Investing in Turbulent Times

The Central bank of Nigeria (CBN) Monetary Policy Committee (MPC) met on 25th and 26th January 2016 and kept everything unchanged. The decision to keep the Naira exchange rate against the dollar at the same level for over a year despite the collapse of crude oil price the main foreign exchange earner for Nigeria is difficult to understand from an economic standpoint. Nevertheless, it made perfect sense politically and further demonstrates the unwillingness of the current leadership of the CBN to exercise its independence in steering the economy.

The economic thinking of the current government seems a bit muddled up. Somehow it thinks since Nigeria generally imports a significant part of the manufactured goods it consumes, devaluation is not an option. The same government also wants to encourage domestic manufacturing and also to discourage imports. At the same time the government ends up subsidizing imports by maintaining an uncompetitive exchange rate. The government claims devaluation will cause inflation but then proceeds with an expansionary budget in 2106 that will require significant borrowing which might also end up stoking inflation. Furthermore, by refusing to devalue by say 20% the government denies itself more Naira for its oil dollars, meaning it could actually reduce its borrowing needs by devaluing.

What can an ordinary investor ought to do in this uncertain, volatile and low growth environment? The most important thing is to tighten defenses and minimize unnecessary risk. This can be achieved by doing some of the following where applicable:

  1. Keep at least 6 to 12 months living expenses in a deposit account to protect against unexpected unemployment or other shocks.
  2. Pay off consumer debts.
  3. Prune equity portfolio and weed out weak companies that should have been sold long ago but are now even more risky in view of deteriorating economic environment.
  4. Identify a few, no more than 10, companies that are sound with low debt. Determine an entry price and buy when the price is achieved despite market volatility. Keep the number of banks to no more than 3 as they are high risk and only a few are really good value. When all is said and done, these companies will weather the storm and you would have bought quality at a reasonable price. This is key, as the return on investment depends on the price paid, the lower the better.
  5. In constructing your portfolio, have a log term view and only sell when fundamentals of the company have deteriorated such that the company is no longer good quality.
  6. You will feel very uncomfortable doing 3 to 5 above, as it is never easy being a contrarian. But your chances of making money are higher if you stick to quality companies and buying more when no one wants them and holding them for as long they remain good businesses.
  7. If you are fortunate enough to have a large enough stash of cash, then keep your eyes open for value in the real estate market as there will be distressed sales that you can grab at a bargain.

Stay calm amidst the chaos, have cash and be ready to pick up value left behind by the departing crowd.

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