This Week in the Capital Market (13-17/01/2020): Devaluation, Inflation, Stock Market, Yields

The need to preserve your wealth: lessons from Dangote

“As of March 2019, he had an estimated net worth of US$10.6 billion. Dangote is ranked by Forbes magazine as the 100th-richest person in the world and the richest man in Africa, and peaked on the list as the 23rd-richest person in the world as at 2014” Wikipedia

Within 5 years he dropped from 23rd to 100th, What happened to King Dangote?

Nigeria happened to him. Inflation happened to him, average inflation rate was 8% in 2014 as against 11.40% of 2019.

Devaluation happened to him, with N155 naira you could buy $1 in 2014 but now you need N306 to buy the SAME dollar.

You must have read somewhere recently that Dangote wants to open an office in New York, you wonder why?

“In Africa, you know we have issues of devaluation, so we want to really ‘preserve’ some of the family’s wealth,” Dangote told Bloomberg TV’s David Rubenstein Show.

The word 'preserve' takes us to one of the functions of money as a store of value. A store of value is the function of money as an asset that can be 'saved, retrieved and exchanged' at a later time, and be predictably useful when retrieved. More specifically, a store of value is when Naira retains its purchasing power into the future.

Put simply, in 2014 when dollar was N155, you saved N155 in your piggy bank with the goal of contributing towards your Masters program in the US in 2020. It’s 2020 now, with joy you retrieved the N155 from your piggy bank, alas! you need N306 to buy a dollar now. Naira just failed you in its function as a store of value. Yes, you saved it, retrieved it but you could not exchange it for the same amount of dollar because it lost its purchasing power to devaluation.

Inflation also decreases the value of money. As inflation increases, it becomes harder to place a value on money, thus it becomes more difficult to use it as a store of value. In the last 5 years, Naira has consistently failed in its function as a store of value.

Now you understand why Dangote dropped from 23rd to 100th.

Now you understand why Dangote wants to preserve his wealth in the US.

Now you understand why CBN wants Banks to recapitalize, N25 billion was worth $161 million in 2014, the same N25 billion is now worth $82 million now.

Now you understand why a lot of businesses have closed shop in the last 5 years, their capital was eroded by devaluation and inflation.

To grow and preserve wealth in Nigeria is a daily struggle. Like Dangote, you must find a way to preserve your wealth. Talking about growth, let’s take a ride to the equities market.

Equities Market Update

The equities market got off to an impressive start in 2020 after a disappointing 2019. In just 12 trade days in 2020, the All Share Index (ASI) has gained 10.34% and currently rank as one of the best performing equities market in the world. You would recall that the same Market declined 14.60% in 2019 and 17.81% the year before.

This positive performance of the equities market is driven majorly by falling yields on treasury bills, opportunities for high dividend yields and some specific corporate announcements. The stocks that have benefited most from this performance are:

If you had invested N100,000.00 or N1,000,000.00 in the shares of MTNN on 30th December 2019, by now you will be boasting of growth in wealth by 21% to N121,000.00 or N1,210,000.00 excluding transaction charges. 21% in less than 21 days is the most prolific investment outcome anywhere in Nigeria at the moment.

Like any investment option, the equities market comes with its own risk but the interesting thing here is that these stocks are driven by some sort of fundamentals that forms the basis of your investment. As an example, Zenith is driven by the possibility of a high dividend yield, Dangote driven by the corporate announcement of a share buyback and many more.

Generally, the buzz in the market is fuelled by stranded funds in the money market as a result of crashing treasury bill yields.

Treasury Bill Yields Continue to Fall

Two T-bills primary auctions have held this year, on each occasion, the returns on T-bills have dropped further leaving billions stranded. I mean that stranded in all sense of it, please follow this real-life conversation.

Mr. A (Investor): I have transferred N2 billion to your corporate account, kindly help me place it in a fixed deposit at 11% for 360 days.

Bank/Fund Manager: Thank you for the transfer, however, we will return your money before close of business today, the maximum we can do is 2%.

At the end of the day, the billions are stranded and Investors confused desperate for investment options. Interestingly, these are not bedtime stories, this kind of conversation is now the norm in most finance houses.

At the current average yield of 3.997% (across the 3 tenors) and inflation rate at 11.98%, the return on treasury bills will come in negative at -7.129%, clearly, you cannot grow your wealth with T-bills.

The biggest beneficiary of the stranded funds is the equities market, if I cannot find where to fix my money 'lemme' just buy shares. These actions create buy activities in the equities market, and as you are aware the equities market thrives on buy, buy, buy...

Have a fabulous weekend like a Stockbroker.