Low Yield Pushes Investors Against Risk Appetite – Experts
In the light of the present inflation rate, political instability, unstable currency and policy summersault, experts have identified low-interest rate on investment as one of the major factors driving investors against risk appetite.
The experts, who spoke at a recent webinar: Leading Conversations with FBNQuest, themed ‘The Relationship between Risk and your Return on your Investment’, were the Head of Equity Research at FBNQuest, Tunde Abidoye, and the company’s Relationship Managers, Wealth Management, Seun Asiru-Balogun, and Ebika Mark.
They noted that money market instruments serve as the number one low-risk investment would-be investor could leverage and get back both principal and interest at maturity (which is within one year of the investment). However, the experts urged investors to be wary of instruments promising high yield as they may be risky or fraudulent.
According to them, one of the red flags investors need to look out for while investing in a promising interest rate is whether it is a flat rate or against the simple interest rate method. Also, whether the investment is regulated by a recognized authority.
The institution behind the investment, its corporate governance, and the asset class underlying the investment, whether it is capital/money market products or equities based real estate, should be of concern to the investors and should form the basis on which they make decisions, Asiru-Balogun said.
“When interest rates are low, especially at this current regime when clients are looking to higher risk investment with higher returns, this is when actually Ponzi schemes float their business and take advantage of that yearning from the market,” he added.
On her part, Mark said understanding one’s risk appetite and risk profile requires getting the right information to work with before embarking on any investment.
She urged, “Know the corporate governance of the institution you want to invest in and their regulator,” stressing that greed has pushed some investors to lose both capital and interest.
“When people want abnormal yields, they could fall into those traps. So you can manage your appetite in terms of greed.
“The calculation for the money market is based on simple interest which they pay annually. An investment company comes and tells you that they are going to pay you 20 per cent flat, if that is the normal way to make the payment that would have been a CBN policy for all the financial institutions to adopt. That is a first red flag if they give you an abnormal interest rate,” she added.
Whilst throwing light on the implication of the removal of Nigeria from the emerging market index, by JPMorgan Chase & Co., Tunde said, dropping the country from the basket means that the fund managers would not be able to track the country anymore, and as a result, the inflow coming into the country would reduce.
Nigerian inflationary pressure was already rising prior to the Russian invasion of Ukraine, although the invasion added a new dimension to the inflation upswing.
As Nigerians await the National Bureau of Statistics’ reports on the April Consumer Price Index, the headline inflation, which had climbed 22 basis points (bps) to 15.9 per cent in March after inching up by 10bps in February, might quicken to 16.84 per cent by May 2022, a member of the Monetary Policy Committee of the Central Bank of Nigeria predicted in his personal statement of last MPC meeting in March.
The National Bureau of Statistics in its March report on the Consumer Price Index marked food inflation, which increased to 17.2 per cent from 17.1 per cent in February, as the major driver of inflation. Supply-side factors, such as insecurity and infrastructure, were also seen driving up food prices.
At present, Nigerian Gross Domestic Product grew by 3.98 per cent Year-on-Year in the fourth quarter of 2021. While the oil sector contracted by 8.1 per cent, the non-oil sector grew by 4.7 per cent YoY respectively.
In respect of the activities sectors that drove the GDP growth, Information Communications Technology (ICT), trade, manufacturing, insurance and transportation were most notable.
External reserves, which opened the year at $40.52bn, have dropped by 3.57 per cent and suffered $1.45bn lost to $39,07bn as of May 11. This is even as exchange rate disparity continues to hover around N417 to N419 per the United States Dollar on the Nigerian Autonomous Foreign Exchange Fixing (NAFEX) and about N590/USD at the parallel market, representing a 40 per cent divergence.
To invest in a stable venture, Asiru-Balogun, said, “For a retiree for example, who have large funds to invest if you are investing in naira it is always very advisable for you to go into government bonds.”He noted that the government bonds tend to have more stable returns in terms of longer tenure and relatively high-interest rates, at least double figures.
“You can also look at foreign-denominated investment in Eurobond. Nigeria issues Eurobond and your fund will not face currency risk. Fixed deposit and commercial paper or USD investment are also instruments to invest.”