The Head of Research at Coronation Asset Management, Mr. Guy Czartoryski, in this interview speaks about the impact of the Covid-19 on investment in Nigeria’s financial market.
What is your assessment of the investment banking climate in 2020?
In total, the climate will be quite good, though the winners will be the ones that adapt quickly. In essence, the investment banks are swapping volumes for margins. So, if you were depending on a high volume of transactions in the past, then that presents a challenge. But if you are now able to offer products suitable for the times, such as hedging products and other derivatives and structured solutions, then you will do well this year.
There appear to be limited investment instruments in the market as fund managers and institutional investors are looking for where to invest as any offer that hits the market is oversubscribed. What should be done to deepen the market and increase investment outlets?
This is the key question. In our publication ‘Navigating the Capital Market: the Investors’ Dilemma’ we described how fund managers have had it easy over the past ten years – just invest in treasury bills and you beat inflation most of the time. They won’t get desirable returns by going back to the same place. There will be a market for risk-taking and for creating products that match their requirements with a controllable level of risk. So fund managers are going to have to start measuring risk again. Some adjustment to the investment rules may be in order, as well.
Coronation Asset Management recently released a research report, can you take us through the major findings?
We conducted a ten-year study of the market, and concluded that Nigerian Pension fund managers and mutual fund managers used to enjoy easy returns, because they could buy Treasury bills and beat inflation for most of the period from 2010 to 2019. In 2020 they cannot, so we set out to measure the benchmarks which they should use to measure risk-free returns like treasury bills and bonds, and also risky assets like equities. Rather than use inflation as our benchmark – inflation is different for different geographic areas of Nigeria and for different people – we used long-term naira deprecation against the US dollar. And, when we added the US dollar yield on Nigerian sovereign US dollar Eurobonds to that percentage, we came up with a target 14.7 per cent per annum target risk-free return – not far from what naira treasury bills have yielded in the past, interestingly enough. As for equities, we examined the data and calculated that, given the risks, investors should demand a 20.5 per cent per annum return, which is clearly difficult to obtain. However, there are listed companies that deliver this kind of internal return, or return on equity, so it is a matter of reconciling the returns that some companies can generate with what investors expect. If investors just say “that’s too risky” then that shows they have forgotten how to manage risk, and they definitely need to learn again.
The Central Bank of Nigeria recently adjusted the Naira exchange rate against the US dollar. How will that affect the level of investment in the country?
The Central Bank of Nigeria has adjusted the official exchange rate twice this year, and it now stands at N380/US$1, which is close to the rate which we observe in the NAFEX market (and the Importers & Exporters window). This is a good development and it will be welcomed by some of our creditors such as the World Bank. However, we still have an economic recession to work through in 2020 and we need to see where oil prices will settle, so restoring faith in our markets may take a little while. It will take a bit of patience, though there are opportunities to take right now.
Inflation as predicted has remained on the upswing. What is your take on that?
In time, we believe that the policy objectives will return to a focus on inflation: but, for understandable reasons, the current focus is on growth. Investors have not abandoned Nigerian investments in the past just because inflation was in double digits, but clearly a higher rate of return needs to be offered when inflation is high than when it is low. The main thing, in time, is to see it trending down and then investors are likely to become comfortable with the situation.
Do you think policymakers in the country have responded appropriately to the economic challenges posed by Covid-19?
The response to Covid-19 needs to balance out the medical emergency with the economic impact, and you have to realise that both are potentially fatal. So, government has a tough job. And it is made even more difficult by the fact that – and this is true of any country in the world – data is difficult to obtain and difficult to assess. The Nigerian authorities took the approach of imposing a lockdown which was held in place and then gradually lifted. The point about doing this is that you can assess the impact of easing restrictions as you go along. We also need to understand that all decisions on public health are made in a political context. For example, it would be impossible to impose a strict lockdown for a long period of time because a large number of people need to work every day. On balance, we think the authorities have steered a prudent course.
Exchange rate unification and fuel subsidy removal were some of the things Nigerians advised the federal government to implement which have all been done. What other measures you will advise the government to adopt to stimulate economic growth?
If you had told me, a year ago, that exchange rate unification and fuel subsidy removal were on the cards, I would have been sceptical that such things were possible. So, a lot of progress has been made in a short period of time, perhaps because of the exceptional circumstances. If I could choose, I would ask for power sector liberalisation, with a strong element of deregulation across the industry, and the removal of much current regulation. I think that would set the entrepreneurial spirit free and you would be amazed by the results.
How has the Covid-19 pandemic affected the Asset Management sector?
There are some profound, though indirect, effects of Covid-19 on the Asset Management sector. The monetary authorities used to strike a cautious balance between pro-growth and anti-inflation policies. But, with the impact of Covid-19, it is pro-growth policies that hold sway.
What does this mean? It means that treasury bills yield close to three per cent per annum when inflation is close to 12.5 per cent per annum.
So, Pension Fund Administrators and mutual fund managers cannot just buy treasury bills. They really have to re-learn risk management and start buying risk-bearing assets, such as credit solutions and equities, if they are going to make the returns which their clients require. This what we explore in our recent publication ‘Navigating the Capital Market: the Investors’ Dilemma’. Fund management is about to change very profoundly, with an emphasis on risk management. And, if you cannot management risk, you will not succeed.