THIS WEEK IN THE CAPITAL MARKET (16-20/12/19): INFLATION, YIELDS, STOCK MARKET

Inflation rose for the third successive months to 11.85% year-on-year in November 2019, higher than 11.61% reported in October and 11.24% in September. Before NBS reports the numbers for December in January, you can conveniently take a guess at 12% and plan based on that because we are almost certainly closing the year with a 12% inflation rate.

In the last three weeks, all major markets have been busy and locked down in traffic, everybody is shopping, people are mostly shopping for what they didn’t need or buy or use in prior months. Some families will buy new clothing for the first time this year (‘aso-odun effect’), some Elites have the habit of changing their wardrobes this month (‘sales effect’), some families will eat rice and chicken for the first time this year, all this buy, buy, buy come with December and they put pressure on prices. Border closure - minus harvest period + December effect = 12% or above for December inflation.

Lesson: To grow your wealth in the coming months, your rates of return, yields, margins on any of your ventures or investments must take you above the inflation rate.

Another perspective: cumulative inflation since 2015 is 764.66%, what has changed in your earnings?

If you sum up all monthly inflation figures from January 2015 till date, what you have is 764.66%.

Your story may not be as bad as the cumulative figures look, but if you have been on the same salary since 2015 and you have kids, partner, younger ones, mother, father, grandparents, jobless friends and still making ends meet, please put M.O.N in front of your name; you are a hero!

Insight: If you want to start a business, it may be safer to assume the middle-class, working-class are shrinking, so set prices that reflect the realities of the low-class (prices middle and working-class can also enjoy). As for the upper class and super-rich, price is price but how many are they?

Almost all consumer goods companies are struggling at the moment, costs are high and they can’t increase prices to reflect the rate of increase in costs, why? Most Nigerians are struggling and will move on from your goods on the slightest increase in price.

Study Chicken Republic pricing model, it’s so streetwise.

Think Outside Treasury Bill Yields

At the conclusion of T-Bills Primary Market Auction ("PMA") on 18th December 2019, yields hit a new year low of 4%, 5% and 5.495%. At an average return of 4.83% and inflation at 11.85%, the real yield on short-dated instruments is now negative at -7.018.

What does the Equities Market have in common with Santa?

Most stocks are currently at their lowest prices, however, Investors and Portfolio Managers are less enthused even when short-dated instruments are now yielding negative returns. In fact, some PFAs are saying at 2% they will stick with bills rather than equities, a classic case of risk-averse Investors.

The Year-to-Date (YTD) return of the Market is negative 15.60%, in December the Market has suffered a decline 11 days out of 14 trade days. It’s almost certain the Market will close the year in the red zone unless Santa changes from red to green, how possible?

Clearly, Investors are deserting the Market, what about you?

It's a wrap, thank you for your attention, leave your comments and questions.