The Head of Research at Coronation Asset Management, Mr. Guy Czartoryski, has said investors in Nigeria are faced with difficult choices.
Czartoryski, who said this yesterday, during an online presentation of a report by Coronation Research titled: ‘Navigating the Capital Market: the Investor’s Dilemma,’ noted that “as interest rates have crashed. The alternatives are either to simply wait for rates to rise again in future, or to accept more risk in order to increase returns. But, to do that, they need to increase their understanding of risk.”
The report studied the Nigerian investment scene over a 10-year period and found how Nigerians have managed to preserve their capital over the long term.
Some of the conclusions were that it has been remarkably easy to beat inflation over the last 10-years by buying Federal Government of Nigeria Treasury Bills. However, with the crash in interest rates in the first half of 2020, this era has come to an abrupt end, it stated.
By contrast, the report noted that equity market returns have not preserved capital for investors over the long term, even when adding back the generous dividends paid to investors.
By looking at the internal profitability of stock exchange-listed companies, it identified stocks that are most likely to generate satisfactory returns for their owners, and back-tests the results.
Furthermore, the report took a new approach to setting investment return benchmarks.
For instance, instead of targeting inflation, which is the conventional benchmark, it recommended that investors should aim to beat the effects of naira devaluation against the US dollar, and obtain the risk-free return they would have in US dollars.
This suggests that they should ask for naira risk-free fixed-income (or Treasury bill) return of 14.7 per cent per annum over the long term. And, when it comes to equities, Coronation Research calculates that Nigerian investors should demand a return of 20.5 per cent per annum.
“These are high benchmarks, but they show what is necessary to preserve the value of investors’ hard-earned money. Coronation Research’s investor feedback shows that Nigerian investors have two concerns.
“The first is inflation. The second is not to lose money in investment schemes. And with fixed-income and bank deposit rates at record lows, and far below the rate of inflation at 12.4 per cent, investors are being tempted to take risks again,” it added.