Economic Outlook for 2021

2020 was an intense and dramatic year for the global economy. Combating Coronavirus through lockdowns affected every government, business and household across the globe.

Covid-19 vaccines debuted in the United States by December 2020, worldwide access to the vaccines could put an end to the pandemic but distribution remains a complex feat, however, the uncertainty of the vaccine’s effectiveness remains very high.

We are learning to manage life with the virus at play but investors need to keep a close watch on fiscal and monetary policies implemented by Central Banks in order to arrive at reasonable investment decisions.

Generally, the recovery might be derailed by inadequate Central Bank policies to override the aftermath of the worldwide global shutdown in 2020.

The Global Economic Recovery

We saw the following factors play a big role in economies across the world surviving 2020, therefore how these forces play out in 2021 is likely to affect the global economic recovery and investor portfolio returns in today’s environment.

1. The Coronavirus Pandemic: Containing the virus through an effective vaccine or other spread control measures would lead to a rebound in consumption and production activities globally, that said, an effective containment will boost the global economic growth.
2. Central Bank Fiscal and Monetary Policies: Banks have cut interest rates, provided stimulus checks and implemented fiscal and monetary policies with the goal to increase consumer spending which should boost economic growth. Failure to provide effective policies and adequate support could wreak havoc on nations worldwide.
3. Inflation: While inflation rates in developed nations of the world remain low, Nigeria struggles with an upward rising trajectory. With this in mind, investors will keep away from low return environments and focus on inflation beating assets.
4. Equities: The stock market continues to rally because excess liquidity exists in the markets, due to low interest rates offered in fixed income securities.
5. The Dollar: If the dollar continues to weaken, concentration in US dollar denominated assets could hurt relative performance.

The Nigerian Economic Recovery

Last year, the nationwide lockdown imposed by the Federal Government of Nigeria meant that economic activities were shut down and consumer spending shifted from luxury to more essential goods and services.

Nigerians travelled less within and outside the country for months, just as other citizens across the world, therefore the transportation sector took a massive blow. Demand for crude oil dropped to dangerous lows but supply remained in excess significantly pushing oil prices in a downward spiral.

In sustaining the strength of the economy, the Central Bank of Nigeria (CBN) announced relief packages and implemented liquidity injections that were targeted at sectors negatively impacted by the economy. The monetary policy rate was reduced to 11.5% despite the inflation surge, for the reason that inflation was driven by structural, not monetary factors.

What helped Nigeria recover from the economic recession in 2016 were the monetary policies that addressed inflationary pressures through the increase in the MPR from 12% – 14% in addition to the I & E window which was introduced to improve availability of foreign exchange in Nigeria.

The outcomes of the following may boost or derail Nigeria’s economic recovery in 2021:

• Crude Oil Prices: Crude oil exports dominate a huge part of Nigerian exports and provide a bulk of the FGN’s revenue; therefore, price fluctuations will affect the recovery of the economy in 2021, another key thing to remember is, OPEC decisions move crude oil prices

• Monetary & Fiscal policy interventions: The outlook for monetary policy in 2021 would be driven by a need to get the country out of the current recession by stimulating economic growth. We expect interest rates to remain low except inflation spirals out of control and the “bank” sees a need to raise MPR which will trickle down to higher interest rates on loans and reduced consumer spending.

• The CoronaVirus – Containing the spread of the virus effectively, will do a lot of good for the country. It will avoid a necessary shutdown of economic activities that could have a devastating impact on the economy.

• Inflation – If prices continue to rise in Nigeria, a looming food crisis may occur because agriculture is a major component of the GDP. The current inflation rate is 14.89% and it is driven by food inflation. Increase in electricity and fuel prices may also push the inflation rate to a height of 18% before a downward trend begins.

• The exchange rate – A further devaluation of the Naira to enable a convergence between the parallel market rate and the I&E window in 2021.

INVESTING IN 2021

To invest in unprecedented times like this, you need a plan. You need a plan to take positions that shield you against market fluctuations while taking advantage of opportunities and finding sustainable returns. 

A report released by the National Bureau of Statistics reveals that 13 sectors contracted while 6 sectors recorded an expansion in 2020. Some of the sectors that expanded include Agriculture, Financial services, Utilities, Telecoms and Coal Mining. Telecommunications was the best performing sector in 2020, which doesn’t come as a surprise due to the massive dependence on data connectivity and online transactions due to less physical contacts.

In contrast to the sectors that expanded, Road, Air, Rail and pipeline transports, accommodation and food services, as well as construction services contracted by above 30% each.

Based on the above, the asset classes (traditional and alternative) we are keeping in our portfolios in 2021 include:

• Stock market
• Capital market (Mostly Euro-bonds)
• Real Estate
• Financial Services (Micro-credit debt notes)
• Agriculture projects
• Venture Capital Equity Funds (Small businesses)

Stock market rallies will remain the order of the day if interest rates stay low, this means that we expect stocks to continue to outperform fixed income and cash in 2021.

Euro-bonds will remain on our watchlist as dollar -denominated fixed income opportunities still remain an option to balance out the market and currency volatility.

Real estate remains a favourite as we focus on helping the members of our community get access to flexible and affordable payment plans for real estate in good locations.

We consider micro-credit debt notes a great way to contribute to enabling access to liquidity for the mass market not served by the large financial institutions and we will continue to work with our partners to make it happen. Agriculture projects remain favourite as well as they provide ROI higher than inflation rates.

Investing in a small business is a long term quest. Our newly formed venture capital club is focused on educating those who are ready to take on this asset class.

In a recession, you need to ensure to ensure that your portfolio comprises investments that enhance your cash flow, protect your capital and help you beat the double digit inflation rate:

• Cash Flow – Dividend paying stocks of companies with solid financials and competent management provide dividend payments and the short-term debt notes with our micro-credit partners provide monthly returns you should consider for your investment portfolio this year
• Protecting your capital – Fixed income should have been the go-to protect capital, but current rates are incredibly low with some yielding as low as zero percent which means you are losing money over time. While we consider euro-bonds a good option, you can also turn to real estate assets to preserve your capital in today’s environment. It all depends on the current state of your investment portfolio
• Beating Inflation – In trying to beat a 15% inflation in Nigeria, investors will need to incur more risks and consider diversifying into alternative investments such as the agriculture and technology.

Finally, you must keep emergency/safety funds aside. Stack up enough in your fund that can cover your expenses for at least 3-6 months as we watch how countries control the pandemic and vaccine roll-out across the world.