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Financial Investments In A Crisis

By Dr. Denis Nfor Yuni, Lecturer at the Alex Ekwueme Federal University Ndufu-Alike, Nigeria

  1. Preamble

It is unfortunate that financial investments are not a critical and attractive sector in Africa as obtained in other climes. This is simply because most people are scared of what they don’t understand. That is why this sector is reserved to the few who do understand and equally contributes to why the rich get richer. Some financial investment opportunities are aimed at redistributing wealth such that even a farmer in the village can be an owner of Apple, Facebook, Ethiopian airlines, Dangote cement or other companies (companies that are publicly traded) whose share value may be affordable enough.

It is important to note that the demand and supply of such transactions are always regulated such that marginal gains are earned except in speculative and responsive transactions. One of such speculations, the biggest of all is during and after a crisis. There exist certain investors that pray for crisis such as the current covid-19 pandemic so as to turn thousands to hundreds or hundreds to millions.

A crisis such as the COVID 19 pandemic that has led to a global lockdown, translating to very low supply, even lower demand, low revenue generation amongst others is bound to lead to a recession. This time around it will be very disastrous given crude price that is at an all-time low. The obvious questions of; how will government make money, how will they pay salaries, how will the market react to these changes should ultimately lead to the personal question of how will I be affected and what can I do to help the situation. It is on this note that this piece attempts to review options of financial investments and how it can be employed in a crisis period such as this.

2-Types of Financial Investments

Some common financial investments applicable in developing countries could be grouped into ownership, lending and cash equivalents and are discussed below:

Stocks are an ownership share in a publicly traded company1. When you buy the stock of a company you become a shareholder and may be hoping that the price will go up so you can then sell it for a profit. The risk, of course, is that the price of the stock could go down, in which case you’d lose money.

In a crisis, you are more than 50% sure that the stock value will eventually go up (so you can resell) except the company declares bankruptcy. But even if it is declared bankrupt and sold out you may only need to wait longer for the stock to appreciate much more than they were bought.

Brokers are designated to sell stocks to investors. You can either opt for an online brokerage firm or work physically with a brokers who have offices in major cities.

Bonds: When you buy a bond, you’re essentially lending money to an entity which could be a business (corporate bonds) or a government entity (government bonds). Government entities are usually the most reliable with very little risk.

After the bond matures; that is, you’ve held it for a predetermined amount of time (usually from 3 months), you earn back the principal you spent on the bond, plus a determined rate of interest. The rate of return for bonds is typically much lower than it is for stocks, but bonds also tend to be lower risk. There is some risk involved, of course. The company you buy a bond from could fold, or the government could default. Treasury bonds especially, however, are considered a very safe investment.

In a crisis, governments and companies usually sell bonds to create liquidity (money) during or after the crisis to cushion the immediate effect of the crisis while making arrangements for other sources of revenue. It is this window that can be explored to add a premium to that deposit income that would have otherwise been lying idle in a bank.

A Certificates of Deposit is a very low-risk investment. You give a bank a certain amount of money for a predetermined amount of time. When that time period is over, you get your principal back, plus a predetermined amount of interest. The longer the loan period, the higher your interest rate.

Banks have found a way of modifying this into various forms that almost differs from bank to bank. It is used to address the problem of the commercial banks’ dilemma, but also used during or after a crisis to raise enough liquidity given that they expect more requests for cash in form of savings/deposit withdrawals and loans than deposits. It is also considered as a low risk investment and suitable during crisis.

Cryptocurrencies are digital currencies that don’t have any government backing such as bitcoin. You can buy and sell them on cryptocurrency exchanges. The truth is that, though it has no government backing which is one of the fundamental features of money – legal tender, it is currently possible to exchange it with cash that has legal tender and vice versa in some places. In fact, some retailers will even let you make purchases with them. However, cryptos often have wild fluctuations, making them a very risky investment.

Commodity investments refer to the purchase of physical products you can buy with the hope that the value will increase and it can be sold at a higher price. They could be agricultural products like wheat, barley and corn, or energy products like oil, coal or solar power. Precious metals like gold and silver are some of the most common commodities. The risks vary with commodity.

In a crisis – recession, the real price usually decreases and the value of a commodity may decline than increase. Purchase of commodities with well evaluated risks can then be purchased during crisis when prices have dropped considerably so that when there is stability it can be resold.

3-Playing safe in Crisis Investment

  • Recessions are usually unpredictable and it may be safer to engage in low-risk investments such as bonds.
  • Investing in consumer products or necessary goods is a good idea because the demand will always be there eg Dangote sugar
  • You may also focus on non-cyclical or recession-resistant industries. Besides necessary consumable goods, there exist other non-essential goods that are in an all-year demand.
  • It is good to diversify/spread investments so that if one happens to fail, the others should not.
  • Real estate has always stood out as a unique investment as it usually appreciates in the long term and it is, therefore, a good area to invest in.
  • It is important to take note of the debt-to-equity ratio of any firm you are interested in investing. And prioritize those that have increased their dividend payouts for at least 20 years.
  • Precious metals such as gold and silver are known for retaining their value even during recessions and so are a relatively safe investment option.

Recession, Devaluation and the aftermath

The current crisis is heating several developing countries hard as their major sources of income are significantly affected. Crude oil prices are very low and tax revenue has declined due to the lockdown of companies. It is therefore common sense that the government will have no choice than to create artificial money in order to meetup with statutory payments and increasing demands of trade unions who will soon realise that their take home can no longer take them home. The other renown solutions to recessions – tax cuts, increased government spending and quantitative easing all require revenue which the government is actually seeking.

Artificial money will be created by devaluing the local currency. This will have huge effects on countries that rely heavily on imports such as Nigeria, Cameroon, CAR, Chad etc as this will directly lead to inflation which is a pandora box in itself. It would be beneficial to countries that have more exports than imports as they become cheaper in the international market and sell more, but the big question remains, how many African countries export more than they import.

In a crisis, it is necessary to therefore convert all liquidity to more stable and key currencies such as the US Dollar or Pound sterling. It could be re-converted to local currency after this devaluation must have taken place giving you higher returns.

In conclusion, profiting from investing in a crisis requires discipline, patience, and of course, enough wealth in liquid assets available to make opportunistic purchases2. Financial investments in a crisis is founded on the idea of the business cycle; that economies will always keep falling and rising and falling and rising again and so on. The greater the risk seem to be, the greater the reward and during this period, it is far riskier not to take risk. In every financial crisis, billionaires are made while some billionaires crumble. Time is of essence and that decision needs to be made urgently.

Ref:

  1. https://smartasset.com/investing/types-of-investment
  2. https://cal.lk/crisis-party-of-six-your-table-is-ready/

Dr Denis Nfor Yuni is a Cameroonian currently resident and working in Nigeria. He holds a BSc in Economics from the University of Yaounde II, Soa and a Masters and Phd in Economics from the University of Nigeria, Nsukka and Nnamdi Azikiwe University respectively. He has been a lecturer in the department of Economics and Development Studies, Alex Ekwueme Federal University Ndufu-Alike (AEFUNA), Nigeria for over 5 years. He is equally a renowned researcher with over 25 journal articles to his credit. He is currently the Deputy Director, Centre for Internationalisation of his university – AEFUNA.

Dr Denis Nfor Yuni

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