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Devaluation: The Investors' Nightmare

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The question in most people's mind is not whether there will be a devaluation of naira but when? Recent events such as published letter by Michael Owhoko ("Open letter to Buhari over planned naira devaluation") in the punch newspaper - 19/9/2019, faster-than-expected depletion of the foreign reserves, higher incoming OMO maturities and the recent events within the banking industry continue to give credence to this call amid the current economic landscape.

Top lenders (ZENITHBA: $500m, 6.25%, May 2022; FBNH: $300m, 8.25%, Aug 2020; ETI: $250m, 8.75%, Aug 2021) have taken turns to recall Eurobond in issue prematurely this year. But considering the body language of Mr President, one may easily dismiss this call as unlikely or premature. While it may appear more as an academic exercise to discuss in detail the pros and cons of this event, what options are available to hedging your risk?

1. Currency: This is the most common option out there, BUY USD. While this approach is practical, most people lose out on interest they could have earned on keeping the fund invested.

2. Bond: An investor can gain exposure to any of the series of Eurobond in issue. This option helps to mitigate the opportunity cost that goes with holding just a currency (e.g. USD).

3. Mutual Funds: Several investment houses in Nigeria now have mutual funds denominated in the USD. The beauty of this option is the diversification benefit that goes with it, and the stress of managing your fund outsourced to an expert. 

4. Equity Investment: Some stocks exhibit a positive correlation with the USD. Once devaluation happens, their earnings shot up as well as the stock prices. This option entails detail research, but WSTC Research got you covered. Contact us today for our top picks.

5. Leverage: This is the diciest of all possibilities. In summary, borrow in Naira and Invest in USD denominated assets, sit back and pray it happens soon and thank me later.

Devaluation will destroy many things in Nigeria including the projections from many startups.