Financial analysts at Coronation Research said that investors will remain interested in risky assets (including equities) if monetary authorities abstain from offering risk-free returns above the rate of inflation.
The analysts stated this in their 2023 outlook report titled ‘2023 Investment Strategy: Better times in 2023’.
The analysts also noted that in the past three years, the NGX All-Share Index (NGX-ASI) has provided a positive Naira return.
Departure from a trend: According to the analysts, this marks a welcome departure from the trend, given that five (2014, 2015, 2016, 2018 and 2019) of the past ten years yielded negative returns.
“To begin with, we are witnessing the effects of low market interest rates. For most of the period from 2011 to 2019, investors obtained returns above the rate of inflation simply by buying and holding Nigerian Treasury Bills (T-bills).
“The excess return of T-bills over inflation was 4.00 percentage points per annum, on average, which gave a strong disincentive to take risks in the equity market.
“Then, in the fourth quarter of 2019, the CBN’s rules governing OMO Bills caused market interest rates to crash, with rates declining in that quarter and throughout 2020. Investors were given the incentive they needed to take risks, and this included buying equities,” they said.
Risk-free returns: They noted that equities need to be re-established as an asset class for individual and institutional Naira-based investors, adding that after three successive years of positive returns, it should feature as part of a long-term investment portfolio.
“As long as the monetary authorities abstain from offering risk-free returns above the rate of inflation, then investors will remain interested in risky assets, including equities.
The performance of Nigerian equities over the past three years challenges the behaviour of Nigerian pension funds, which have low allocations to equities, and that of retail investors who hold very little money in Equity Mutual Funds.
If 2023 turns out to be another good year for equities, they may miss out again on returns superior to T-bills and FGN bonds,” they said.
Liquidity: The analysts noted that a high level of liquidity in the financial system in the first quarter of 2023 is likely to push market interest rates down, with the effect of lowering T-bill rates and, quite likely, bank deposit rates.
“This also implies mark-to-market gains on FGN bonds so we would look for investors to crystallise these. Indeed, Fixed Income Mutual Funds, those that report according to mark-to-market rules (as SEC rules require), may record significant gains early in the year,” they said.