The Nigerian Stocks Market As An Inflation Edge

The great thing about finance -- personal, corporate or government finance -- is that they stay true to some fundamental principles. For example, it doesn't matter how financially big you are, the moment your expense begins to exceed your income it is a drive down into poverty/demise/trouble. That is why you keep hearing stories of once popular and super rich footballers now poor and living on hand outs. That is why you will see very big companies like Arik Air and Aero Contractors dying. That is why Nigeria is still poor despite the plenty natural resources and accumulated earnings from oil and other mining exports.

What then is great about it all?
It is that for someone who pays attention to these fundamentals and diligently learns from history, he can be handsomely rewarded. He gets to fare better than others.

Lately, I have been trying hard to be that someone. What opportunity lies in our current state in Nigeria? What does history say about what is currently happening? Those who came out on top, according to history, did what?

Today, as my gift to you into the new year, I will be sharing with you my amazing find.

First, just in case the whole holiday activities have made you to forget, I will be presenting our current economic state in Nigeria. Since last year (2015) we have been experiencing an undesirable change in our economic fortunes, though, it started before we actually voted for change. The seeds were sown by our past political leaders, they made sure that they spent all the money the country earned without planning/preparing for the future. They know nothing about business cycles and the economic turbulence no nation is immune to. So when money flows in, like agberos who believe that there will another danfo to extort money from tomorrow, they squander everything. They do white elephant projects to ensure the money is completely spent. They spend millions/billions on painting and repainting the third mainland bridge parapet, building a centennial city, doing double anniversary/independence celebration in one year, printing new celebratory currency notes, paying criminals upfront as amnesty, living national life like there is no tomorrow.

Then tomorrow showed up and we are now paying for their irresponsibility. Unfortunately, they privatized the cash outflow, diverting huge chunks of project money into their own pockets, and now they are trying to publicize the cash crunch, squeezing money from us in all ways they can.

The inflation rate shot up. Went from 9.6%  in January 2016 to over 18% by October and November 2016.

GDP declined and the entire economy shrunk.

Foreign direct investments dropped as investors became worried by our unsound policies and lost confidence in us. Dollar inflow dropped. Our foreign reserve dropped. The Central Bank entered a panic mode. Ordinary Nigerians bear the brunt of it all as unemployment rate went up and prices of goods went up.

So by the important metrics, we are doing very badly.

The Naira is losing value and rather than our salaries increase, most people are out of job/salary or have seen their salaries slashed. 

However, in a corner, out of attention, is our stock market not much feeling the general economic happenings this year. But all that is not because it is immune but because of what economists call a lag. There is always a lag between cause and effect in the economy of a country (macroeconomics). But if one reads through the textbooks on the fundamentals and pay attention to history, he would know the direction the stock market will head once the lag time is over.

And that is the secret, the amazing find, I want to share with you.

I'll start from what the fundamentals say: in the end the stock market always capture the inflation-driven price increase and generally produces more returns than bonds. And when you look at the Federal Government 10 Year Bonds doing return of close to 16% and still lagging the inflation rate, then you know that the stock market is ripe for nominal growth.

As for history, Venezuela just won the award this year for the best stock market return in the world in nominal terms. Also during the popular Zimbabwean hyperinflation years, only the stock market reflected the new realities by rising in tandem with cost of living. I know that our current situation is not as dire as theirs is/was, but the fundamental holds true. The stock market, especially in times of unexpected high inflation, always rise to reflect the underlying price increase in the economy.

What is my takeaway from all these? I have moved all my money from savings-like (money market) investment to the stock market. And I am investing all my income, after taking out the living expense and business expense, in the stocks market.

I know not everyone can take such a decision, but in case you've been mulling it and would benefit from an outside opinion. Here's my "You're welcome!" to your anticipated "Thank you".