It is no longer news that Nigerians are increasingly moving their investments to dollar-denominated assets to diversify their portfolio and minimise their exposure to naira devaluation.
The CBN has also come under pressure to find a fast solution to alleviate the lingering dollar crisis that has affected the naira in recent times. Some of these policies include:
- CBN stops dollar cash payments for foreign personal and business travels.
- CBN stops international oil companies (IOCs) from remitting 100% of forex proceeds abroad
- CBN issued a circular to banks stating that NOP (Net Open Position) must not exceed 20% short or 0% long of the bank’s shareholders’ funds.
But we all know these solutions are good for the short-term and do not address the main problem of our imports exceeding our exports, thus putting pressure on the naira. It has now become unwise to leave all your money in naira-denominated assets, as you may risk losing a significant part of your life earnings to devaluation. This is why I will be sharing 5 ways Nigerians are investing in dollar-denominated assets.
What are dollar-denominated assets?
Dollar-denominated investments are assets, securities, and transactions priced in US dollars. Investors invest in these classes of assets and earn returns in dollars.
5 ways to invest in dollar-denominated assets
- Dollar mutual funds: Mutual funds are a type of investment made up of a pool of money collected from many investors to invest in securities like stocks, bonds, money-market instruments, and other assets. Dollar mutual funds are mutual fund investments denominated in US dollars
- Eurobonds: Eurobonds are bonds that are issued in international currencies—currencies different from the host country’s currency (in the case of Nigeria, currencies that are not naira). This way, the government borrows in dollars and pays back interest in dollars as well. For example, the Nigerian government can issue a bond to foreign investors that allows them to lend the Nigerian government money in dollars and not naira (since they don’t spend naira in their country).
- Foreign stocks and ETFs: This involves investing in stocks of publicly listed companies on the floor of the foreign stock exchanges such as S&P and Nasdaq in the US. Investors buy units of shares of a company listed, say, MSFT for $400 per share, depending on the trading price at the time of purchase. Unlike bonds which have a fixed rate of return, investing in shares allows you to earn through capital appreciation and dividend repayment (for some stocks).
- Fintech dollar options: Using a fintech app is another way to save in dollars. Some fintechs offer dollar-saving products that enable you to save your money in dollars and earn interest as well.
- Cryptocurrency: Some cryptocurrency platforms allow you to buy, sell, and convert cryptocurrencies like Bitcoin, Ethereum, BNB, Chainlink, and TRON. Some people buy near-stable coins such as USDT (USD tether) or BUSD (Binance USD) to protect themselves against currency devaluation.
An illustration of exchange rate difference gain
In October 2019
Imagine you invested N360,000 in a dollar mutual fund with a return of 7% per year. This became $1,000 at an exchange rate of N360/$1.
In February 2024
Due to the volatility of the exchange rate, your invested $1,000 will now be $1,310.79 (interest + capital). Which today is now worth N2,359,422 at N1800/$1.
Can you spot the huge gain?
Why you should invest in dollar-denominated assets
- Portfolio diversification: Investing in dollar-denominated assets allows you to diversify your investment portfolio beyond the naira. This helps reduce the risk associated with holding all investments in one currency.
- Inflation protection: Investing in dollar-denominated assets can help preserve wealth and purchasing power during times of economic uncertainty or high inflation in Nigeria.
- Access to global markets: Investing in dollar-denominated assets provides you with access to a wide range of global investment opportunities that may not be available or accessible in the local market. This includes stocks, bonds, mutual funds, ETFs, and other investment vehicles traded on international exchanges.
- Potential for higher returns: Dollar-denominated assets, particularly those invested in international markets, may offer higher returns than domestic investments. This is especially true for sectors or industries that are performing well globally but may not be as accessible or developed in the Nigerian market.
By diversifying your investment portfolio, protecting against inflation, accessing global markets, and potentially earning higher returns, you can benefit from investing in dollar-denominated assets as part of your overall investment strategy.
What are your thoughts on this?
Do you need help with diversifying your portfolio, then send an email to sales@themoneyafrica.com to get started.
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