The financial industry in Nigeria has experienced a significant amount of system liquidity, primarily due to sustainable high FAAC allocation, among other contributing factors. Our expectation is that with the removal of fuel subsidy and floating of the exchange rate, the high liquidity trajectory will be sustained in the nearest future.
To navigate the current low-yield environment with high liquidity levels, it is wise to adopt a long strategy that involves purchasing long-dated investment securities. This will help you achieve better investment returns over time.
However, this surge in liquidity was temporarily disrupted by the Central Bank of Nigeria’s (CBN) significant Cash Reserve Ratio (CRR) debits to banks, resulting in a prolonged period of negative liquidity in Q1, 2023 into Q2, 2023. Despite the removal of subsidies in late May 2023, the market has experienced increased activity due to a boost in liquidity. This is further supported by the anticipated FAAC allocations and bond coupon payments expected in Q3, 2023.
Similar to the Covid-19 pandemic, the current policy landscape offers a chance for smart, long-term investments due to the loose monetary and fiscal policies in place. Recall that yields on short-term government securities in the latter part of 2020 declined to 0%, and longer-term bond yields averaged 4%, as shown in the chart below.
Savvy investors can leverage the current liquidity surge by adopting a long strategy focused on acquiring long-dated investment solutions e.g., Investors can use our FBN Bond Fund and FBN Halal Fund as both funds have exposures to long-tenured bond instruments. By doing so, they can secure higher coupon rates, and maximize their returns over the investment horizon.
Historical data indicates that towards the end of the Covid year when there was high system liquidity due to loose economic policies, investors who went long early in the cycle and positioned themselves at the longer end of the yield curve benefited greatly. A case in point was the FBN Bond Fund which returned 18.37% by 2020FY, higher than the inflation figure in that year (13.25%). Drawing from this experience, investors can make prudent decisions and prioritize longer-term investments (1-3 years) to preserve and grow capital amidst the current liquidity abundance. Embracing a long-term investment strategy can help investors navigate the current economic landscape and capitalize on the opportunities presented by the increase in statutory allocations due to subsidy savings.
Charts’ data source: CBN, FMDQ, FBNQuest Asset Management
We recommend that you get in touch with your professional investment advisors at FBNQuest Asset Management to discuss your investment portfolio!