavirus to infect their investment strategy. “It is scary stuff. I don’t think it should affect what you do with stocks,” he told CNBC’s Becky Quick in an interview that aired February 24 on “Squawk Box.”
No need for any fear-based changes. Investors are encouraged to continue disciplined investing through systematic investment plans (SIPs) and stick to their asset allocations. Panicking to sell out as markets slide would only lead to further losses. Staying the course can help handle the downturn, and potentially stay the course.
In tuning out the noise and sticking to the long-term plan, you should identify opportunities to immunize your portfolio against coronavirus and other possible similar outbreaks. Diversification premium is an investment cure for coronavirus. Having a mix of assets across sectors and geographies is the best way to ensure that one spell of volatility does not take your portfolio down.
Despite the perceived and actual threats from the coronavirus, high-quality bonds, gold and safe-haven currencies like the U.S. dollar have rallied while more production-intensive commodities like oil have suffered, as have the stocks of companies domiciled in or exposed to the affected areas. Funds focused on sheltering capital, strategic bond funds, and multi-asset funds with a cautious approach are good additions if you are looking to add diversification to an equity portfolio. The current situation should also be seen as an opportunity to invest for long-term in quality companies.
Investors are admonished to be on alert for fraudsters attempting to play into our natural emotions of fear and greed during this period of uncertainty. There have been spikes in investment opportunities with unbelievable return-on-investment and get-rich-quick schemes. At the risk of sounding like a broken record on this topic, there are no sure things or get-rich-quick strategies when it comes to investing.
While it’s unclear how many people will ultimately be affected by COVID-19, or how many weeks or months it will take to run its course, if it holds true to similar epidemics, however, it will run its course. Investors are enjoined to stay alive even as they seek to safeguard their investments from the outbreak. Standard recommendations to prevent infection spreading include regular hand washing, covering mouths and noses when coughing and sneezing, thoroughly cooking meat and eggs, etc. Also, avoid close contact with anyone showing symptoms of respiratory illness such as coughing and sneezing.
Written by Oluwaseun Oguntuase
How Cash flow, Liquidity, and Leverage impacts your financial plans
Aja discusses how Cash flow, Liquidity, and Leverage impacts your financial plans.
It is key to discuss cash under the three themes of Liquidity, Leverage, and Cashflow. These concepts are interrelated, but each has different impacts on your financial plan.
It captures only cash transactions and is simply the amount of cash flowing in and out of your business or person. Hence, if you buy an asset and issue a Purchase Order to pay a supplier in 90 days, that transaction will not show up on your cash flow.
As an illustration, if Emeka buys a TV with N200,000 but issued a cheque for N100,000 cashable in 90 days; only N100,000 will be captured leaving his cash position. Thus, Emeka has positive cash flow and negative leverage, because his debt has gone up.
For Okafor, the seller who received half of the proceeds in cash, he may be liquid but cannot replace his stock due to lack of enough cash flow. He may have to leverage to generate cash. Should he need cash, he can create liquidity from his paper check of N100,000 by discounting to cash before 90 days, but at a cost.
You must be aware of negative and positive cash flow and avoid as much as possible, generating cash from financing activities i.e. borrowing to fund non-income generating assets or activities.
It is determined by how fast an asset can be converted into cash. If Okafor gets a cheque offer from Dangote Cement and another from Emeka to pay for a TV, which do you think he will accept all things being equal? Most likely the Corporate cheque, because he perceives that it is easier to discount to cash; thus, more liquid than the individual cheque.
Federally issued bonds are said to be less risky than State or Corporate bonds of similar tenor because the issuer (the FGN) is more liquid than the States or even Corporates.
The same can be said of Equities. Stocks that are traded more often and held by more investors are more liquid and commands a better premium to the bonds of a similar company. This is one reason large blue-chip stocks command higher market prices, the investors are also paying for the ease of liquidity.
A good metric for measuring liquidity has to be the Acid Test liquidity ratio that determines how easy it is for you to generate cash in an emergency. It is calculated by dividing your assets by your liabilities, but the key is that the assets are stripped off all hard assets and will include only cash and easily marketable securities and commodities like gold that can be sold. The higher the ratio the better.
Simply put, leverage is borrowing. You can borrow to increase potential profits or to meet an obligation that is due. When cash is borrowed, it must be paid back with a cost called interest. Leverage can produce cash flow and liquidity, but no firm or household can remain a going concern solely on cashflow financed by leverage.
Eventually, the interest cost will swell and more of future operating cash generated by the firm or household will be earmarked to pay off interest, leaving the principal to remain and generate more interest cost.
In the earlier example, Emeka used leverage to buy the TV and gave Okafor a cheque, who will in turn generate cash flow by liquidating the instrument from Emeka.
A good leverage analysis is to calculate your Leverage Ratio. To determine your leverage ratio, list out all your liabilities, divide by your total assets, and multiply by 100. The answer tells you how much of your assets are financed by debt i.e. leverage ratio.
Hence, you can have positive cash flow, be liquid but be highly leveraged, which is not ideal. The rule of thumb says the lower the leverage ratio, the better.
Summarily, with cash, you must be aware of the implication in terms of cash flow, liquidity, and leverage.
#EndSARS: Analyzing the economic prospects of another lockdown
Decisions taken in the next few days will determine how soon the issues surrounding the #EndSARS protests will be resolved.
The past five to seven days in Nigeria have been nothing short of fictional for the Nigerian people.
One would be hard-pressed to describe the events without seeming to take sides with either part of the standoff as emotions, euphoria and sometimes, unfounded principles have seemed to become the order of the day. Logic, accountability and common sense being on vacation as they often are in such matters.
If there were negotiations (of which there are none presently), parties involved may likely disagree on a couple of things ranging from the sincerity of the other party, approach to a peaceful resolution, what amounts to a peaceful resolution and how to forge ahead.
There would be accusations and counter-accusations, more so, as the chasm of discord between stakeholders continues to widen with each passing day of the #ENDSARS protest across major cities and towns of the Country. Nonetheless, one thing both parties would agree on is that their continued standoff and reluctance to resolve the complex issues around the protest is ruinous to the economy.
Nigeria’s real GDP growth for 2019 was estimated at 2.3% by the AfDB. It was an improvement on the 1.9% estimate for 2018 and an achievement of the 2019 expert projections despite the uncertainty about the 2019 election outcomes, policy implementation slowdown and sell-offs by foreign investors in 2018.
Household consumption was the key growth driver in 2019, followed closely by growth in transport, the oil sector and information and communications technology. Agriculture, for all its Government patronage could not withstand the floods that heralded a climate change while suffering from the conflicts between herdsmen and farmers- it flopped, and so did manufacturing which could not be reckoned with due to a lack of financing. Estimated inflation for 2019 was 11.3%.
After a turnaround from –1.6% in 2016 to 0.8% in 2017, 2020 was supposed to be the year where Nigeria consolidated on the steady GDP growth of previous years by implementing its Economic Recovery and Growth Plan with an emphasis on economic diversification.
The CBN’s proactive decree that banks hold loan–deposit ratios of 60% was geared to increasing lending to the real sector, even as they eased the risks of lending to small businesses.
An increase in the value-added tax from 5% to 7.5% was implemented to shore up domestic non-oil revenues, and agro-industrial support from the Government was supposed to make 2020 a year to surpass growth forecasts even as oil revenues began to improve and drive foreign exchange reserves. Then came COVID-19.
Lacking a clear nationwide pandemic framework, coupled with a nonexistent welfare system and weak healthcare infrastructure, the Nation did a relatively impressive job in managing the pandemic but did lose the economic advantage it started the year with. Negative GDP growths were projected for Q2 and Q3 even as oil prices slumped to an all-time low.
Diaspora remittances (which accounted for 83% of the FG budget in 2018) had reduced to a trickle because of the pandemic, and unemployment surges. The World Bank predicted a recession by Q4, it would be Nigeria’s worst in four decades.
Once again, Nigeria beat the odds. A series of monetary and fiscal policies saw to it that more funds were made available to the real sector; delinquent loans were restructured to keep from becoming bad; the free fall of the Naira was staved off and key industries were supported through Government’s special intervention programs. A few optimists were beginning to think we had rounded the corner, then came #EndSARS protests.
In the few days since the protests have begun, the Nation is estimated to have lost billions of Naira with Lagos state, understandably, being the biggest loser so far hosting the largest protests. Manpower hours have been lost, properties have been destroyed and worst of all lives have been lost.
Household spending, transportation and manufacturing cannot continue to thrive in these unrests. September inflation was pegged at 13.7%, its highest since February 2018 there is already considerable strain on healthcare due to the pandemic and the exposure of the populace during the #endsars protests and counter-protests could spike up the COVID-19 numbers once again.
The peculiarity of the nature of the protest has seen Nigerians in the Diaspora channel their funds to supporting the protests in Nigeria while organizing theirs in their host country. Another significant loss of diaspora remittances which represent a substantial percentage of the GDP. Also, the protests are beginning to weigh in on stock market activities and could affect other economic indices if tensions escalate further.
The unfortunate resolve of both sides to fight to the finish without giving room for dialogue could lead to another lockdown of economic activities as witnessed in Edo, where a 24hr curfew has been declared; Lagos where schools and businesses have shut down; Osun, Ekiti, Plateau, Imo and the FCT where business activities have come to a grinding halt.
The cyber warfare being threatened by both sides could also have far-reaching effects on the liquidity of our financial institutions as their customers opt for crypto wallets as safe haven for their funds and as punitive measure for brands they perceive as not being supportive towards their cause.
Of course, decisions taken in the next few days will determine how soon the issues surrounding the protests will be resolved, but for a country on the precipice of serious economic repercussions, both parties seem a little too comfortable in staring down the opposition when serious gains could be made by coming to a round table.
More agriculture loans but longstanding bottlenecks remain
Despite the flurry of funds provided via intervention policies, long-standing bottlenecks in the agric sector still exist.
According to local media reports, the Minister for Agriculture, Sabo Nanono through an information official of the Agric ministry announced plans by the ministry to provide relief for farmers in form of interest-free loans, and effective input subsidisation. According to the statement credited to the minister’s representative, the relief is for the recent covid-19 disruptions to farming activities and flooding in Kebbi, Jigawa and Kano states. In addition,
the minister stated the interest-free loans would be provided through a partnership of the Agric ministry and the Central Bank of Nigeria.
We acknowledge that farming activities have been significantly affected in 2020 due to covid-19 movement restrictions during the planting season as well as abnormal rainfall patterns which led to flooding of farmlands. That said, we note that the farmers/herders clashes remain a significant threat to agricultural productivity. These unfortunate events have led to a spike in food prices refelected in the food inflation rate of 16.66% in September according to the National Bureau of Statistics (NBS). Thus, we consider provision of reliefs for farmers important to restore farming activities and output level back to pre-covid levels.
However, we note that the agriculture sector remains plagued with long-standing structural challenges which if ameliorated, would significantly improve output level and drive the country towards its goal of achieving self-sufficiency in food production. Some of the long-standing bottlenecks include; poor transport network to connect farmlands with main markets, poor storage facilities, sub-standard farming inputs, crude agricultural techniques
etc. These in our view, are the reasons why the funds that have been pumped into agriculture via different intervention schemes such as Anchors Borrowers Program (ABP) and Commercial Agricultural Credit Scheme (CACS) have yielded limited results and remain riddled with repayment controversies.
In our opinion, while short term relief for farmers is necessary to immediately alleviate some of the pressures on food prices in the short term, we think some of the flurry of funds provided via intervention policies should be directed at resolving long-standing bottlenecks to truly maximise the full potential of Nigeria’s agriculture promise.
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