April 15, 2020

Opportunities for Stronger Portfolio Diversification Through Foreign Currency Denominated Investments

Portfolio diversification is an investment approach that many tend to undervalue when the going is good. As long as an investment portfolio’s value continues to grow, many investors pay little attention to this basic principle of investing.

Even when empirical research suggests the right action to take, there is a tendency to simply gravitate to the asset class that offers good returns with low to moderate risk. However, there are some events that shift the sentiment of investors as they consider their options in a season on heightened volatility.

The spread of the Coronavirus (COVID-19) across the world is one such events that has given many investors cause to pause and re-evaluate their approach. In just over a month, it has unleashed a global economic slowdown that is unprecedented in a time of peace. In the month of March, gigantic economic stimuli have been proposed by governments and central banks to manage the impact of a public health scare that may change our world as we know it forever.

While governments and businesses across the world are trying to come to terms with the attendant impact of the border closures, stay-at-home orders and the rising rate of infections on economies, portfolio investors are also confronted with tough decisions to preserve the value of their assets. Financial markets have also not been spared in the slowdown, as stock markets in Europe and America have fallen sharply. The price of crude oil has also fallen, and oil producing economies like Nigeria are facing a significant price shock with weaker fiscal buffers than they had to soften the blow from past price slumps.

This has resulted in huge volatility in the exchange rate which potentially presents two problems for investors. First, there’s the risk of lower real returns from investments in naira denominated assets as a weaker exchange rate should lead to higher inflation. Second, investment returns in dollar terms are potentially lower for those to whom the dollar value of their wealth is critical. These include parents that have to pay fees to schools abroad, and others who have regular or occasional foreign currency obligations.

All these highlight the value of diversifying into foreign currency denominated investments. For those looking for alternate investment options, the FBN Nigeria Eurobond (USD) Fund provides the opportunity to invest in Eurobonds issued by the Nigerian government and Nigerian banks.

There are few reasons why Nigerian investors should consider investing in the FBN Nigeria Eurobond (USD) Fund at this time. Firstly, the potential weakness of the Nigerian currency (Naira) presents a compelling case for diversification, considering that the returns offered by the fund are in US dollars.  While we have seen an adjustment in the exchange rate by the Nigerian authorities over the last month to reflect the impact of the COVID-19 pandemic and oil price decline on the Nigerian economy, the risk of further depreciation remains in the event that oil prices persist around the current levels or fall further in the short term. It is therefore prudent to consider investing in asset that can serve as a hedge against the depreciation of the naira.

Individuals and corporate organisations can invest in Nigerian Eurobonds through with the FBN Nigeria Eurobond (USD) Fund managed by FBNQuest. A minimum investment of $2,500 is all it takes for an individual to get started, which is a relatively low amount when compared to the minimum entry requirement of other Eurobond funds offered in the country.

It is noteworthy to mention that Nigeria has no history of default on its foreign currency, even when oil prices fell to $10 a barrel in the late 1990s. In addition, Sovereign default risk remains low, and Nigerian remains in a strong position to meet its foreign currency obligations which are estimated to not exceed $2.5 billion this year.