Taming the investment red flags in 2023

The state of Nigerian economy and the financial market in 2022 can be captured in one word – Uncertainty. There are a number of red flags that an investor cannot ignore in order to operate an efficient portfolio in 2023:  Soaring inflation rate, interest rate conundrum, exchange rate volatility, naira devaluation, cost of transaction in the stock market, insecurity and anticipated impacts of the presidential election on the economy are sending dangerous signals to investors. But the flags must be managed.  

Inflation rate has done incalculable damage to the global economy and this will impact investment decision in this new year. As one of the last options to tackle inflation, Central Bank of Nigeria (CBN), raised the nominal anchor, called the Monetary Policy Rate (MPR) 16. 5 per cent. Yet, the inflation rate soared to 21.47 per cent, a 17-year high as at November, 2022, amidst low purchasing power.  The Nigerian Gross Domestic Product (GDP) slumped 3.54 per cent at Q2 2022 to 2.25 per cent in the third quarter according to National Bureau of Statistics (NBS). 

The momentary gains from crude oil could not provide buffer for the Nigerian external reserves which dropped to $36. 94 billion as at December 16. The reserve hit $40 billion in the corresponding period in 2021. 

As an indicator of an embattled economy, the naira plunged to 750 against the dollar at the parallel market, compared to 560/$ in 2021 and hit almost 900/$ in November 2022. The official rate (NAFEX) averaged N447.58/$ on December 16, compared to N417.65/$ at the end of last year. Public debt has become an albatross, rising to N44.06 trillion as of September from N39.56 trillion by the end of 2021. By October, the Federal Government’s debt to Central Bank of Nigeria has peaked at N23.77 trillion from N17.46 trillion in the preceding year. 
 
Official figure of unemployment rate stood at 33.3 per cent in the review period but in reality Nigerian youths across various professions have taken solace in migrating to other countries in dire search of jobs. The controversy over estimated N4.1 trillion oil subsidy is still raging and the much-anticipated benefits of the Petroleum Industry Act (PIA) 2021 are being called into questions by many analysts. No fewer than 133 million Nigerians are believed to be leaving below poverty line.  Manufacturers contend with challenges of forex and other indices of tough operating environment. It is not surprising that the stock market, a barometer for gauging the economy has been on prolonged bearish trend. Some companies on the main board of NGX Plc had to delist voluntarily and moved to NASD OTC Exchange, due to their inability to comply with the post listing requirements. There have been layoffs and pay cuts in many companies.

Nigeria is not the only country undergoing economic quagmire. For instance, there are speculations that one of the Wall Street’s giants, Goldman Sacks is planning to disengage thousands of employees to “navigate a difficult economic environment.” This confirms the belief that Wall Street is under stress as deal making is drying up and revenues plunging. It is obvious that 2023 signals a wild card for investment decision. 

Despite the inclement operating environment savvy investors in Nigeria realised good returns in 2022 through daring investment in dollar-denominated products such as mutual funds, fixed income securities, commercial papers and equities. It is all about understanding market psychology and taking advantage of investment advice from stockbrokers. At the basic level, it is clear financial instruments or other products are prone significant risk, including the possible loss of the principal amount invested. Similarly, every financial instrument or other product denominated in a foreign currency is subject to exchange rate fluctuations. This may have an adverse effect on the price or value of an investment in such products. 

The famous Economic Intelligence Unit (EIU) has posited that commodities prices would recede in 2023 based on slow demand globally. But the magazine quickly added that low supply of commodities products would push up prices.  “War in Ukraine will still affect agricultural commodities markets in 2023,” says EIU.  But in the case of Nigeria, the more the Federal Government creates an enabling environment for the commodities ecosystem, the better for the country’s ability to compete in the global market and generate forex.  The Managing Director, Lagos Commodities and Futures Exchange (LCFE), Mr. Akin Akeredolu-Ale has always maintained that if the commodities for export pass through a commodities exchange by way of trading on its electronic receipts, it will reinforce the products’ quality and enhance their global competitiveness because of the processes they will undergo at the Exchange. 

Businesses across the globe will contend with the aftereffects of COVID-19 pandemic, ongoing war in Ukraine and continuous development in technology.  Although 2023 portends more rivers to cross for every investor, an astute one would begin to focus on the recovery that lies beyond. His portfolio must be ready for a year of change and opportunity.  
This is the time for portfolio review and rebalancing. 

Sectors that can provide succour for investors in 2023 include consumer goods, healthcare, utilities, major banks, agriculture, technology, top dividend paying firms, telecommunication, oil and gas, logistics and small caps stocks with strong fundamentals. However, in order to tame the investment red flags this year, a review of investment objective, risk tolerance and time horizon amongst others is necessary for an investor. This is the pathway to an informed investment decision.

• Oni, an integrated communications strategist, chartered stockbroker and commodities broker, is the chief executive officer, Sofunix Investment and Communications.