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Where Do I Put My Money?

Proshare

Friday, August 25, 2017 4.18PM /Proshare Research

Preamble

The macro environment and the policy response at any point in time affects household income, just like many other economic agents, households are also a subset of the economy.

The consumer confidence index’s is the barometer of consumer perception of the economy. The index is a lagging indicator which reacts to the direction of other leading indicators. Evidently, it is a measure of the health of the household, which is reliant on the cycle.


Thus, in a period of prosperity household are more likely to invest due to stronger disposable income, in such period aggregate demand also improve. The presence of stronger disposable provide a higher earning period which allow them to shift consumption over a  given life, in order to provide room for investment.


On the other hand, in periods of downturn in cycle, household is more cautious about consuming. In certain scenario, a weaker disposable income would emerge due to rising cost of inelastic goods making it harder to save.




In recent time, the nominal currency underwent devaluation and a rise in inflation due to push factors. Moreover with the bandwagon effect of an increase in power tariff, episodes of currency overruns and oil price In return household has experienced a dwindling in the purchasing parity of their income as the cost of their active demand. 

The quality of household spending has fallen, as unmet needs keep rising.  The heavy cost of active demand coupled with stagnant disposable income has left leaner resources available for speculative demand.  The genie’ (disposable income) in the bottle (pocket) is still the same, but its leaner and less powerful. 

More importantly, the ability to shift consumption further by household, over their individual life span has become more difficult.  In reality the periods of high earning period seem to have vanished, leaving  household hard pressed to store wealth in financial asset.  

Evidently, the cycle has imposed constrains on the current earnings of household to store wealth in financial asset, at the same time the cycle never penalized investment entirely. In reality it triggers an asset rotation and simultaneously raises the bar on opportunity cost.  

After all there is a more intense competition for capital, given the reality of  limited liquidity in a downturn. 


Policy Response 
Investment decisions are largely dictated by the macro-economic environment and the response by both fiscal and monetary policy. In most circumstances investors tweak their decisions to accommodate the duo of macro climate and policy response, in order to maximize returns.  

Certainly, the question of “where to put money is influenced by understanding timing.  Timing in context refers to the health of the cycle and its relationship with the risk.

Simply capturing the state of the macro-economic environment helps in identifying bobby traps either asymmetric or systemic risk. The internal dynamics provides the needed caption of both policy response and risk 


Fig 2:   Internal Dynamics

Factors

Dynamic

when

Growth still resides within negative territory with fragile growth.  The macro-economic environment has exacerbated risks.

  Therefore the dynamics has blunted risk seeking, as the market remains cautious.

Monetary policy

Interest rate has been left untouched for a year, regardless, the high interest rate regime still magnifies leverage risk for firms. The apex bank has maintained a policy of dynamic sterilization, where OMO bills form its policy instrument.  

Inflation

Inflation stands at 16.10%.  This is increasing Operating cost, making firms vulnerable to marginal compression.

 

Theoretically  investors should  be seeking for a return higher than 16.10%, which is considered as the  natural rate

Fiscal policy

Fiscal policy is largely domineering, due to federal government’s expansionary budget plan. This has led to substantial participation in the money market by the federal government, making the market captive.

 

Taking into consideration the current macro environment fused with both monetary and fiscal policies, where should I put my money?

Equity: Cautious Bet

Fig 3: Revenue and Profit After Tax of Quoted Companies Posted in the Month of July 2017.

 

Date

Revenue % Change

Current PAT (mln)

PAT % Change

07-Jul-17

13%

                           9,425.74

-31%

14-Jul-17

11.16%

                         2,431.267

-82.18%

21-Jul-17

1.31%

                               25,431

-20.16%

28-Jul-17

20.33%

247,026.290

-54.01%

Average

11%

71,078.48

-0.468268257

Total

 

284313.914

 

Source: Proshare Research  

In the month of July alone, quoted companies posted 284.3 billion in profit, which reflects an 11% increase in revenue but still reflect weak top line.  

This showed that the growth in revenue failed to seep into bottom line, suggesting that firms are still burdened by a high operating cost environment. 

Recently the introduction of the Nigerian import and export window has triggered a bullish run in the equities market.  

One must admit that prices of equity had sustained heavy bleeding in the past, which led to valuation hitting the floor. In other words, small entries in absolute term in the market will end up triggering substantial change.  

Earlier mentioned, equities are vulnerable to wolf packs intrusion that drives prices of stocks appreciation.  

At the same time equities are leading indicators, which tend to reflect an uptick in momentum, especially when quantitative variable begin to swell.

Regardless they still remain a cautions investment space given the present fragile macro clime and the volatile nature inherent.  


Deposit Rate; Safe Bet 
This is the interest rate paid by deposit money banks for holding accounts in the bank. They are relatively low risk and in return accompanied with low return.  

They are considered to be held by conservative investors which are not risk seeking.  Such financial investment is done out of capital safety rather than yield.  It also underlines the reality of a limited possibility of hitting a positive real saving rate without reaching macro fragmentation.


Fig 3: Average Deposit Rate from May 2016 to May 2017

Month

Average

Inflation

Real Savings

May-16

6.38

15.58

-9.2

Jun-16

5.53

16.48

-10.95

Jul-16

6.03

17.13

-11.1

Aug-16

6.3

17.61

-11.31

Sep-16

6.15

17.85

-11.7

Oct-16

6.75

18.33

-11.58

Nov-16

8.12

18.48

-10.36

Dec-16

8.39

18.55

-10.16

Jan-17

8.51

18.72

-10.21

Feb-17

8.51

17.78

-9.27

Mar-17

5.54

17.26

-11.72

Apr-17

9.91

17.24

-7.33

May-17

8.65

16.25

-7.6

Source: Proshare Research  

Government Securities: Truly, Top Layer Gold 
Government securities are largely referred to as risk free, which makes it a safe haven. Fiscal authorities are running an expansionary budget and a chunk will be sourced out from the money market.  

Therefore, the status of Government security as a top layer gold investment is further boosted, given its ability to be both a safe haven and provide high yield; who says you can’t eat your cake and have it?  Try gilt edge in a fragile cycle coupled with a dominating fiscal conduit. 


 Fig 4: Interest Rate of Government Instrument

Securities

Treasury Bills 90 days

Treasury Bills

180 days

Treasury Bills

364 days

Bonds

10 year

Rate

13.42

17.4

18.83

16.25

Source: CBN, Trading Economics, Proshare Research  

The return on Government securities at this particular point of the cycle makes it the preferred financial asset of most investors. Moreover the ability to lock into government security over a short period, whereby allowing investors to retain liquidity and still take advantage of high yielding instruments makes treasury bills the most sort after among all other government securities at this point.    

Corporate Paper and Bankers’ Acceptance:  Crowded Off   

Fig 5: Commercial Paper and Banker’s Acceptance held by Banks


Source: CBN, Proshare Research 

Investor’s taste bud for commercial paper has weaned greatly, even though such financial asset still hold a low risk position. The growing dominance of fiscal policy have crowded out or commercial paper, which is responsible for the wean investor appetite in such financial asset. We must highlight that the money market have always been a captive one, relatively shallow with regards the participation of private capital. 

Regardless, commercial paper find itself experiencing yield emasculation from federal government instrument, as investors take up higher yield. At the same it still remains lucrative given the yield position of other asset. 

Most importantly an intense competition for capital is in play, which ends up substituting less efficient government capital for more efficient private capital.  In the long-run, it holds back the growth of private capital.    

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