Stockbrokers have emphasized the need for investors to think about hedging their portfolio by buying dollar-denominated assets (foreign stocks, dollar mutual funds, Eurobonds, and dollar-fixed deposits) to reduce the impact of the currency devaluation. They are dissatisfied with the protracted foreign exchange crisis.
The operators claim that no investor wants to hold naira or naira assets due to the low money market rates and 23% inflation, which is a harbinger of another currency crisis.
They said that despite the Federal Government’s recent attempt to unify the FX rates, foreign portfolio investors (FPI) have been forced to avoid the Nigerian market due to their growing exposure to the naira depreciation and the dollar issue.
However, some analysts have warned against buying dollar-denominated assets, claiming that such a move would only accelerate the devaluation of the naira and fuel increased demand for foreign currency on the foreign exchange market.
However, the operators countered that dollar assets like mutual funds, Eurobonds, or foreign stocks ensure strong returns through interest payments, capital growth, and protection against dividend erosion.
The average Nigerian Autonomous Foreign Exchange Fixing (NAFEX) rate for the week ending July 21, 2023, was $/787.30 compared to $/770.33 for the week ending July 14, 2023, reflecting a 2.16 percent ($16.97) depreciation of the naira versus the dollar.
The naira has been under pressure versus the dollar due to the weakening of external reserves. Unfortunately, other sources of dollar inflows have not been spared because foreign investors are reluctant to invest, which has led to the currency reaching a record low.
Paul Uzum, Head of Equity at Planet One, stated that given the macroeconomic situation in the country, investors should diversify their holdings abroad and keep up to 25–30% of their money in dollar-earning assets.
He emphasized that in order to diversify their portfolios and reduce their exposure to naira depreciation in order to protect their investment, every serious investor at this time needs to think about acquiring international diversification and look for chances to invest in assets denominated in foreign currencies.
Although he acknowledged that the tendency is not good for the economy, he noted that it is the only other way to guarantee investment when there is no faith in the local currency.
“People thought that FPI will return to Nigeria with FX unification, the reality is that foreigners have shunned our market. The Exchange rate market is unstable and causing fear and panic. Are we on the verge of another currency crisis?”
“The CBN and Federal government think they are smart by engineering a regime of low money market rates in the face of 23 per cent inflation, today no one wants to keep the Naira or naira assets, indeed, we are on the verge of another currency crisis.”
“The reality is that FPI has stayed away, they are watching us, and they do not know if after coming today, naira will hit N2,000 in 2027. At this point, I think the best bet for us all as finance professionals is to diversify our investment globally. Keep 25-30 per cent of your funds in dollar-earning assets. Politicians will send us back to the stone age.” he said.
According to Tajudeen Olayinka, CEO of Wyoming Capital and Partners, certain investors throughout the world have already adopted the proposal, which is affirmative.
Although it does not completely eliminate interconnected global risks like a global crisis, a global lockdown, or a resemblance of the Russia/Ukraine war, among others, he noted that global diversification of portfolios could be another method to protect against a country’s specific risk.
He asserts that the advantage of investing globally while acting locally is the chance to profit from opportunities in the local market when it becomes the correct thing to do.
“Some of the people or corporate entities we call foreign portfolio investors are local investors with offshore assets.”
Patrick Ajudua, president of the New Dimension Shareholders Association, stated that considering foreign diversification to safeguard investments against currency fluctuations and unstable economic policy is not inappropriate if there are no constraints on company diversification.
“This way, it will also help to mitigate the effect of currency devaluation and reduce the effect of foreign exchange losses on the financial. But the side effect is that it will result in capital flight and will rather boost the economy of the foreigners than the local economy.”
