This article was produced on behalf of Investment One as Stears explores the options available to Nigerians.
One thing is sure: Nigerians do not save enough. Less certain is why. Some put it down to a weak savings culture, others to few investment opportunities – or a lack of awareness of opportunities, while some argue that Nigerians are simply too poor to save. We know that there’s still a misconception that saving is for rich people and that Nigerians probably save in ways that formal channels won’t capture.
Meanwhile, a new retail savings culture is breaking these myths and obstacles. Financial institutions are waking up to the part they must play in this, and in that vein, Investment One, a leading financial services firm, outlined its Top 10 Investment Recommendations for 2018. From the report, it is immediately apparent that we have more options than we think…
So what do the experts at Investment One consider to be the best investments at the moment?
Where to look – public sector
Savvy investors would be unsurprised to find treasury bills (T-bills), debt issued by the federal government redeemable within 1 year, near the top of the list. Investment One highlights their primary attractiveness, “treasury bills tend to be (credit) risk-free as they are guaranteed by the Federal Government,” but T-bills are also tax-free and high yielding. Investors can get annual returns of up to 15% at present! The experts at Investment One expect these yields to go down as the year progresses (they predict a 2% cut in the Central Bank base interest rate) but T-bills will still score high on both return on and of capital. The report also cites the lesser-known cousin on T-bills: commercial papers (CPs), short-term debt issued by corporates like commercial banks, which should give you higher returns (at higher risk). Our favourite thing about CPs is that you’re effectively loaning money to banks, an ironic turn in a country where bank lending comes under regular scrutiny.
While T-bills and CPs are good short-term savings devices, Federal Government bonds work better in the long-term. FGN bonds are longer-term debt issued by the government. They also credit risk-free and tax-free, though there is a sizable interest rate risk especially for longer-term bonds. Investors get semiannual coupon payments based on the interest rate on the bond. The experts at Investment One also debunk the myth that regular people can’t buy FGN bonds, pointing out that although they have a minimum investment value of ₦50 million, retail investors can buy as little as ₦10,000.
Meanwhile, you can also purchase state or local government bonds, and if you are wondering why you would lend money to one of Nigeria’s fragile states, you would be pleased to know that “state bonds often have an Irrevocable Standing Payment Order to guarantee payment of the bond obligations,” i.e. bond payments are usually a first-line charge on a state’s FAAC allocations.
Where to look – private sector
The report also mentions corporate bonds – these are to CPs as FGN bonds are to T-bills – and Eurobonds. Eurobonds are identical to regular bonds but everything is done in foreign currency (purchase, coupon payment, etc.) and the bond is subject to international interest rates. The chief benefit of Eurobonds is that they “provide a hedge against exchange rate fluctuation of the domestic currency for investors”. And that little hedge can turn into a small fortune when the currency plummets.
Beyond T-bills and bonds, you can invest in equities – buying shares/ownership in companies listed on the stock exchange. This is what most people think about when they think about investing, and you make money through dividends the company may pay out each year, or capital gains (selling the share at a higher price). Equities are riskier (share prices can fall) but have much larger upsides than the instruments listed above. For example, the main index on the Nigerian Stock Exchange returned 42% in 2017, with many stocks doubling or tripling in value.
The tricky stuff
All these instruments are what we call vanilla investment products, and Investment One highlights two more complex investment vehicles: Mutual Funds and Real Estate Investment Trusts (REITs). A mutual fund is created by pooling monies from retail investors so that the large fund can be managed by a portfolio manager. These are becoming increasingly popular among regular Nigerian investors as they provide almost the same benefits you would get as a high-net-worth client. Most investment banks create their own funds – Investment One has its Abacus Fund and a Vantage Balanced Fund which invests clients’ funds in a range of fixed income, equity, and real estate assets, and returned 25% in 2017.
Meanwhile, REITs allow you to get investment exposure to real estate without actually buying any property. Instead of buying property, you can contribute to a REIT that acquires and manages real estate on a larger scale. The experts at Investment One seem to be relatively bullish on REITs for now, predicting that, high-interest rates on government instruments in 2017 may not be sustained in 2018, thus investors may consider real estate as an alternative investment in 2018.”
The final investment recommendation is arguably the most interesting. Despite Nigeria’s rising entrepreneurial culture and relatively restricted access to formal credit, venture capital has not yet penetrated mainstream finance. In that sense, it’s a bold and surprising inclusion on the list, and one that holds significant promise for both Nigerians looking to save and Nigerians looking to grow their startups. The inclusion of venture capital is particularly pronounced when you consider that at least 6 of the top 10 recommendations are what you would call fixed income instruments, less risky assets that pay a fixed return. Whether this reflects Nigeria's high interest rate environment, higher risk aversion among Nigerian investors, or a more advanced fixed income market in the country, venture capital offers an alternative investment path, and also one that could lead to sustainable economic development.
When all is said and done, the best investment would depend on your risk profile, time horizon, investment amount, liquidity needs, and so on. Furthermore, it’s never a good idea to invest and then go to sleep; exit your investment when the conditions no longer suit you and always be on the lookout for better opportunities. And most importantly, make saving a habit.