July 13, 2023/CardinalStone
Watchers may be tempted into a feeling of déjà vu as rapidly transforming monetary policies bring back the sensation of the 2017 pro-market win. Indeed, the Investors and Exporters (I&E) Window is reborn, and, with it, a breadth of fresh air for stranded investors as currency arbitrageurs face up to the reality of an end to the ‘easy money’ era. Yet, despite the similarities to 2017 initiatives, 2023 comes with a complete bouquet of pro-market initiatives this time out, commencing with the removal of subsidy on May 29, 2023, to the recent decision to allow the naira to trade more freely. The new government is also looking to tame the decade-long drag from weak labour productivity growth that has masked passthrough from a fast-rising labour force and left the nation underperforming peers from a trend growth rate perspective.
Despite the initial excitement and a surprising lack of resistance from a usually distrusting populace, there appears to be a consensus that initial pains must precede future gains. For one, the cost-of-living crisis seems set to worsen as the government pulls the plug on unsustainable subsidies and continues to demand tax charges despite dwindling incomes. Debt sustainability metrics may also deteriorate in the short run on the impact of devaluation and potential securitisation of ways and means. A few producers would also have to resolve the difficult puzzle of trying to protect margins while preserving market share in the face of historically high-cost inflation and cut-throat competition in some instances. A resolution of this puzzle in no way insulates most of these businesses from the imminent foreign exchange losses on unhedged positions.
For us, the reality of rising costs puts a greater burden on asset managers to strategically seek alpha like never before. In the equity space, investors may monitor volatilities and seek to enter sound banking and downstream oil & gas counters, which appear in pole positions to benefit from the new policies. Investors may also chase traditional names that have, hitherto, been the toast of foreign investors who may now be inclined to re-evaluate the Nigerian story. Decision-making may be a tard difficult for domestic fixed-income investors, with fundamentals pointing to higher yields and political will seeking a low-interest rate environment. We, however, favour a laddered portfolio approach to mitigate the risk of locking in lower yields should interest rates become depressed and increase the chances of making good returns on re-investments should an upward swing in rates materialise.
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