The TGI CLUB ASSET ALLOCATION REPORT 2021. A review of Q3 2021 & our expectations for 2022

Outline

• A recap of the local & global economy in Q3 2021.
• How the TGI Club invested in Q3 2021
• Our outlook for Q4 2021
• Our expectations for 2022

GLOBAL & LOCAL ECONOMY IN Q3 2021

The delta variant of the coronavirus dictated the pace of economic growth in economies around the world in Q3 2021.

Gross Domestic Product (GDP), an economic indicator of economic growth, slowed to 2% in the US, falling short of the projected 3.6% growth rate in Q3 2021. In China, GDP growth also fell below forecast as it grew by 4.9%, 0.1% less than the 5% projected within the same period.

Nigeria on the back of a full reopening of its economy recorded a sharp growth in GDP in Q2 2021. GDP grew in Nigeria by 5.01% year on year and slowed by 0.79% on a quarter-on-quarter basis.

Apprehension about covid-19 vaccines has led to an uneven vaccination rate around the world and dampened global economic growth forecast for 2021.

ENERGY CRUNCH AND GLOBAL SUPPLY CHAIN

The tail end of Q3 was coloured by the energy crunch in Europe & Asia. China in its journey to becoming carbon-free by 2030 introduced regulations restricting the use of power in factories and homes. This together with the surge in gas prices is limiting production and fueling inflation due to increasing demand.

Europe is battling high gas price due to a shortfall in the supply of gas from Norway and Russia. Energy-intensive industries like steel & aluminium were threatened with a shutdown at the peak of the crisis.

The slowdown of production has worsened the already disrupted supply chain. Global supply chains were dealt a heavy blow during the 2020 pandemic, the recent energy crunch is worsening supply shortage. Economies are opening and learning to live with the pandemic. This coupled together with government stimulus packages to citizens is blowing up demand. Given limited supply & growing demand for goods, inflation has remained elevated.

In Nigeria, inflation continues to increase at a decreasing rate, a trend that started in Q2 2021. Inflation fell from 17.75% in June to 17.38% in July, it fell further to 17.01% in August and as of September 2021, it is at 16.63%. These declining inflation numbers still do not reflect in the everyday prices of goods and services, a breakdown of inflation numbers show year-on-year decline and month-on-month growth.

CRUDE OIL PRICES RIDES HIGH ON THE ENERGY CRUNCH

The gas supply shortage has increased the demand for crude oil and raised crude oil prices. Goldman Sachs has forecast that oil prices will climb to $90 before the end of 2021. OPEC+ is trying to make this a reality by limiting oil output in the face of growing demand for crude oil globally. For Nigeria, the implications of high crude oil prices are mixed, as oil subsidy bill balloons alongside oil prices, putting a cap on foreign exchange earnings from crude oil.

FOREIGN EXCHANGE REMAINS A CHALLENGE

The foreign exchange remained a major challenge in Nigeria, In Q3 2021. The Central Bank of Nigeria (CBN) stopped the sale of forex to bureau de change operators and aimed to maintain liquidity in the FX market through commercial banks. This action led to a depreciation of the naira in the parallel market as the bulk demand for FX couldn’t access the official channel and easy access to Personal/Business Travel Allowance (PTA/BTA) made room for round-tripping. The Naira lost 11% in the parallel market in September 2021 alone. Towards the end of the quarter, Nigeria issued a Eurobond that was oversubscribed. The bond was issued to cater to the 2021 budget deficit. The inflow is expected to temporarily ease the foreign exchange pressure in the country.

HOW TGI CLUB INVESTED IN Q3 2021

The 3 themes of the Nigerian economy (Insecurity, high inflation & foreign exchange scarcity) remained in Q3 2021 as it was in the first half of the year. The foreign exchange situation worsened with the ban of the sale of FX to bureau de change operators. Though oil prices were above $60 all through Q3 2021, it did little to assuage the foreign exchange situation as oil subsidy continues to limit the foreign exchange earnings of the government.

These factors influenced how we curated investment opportunities in the period under review for members investments portfolios.

In Q3 2021, members of the TGI Club invested in 6 asset types

• Agro financing projects
• Venture Capital
• Private Debt Notes
• Fixed income (Eurobonds)
• Stock Market
• Real Estate

Q3 2021, saw members of the TGI Club invest a total of $2.9mn, while in the 9months of 2021, a total of $11.5mn was invested by over 2,000 members. Total investment amount declined by 9% on a year-on-year basis and fell by 50% quarter on quarter. However, the total invested capital in the 3 quarters of 2021 rose 76% higher than the $6.5mn invested in the first 3 quarters of 2020.

The club’s investment portfolio in Q3 2021 was more diversified than it was in Q2 2021. Though Agro finance projects still account for a substantial part of the investment amount, its percentage of the total portfolio dropped to 41% from 70% in Q2 2021.

Our Agro finance partners progressed with their expansion projects venturing into oil palm farming and continuing with their investment in value-add exportable commodities. We remained supportive of their business as we continue to earn attractive returns from invested funds.

The continuous rise in prices of goods and services and better access to credit has led to a rise in the customer base of companies in the micro-lending space. As the demand for credit grew, so did our investment with our microlending partners. 24% of the total investment amount in Q3 was in the micro-lending space.

After a successful fundraise in Q2 2021, with the TGI Club being one of the lead LPs alongside FBNQUEST in the Loftyinc Afropreneurs Fund 3, we had our second venture capital fundraise in Q3 2021 with Ventures Platform. 18% of invested funds in the period was in the fundraise.

We maintained the defence of our investment portfolio against the continuous loss of value of the naira with our investment in Eurobonds and US equities. Corporate and government Eurobonds were issued in Q3 2021 in the Nigerian bond market. 13% of invested funds in Q3 2021 was in Eurobonds. The US stock market remained positive in Q3 gaining a meagre 0.03%, as markets reacted to the spread of the delta variant of the coronavirus. 2% of invested funds went into the US stock market.

Our members maintained the installment investment in real estate opportunities they started in 2020. This accounted for 2% of the total invested amount in Q3 2021.

WHAT WE ARE DOING DIFFERENTLY IN Q4 2021

The Eurobond issued at the tail end of Q3 2021, alongside the rise in oil prices is expected to help with the FX liquidity challenge in Nigeria in Q4 2021. The central bank’s ability to clear out the backlog of FX demand and maintain liquidity at the official window would ease the foreign exchange pressure. We also expect the recent launch of the eNaira to lead to wider acceptance of the digital naira and help cut back on the cost of printing physical cash and improve financial inclusion.

The ongoing energy crunch and supply chain disruption in other parts of the world is expected to continue to fuel inflation given the import-dependent nature of the Nigerian economy.

Based on the foregoing, we expect our investment in the TGI Club in Q4 2021 to spread across 6 assets categories (Agro financing projects, Money Market, Private Debt Notes, Fixed income (Eurobonds), Stock Market, Real Estate) with a focus on investment opportunities that allow investors own income-generating assets and not simply earn returns from holding debt instruments. See more details on each asset class below.

Agro Finance Projects

Food remains a major driver of inflation in Nigeria and food inflation as of September 2021 was 19.57%. Our Agro finance partners are positioned to benefit from the continuous rise in food prices in Nigeria and we intend to continue to provide the required funding for them to grow sales in the local & international market.

Money Market

Despite the need to borrow to fund government expenses, the rate on government debt instruments has remained muted. Rates on 364day treasury bills did not exceed 7% in Q3 2021. Going into the rest of the year, we do not expect a significant change in rates on government debt instruments. However, we might see a rise in rates on government debt instruments in the pre-election year. We will continue to curate investment opportunities that allow members position in the money market to maintain some liquidity in their investment portfolio.

Private Debt Notes

Consumer spending, in the last quarter of the year, typically skyrockets given the festivities during this period. We expect this increase in spending to fuel an increase in consumer lending in Q4 2021. Though our focus in Q4 and subsequent periods will be on owning income-generating assets, we will continue to curate private debt notes as an investment option from our trusted investment partners that will enable the members of the TGI Club to enjoy the consistent cash flow and return from this debt instrument.

Dollar Denominated Assets

While some form of liquidity is expected in the Nigerian foreign exchange market in Q4 2021 based on the foreign exchange inflow from the Eurobond issued in Q3 2021 and crude oil sales, we plan to take advantage of dollar-denominated investment opportunities. We’ll work with our investment partners to help members of the club invest in Eurobonds and provide the necessary guidance for them to invest in the US stock market.

Stock Market

The performance of the Nigerian stock market has been a reflection of the economic situation in the country. By the end of September 2021, the exchange has returned -1.7%. This notwithstanding we see opportunities in the market. Companies that source most of their raw materials locally (e.g., Okomu oil) and those in the telecommunications sector (MTN Nigeria) have so far had the best financial performance on the exchange. We’ll help members align their investment in the Nigeria stock market with these companies in Q4 2021.

Real Estate

Real estate is at the heart of our goal for Q4 2021. It is one of the few assets that rises alongside inflation making it a good fit for Nigerian investors portfolio. In Q4 2021, we will be curating investment opportunities that will enable our members co-invest in a UK real estate fund & in real estate properties in Nigeria & earn rental income.

Our expectations for 2022

While we’ve seen a sharp recovery in the global economy in 2021 from the severe recessions of 2020, we do not expect growth in 2022 to be as buoyant. The Organization for Economic Cooperation and Development (OECD) has projected a growth rate of 4.5% for the global economy in 2022, a 1.2% drop from the 5.7% expected growth for 2021.

The political risk in the United States (issues around the debt ceiling), China’s indebted real estate sector and its seemingly shift away from carbon powered industrialization, and global supply shortage are major threats to the growth in the world economy in 2022. Though demand, riding on the back of consumer savings and robust government stimulus programs has increased significantly, we believe a low supply of raw materials and declining labour if prolonged may amputate growth.

Already, the automobile sector has had to significantly reduce production due to a drop in the supply of semiconductors. Building materials are becoming difficult to find, & production has slowed in Chinese factories due to power rationing. These coupled with the Fed’s announcement of the gradual winding up of its bond buybacks which is expected to end by July 2022 do not speak well for the growth of the global economy in 2022. The protracted slowdown of production could lead to job losses which could also trigger a recession or market correction.

In Nigeria, 2022 is a pre-election year and going by the trend in past pre-election years, the economy takes the back seat while politics is at the front burner. Some of the risks to global economic growth especially the threat of low supply and the federal reserve’s tapering of loose monetary policy (which implies higher interest rate) will trickle down to Nigeria in the form of imported inflation and outflow of funds (foreign exchange) to investment grade (more secure) debt instruments. This may force the government to raise rates on bonds and other debt instruments to fund the expected N6.25trillion budget deficit in 2022.

The nagging question becomes, ‘How do I invest successfully at a time when global economic growth is expected to slow down and there is no clear-cut direction for the Nigerian economy? We’ll be answering these questions and more at the TGI Club annual event, TGIx

The TGIx event will hold on the 23^rd of January 2022 by 1pm at the Civic Center, Victoria Island, Lagos. At the event, existing investment partners will share their plans for the year in line with economic realities. There will also be a keynote speaker who will share from practical experience how he has weathered the many economic storms and open up our minds to the opportunities we can take advantage of despite the expected economic headwinds. Plan to attend.

We are open to working with new investment partners in 2022. Investment companies who have legitimate and viable investment opportunities can reach out to us via email: hello@thegreeninvestmentclub.com.

Note that Interested companies will be subjected to our due diligence process to qualify to become investment partners.