With the current challenges of rising inflation, Nigeria’s economy is facing significant turbulence, which has left investors and businesses feeling uncertain. As of the beginning of Q3 (July 2024), inflation has reached 33.4%, with the core consumer prices increasing to 27.47% – an all-time high in the country’s inflationary history.
As inflation continues to erode the purchasing power of the naira and impact the sustainability of business operations, traditional investment strategies may no longer be enough. This prompts investors to consider strategies and opportunities to safeguard and grow their wealth during these unpredictable times. Fixed-income investments —assets and securities typically in the form of fixed interest or dividends, were once safe havens, but now yield returns that barely circumnavigate the impacts of inflation. This presents a unique challenge, yet, an opportunity to rethink how to build a resilient investment portfolio in such a volatile landscape.
The effect of inflation on investment returns is considered a critical factor. For instance, an investment yielding a return of 11% annually, but with a 27.4% inflationary rate means you are losing more than 15% in purchasing power, nullifying any gains made. This raises the critical question: how can you ensure your investments are resilient enough to not just survive, but thrive, in such an environment?
Key Strategies to Build a Resilient Portfolio
Benjamin Graham, a U.S. investor popularly regarded as the ‘father of value investing’, once stated, “Losing some money is an inevitable part of investing, and there’s nothing you can do to prevent it. But to be an intelligent investor, you must take responsibility for ensuring that you never lose most or all of your money”. In today’s blog post, we identify beneficial investment strategies that can withstand inflation and its effects.
- Diversify Across Borders: One of the most effective ways to hedge against local inflation is by investing in assets denominated in foreign currencies (USD and GBP). With the naira losing ground, foreign stocks, bonds, or even real estate in stable economies could provide a cushion against inflation-induced losses.
- Investment in Treasury Bonds & Bills (T-Bills): T-Bills are short-term debt instruments with a maturity of less than a year and relatively low risk, issued by the Central Bank of Nigeria (CBN) to raise funds for financing government projects. They are also considered the safest investment choice for individuals and institutions looking for safer investment alternatives in Nigeria
- Consider Decentralised Finance: The global landscape of digital currencies is rapidly Decentralised Finance, also known as DeFi or digital currencies, is increasingly recognised as an effective way to hedge against the volatility of inflation — regardless of its associated high risks. According to a report by Bloomberg in 2023, the Nigerian Naira was ranked as the third worst-performing currency at -55%, making it hard for Nigerians to save, invest in local currencies, and transact in foreign exchange effectively. However, investors with high-risk tolerance are now choosing to invest in cryptocurrencies.
- Stock-market Investments: Investing in stocks and shares of domestic and international publicly listed companies represents one of the most traditional investment practices. A well- diversified and carefully structured portfolio serves as a crucial tool for preserving financial stability, especially during challenging economic periods. For instance, holding shares in U.S. S&P 500 companies, commercial banks, or emerging Nigerian corporations can mitigate the erosion of purchasing power over time.
- Target High-Growth Sectors: In inflationary times, not all sectors are equally Companies in high-growth industries, such as technology, energy, and telecommunications, often outperform others. Locally, Nigeria’s agriculture and FinTech sectors are poised for growth as they receive significant government support and foreign investments.
- Invest in Other Assets: Real assets commodities — such as real estate, infrastructure, gold and other precious metals — are less likely to be affected by the impact of inflation. Due to the appreciation and performance of these assets during inflationary periods, they become the safe haven making them a viable option for potential investors.
- Rebalance Regularly: Inflation calls for a dynamic approach to portfolio management. What worked last year may not serve you well today. Regularly reviewing and rebalancing your portfolio to align with the changing economic climate is key to staying ahead of inflation.
Pain Points for Emerging Corporates in Nigeria
The nail-biting effects of heightened inflation create a host of challenges for emerging businesses in Nigeria, inflation. From rising input costs to reduced consumer spending power, companies face significant financial strain. These are some of the critical pain points and how to mitigate these challenges;
In the past four months, businesses in Nigeria have encountered rising operational costs driven by the country’s ongoing inflationary pressures. Emerging corporations, in particular, are seeing their profit margins narrow as expenses surge. For example, the Consumer Price Index (CPI) recorded a 17.1-point increase on a month-to-month basis and a 192.1-point rise year-over-year. Compounding these challenges, the Central Bank of Nigeria’s recent interest rate hike to 18.75% has tightened financing conditions, making credit less affordable for businesses looking to expand or stabilize operations. Additionally, the depreciation of the naira against major foreign currencies has further strained corporate profitability, with the rising cost of imports amplifying pressure on already slim margins.
Month-on-Month basis: June 2024: 750.30 points (base month); July 2024: 767.40 (current year)
Year-on-Year basis: July 2023: 575.3 points (base month); July 2024: 767.40 (current year)
How Emerging Corporates Can Navigate These Challenges
To effectively manage rising costs, companies should adopt stringent cost-saving strategies by renegotiating supplier contracts, streamlining operations, and eliminating non-essential expenses are critical steps in alleviating the financial strain caused by inflation.
Moreover, in the face of inflation’s complexities, expert financial guidance is indispensable. Partnering with a seasoned advisory firm can enable emerging businesses to optimize their financial structure, enhance resilience to inflationary pressures, and secure cost-effective financing options.
At Crimson Oak Capital, we understand the nuances of navigating Nigeria’s inflationary climate. Whether you’re an investor looking to diversify or an emerging corporates seeking ways to optimize operations, our tailored advisory services can help you make informed decisions that protect and grow your wealth even in challenging economic conditions.
Reach out to Crimson Oak Capital today for expert guidance and strategic planning to navigate uncertainty and build a stronger financial future.
References:
- Nigeria In0ation Rate – Trading Economics, com/nigeria/inflation-cpi
- Consumer Prices — Trading Economics, com/nigeria/core-inflation-rate
- Quote from Benjamin Graham — WiseOwl Quotes, com/benjamin-graham/
- Bloomberg Report — com/news/articles/2023-12-29/non-usd-niReria-s-naira-set- for-worst-vear-since-1999-with-no-rebound-in-sight
- Nigeria Interest Rate – Central Bank of Nigeria, https://www.cbn.gov.ng/rates/)
- Emerging Markets and Inflation – IMF Report, https://www.imf.org
- mutualfundssahihai.com/en/what-are-debt-funds
- mariblock.com/africans-should-embrace-stab1ecoins-safeguard-savings-against- inflation-currency-devaluation/
