Market | Mutual Funds

A Fund Manager's Perspective on Investment Climate Review and Options

Mar 30, 2022   •   by   •   Source: Proshare   •   eye-icon 139 views

Wednesday, March 30, 2022 / 02:21 PM /  By FBNQuest / Header Image Credit: FBNQuest/EcoGraphics 

As Nigeria's economy emerges steadily from its second recession in 6 years, In this interview, Laura Fisayo-Kolawole, Portfolio Manager at FBNQuest reflects on the investment climate, Nigeria's asset management industry and how investors behavior should evolve going forward. 

QFinancial markets across the world are constantly evolving. Amid the volatility, new products are emerging to address investors' needs. What themes are you excited about in relation the asset management industry and what themes concern you? 

AAs you indicated, financial markets, as well as other sectors, are constantly evolving. Over the last year, several themes have emerged that influence the outlook for the asset management industry. The first one is the renewed interest by local (retail) investors in investment products and markets. One evidence of this was the enthusiasm of investors around the MTN public offering late last year. As you may know, many investors lost a lot of money during the global financial crisis that began in 2008. This discouraged a lot of people, but I believe that we are probably seeing the greatest revival of interest in investing from retail investors in over a decade. 

Some challenges related to the inflow and repatriation of capital has underpinned a significant decline in foreign portfolio investment over the last year. Conversely however, local investors have increased their investment activity in the equity market as well as in foreign currency denominated assets such as Eurobonds. So overall, it is encouraging to see the growing appetite of local investors as this is positive for the asset management industry. 

I will add that Investors are often stimulated by good news. So, I think that while the 2023 elections brings some uncertainty that could spook some investors, I expect the trend of greater investment activity to continue this year as asset prices rise. We believe that several factors point to a rise in the value of equities for example. For one thing, the decline in foreign investor participation in Nigeria has left many stocks undervalued relative to their peers in many African countries. This will support the long-term prospects of the stock market and a positive performance will raise the enthusiasm of local investors to invest in equity-based products. 

QNigeria's economy has slipped into 2 recessions since 2016. While the recovery in 2020 beat many analysts' expectations, what is your view on the impact of the economic upheaval on investor behavior? 

AThe volatile economy since 2016 has certainly fueled some trends in investor behavior. For example, the depreciation of the Naira against the US Dollar has underpinned greater interest in foreign currency denominated assets. Even previously unsophisticated retail investors have explored investments in assets such as Eurobonds, which are seen to provide a hedge against further Naira weakness. I also believe that there has been a greater focus on investing internationally by those who have the means and opportunity to do so. The monetary easing that was pervasive for the most part of the last 6 years supported the rise in equity markets across the world. This has not gone unnoticed by Nigerian investors and so we have observed greater interest in foreign markets by locals. 

Q:  What trends are you seeing in terms of the approach and philosophy that underpins traditional asset management business? For example, how are the principles of growth and value investing being applied in the current environment? 

AAs a background to my response to your question, it is useful to clarify the meaning of a few terms. Growth investing refers to investing in companies that offer strong earnings growth while value investing refers to an approach that seeks stocks that appear to be undervalued in the marketplace. It is not uncommon to see a shift in investment philosophy when strong economic growth, excess liquidity or other factors spark an extended rise in asset prices like we have observed internationally in the last few years. So, I think that this has influenced the investment styles of asset managers across the world. 

However, growth companies have become so integrated in the new economy that it is seems foolish to ignore them and prudent to take them more seriously when allocating funds in a typical growth or balanced portfolio. Growth companies such as Apple Inc. for example are some of the most valuable public companies in the world. In addition, the emergence of relatively new assets, such as crypto currencies, is expanding the frontiers of investment activities. In Summary, I will say that growth investing has become a lot more emphasized today than value investing. The incredible success of companies such as Apple Inc., Google LLC, and Tesla, Inc. as well as the implications of this on the future earning potential of these companies is driving a shift in mindset in the investment management industry. That said, it is important to note that an investor's objective and risk tolerance should underpin all investment decisions. 

QWith regards to risk profiling? What factors should an individual or organisation consider in assessing their risk profile? 

ANow, that is an area where I think the principles have not changed. Several factors are considered in making an assessment of a person's or organisation's risk profile. This assessment is best made by a professional fund manager. Sadly, I see some investors who seek to invest in financial assets by themselves miss this very important step. The common theme to note in making an assessment include the definition of your investment objectives, your projected cash flows, your financial commitment and the time horizon over which you will like to make the investment. 

QFinally, what is your outlook for the Nigerian financial market and how does it influence investor behaviour? 

AA lot has been said about the risk factors that will influence asset values in the short term. Factors like pre-election hesitancy among local and foreign investors, the difficulty of the government to fund the 2022 budget, further weakness of the Naira this year, and the recent decline in short term yields on government securities will drive markets in 2022. 

However, it is also important to point out that some asset values are quite attractive at the moment, especially in the stock market where many companies are undervalued relative to their African peers. The stock market has started the year on a positive note. However, we believe that there are still several companies that offer attractive upside potential. I expect more investors to pay attention to this over time and this could drive stock prices up later in the year.

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