Part 2- Making Smart Choices - How COVID-19 is affecting your investments

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The Ghanaian Experience

COVID19 has not spared Ghana in many aspects. As at date of publishing this article April 07, 2020, Ghana had recorded 287 cases. Many businesses have had to re-adjust their workflows processes with many working from home, cutting down on production and with others temporarily shutting down. Imports especially from China which we hugely rely on, has even slowed down because of production halts resulting from close down of many Chinese cities and production lines. Demand and supply dynamics pushed prices north for some goods and services.

The Ghanaian government has been instituting measures to curb the spread of the virus including enhanced personal hygiene education, closure of the borders, partial lock down of Accra and Kumasi, disinfection and sanitation of major market areas.

Some other policy interventions have been initiated by the Bank of Ghana to help stabilize or reduce the shocks to the economy amidst this global pandemic. I will touch on the 3 that caught my attention including:

  • Reduction of the Primary Reserve Requirement by banks from 10% to 8% thus freeing up money for banks to give loans to businesses and individuals who are likely to be affected by slowdown in the economy. Basically, the central bank is trying to stimulate growth in the economy by adding money and help ailing businesses have access to funds at reduced rates to keep them afloat.

  • Suspending mobile money charges excluding cash outs for transactions up to GHS 100. This measure in particular is geared towards discouraging people from handling cash as it is an easy mode for the virus to spread and encourage the use of digital platforms.

  • The major financial intervention in my opinion which directly affects your investments is the reduction of the monetary policy rate from 16% to 14.50%. This consequently will lead to a lowering of lending or interest rates. Keep in mind however that this rate has been unchanged since 28 January 2019. This lowered interest rates in the short to medium term will define the risk-free rate of return (which is also treasury bill rates). Since short term interest rates are falling, the prices on longer dated government bonds are expected to rise as investors will be seeking or searching for yields (returns) above the risk-free interest rate and will be willing to pay a premium to buy these bonds. This will particularly be seen on the secondary market quotations by participants. These increased prices will cause the yields of these longer dated securities to fall.

What do these points mean to you as an investor

  • Treasury bill rates in Ghana will likely be lower in the short to medium term. This is evident in the drop from 14.76% from March 16th to 14.44% for April 06, 2020 91 day issued T-bill. The 182 day (6month) T-bill has also dropped from 15.18% to 14.95% in the same period. Aforementioned, this trend will likely continue and as such it is better to invest now rather than later as interest rates are likely to dip. Also, for those who have short term investment, your reinvestment risk is higher as rates will likely be lower than when you initially invested.

  • Interest rates on fixed deposits offered by banks and other specialized deposit taking institutions will also be lower in the short to medium term.

  • On the stock market, we haven’t seen significant dips in prices especially since our market is not that efficient. Also, trading activities have been low just as before the break out of this pandemic. I have been asked a couple of times if for example Telcos are expected to rake in higher revenues as a result of increased consumption of data since most people are either working from home or keeping themselves entertained through the use of internet during the lock down period. This may not be entirely accurate. They might not be as profitable as we imagined during this time because a chunk of Telco consumers recharge using scratch cards and credit transfers. Also, many institutions will be using much less data and network services as they have temporarily closed shop due to in their quest to reduce the spread of the virus. As the lock down extends it might significantly affect revenues and profitability. Furthermore, fees from Momo activities will decline as a result of the waiver for transactions up to Ghs100. Thus, we may need to take a long-term view on the Telcos as well as any other stock.

  • The aforementioned experiences tell me not to panic in this moment as “short-term moves reflect money flows rather than fundamentals. The underlying fundamentals of a company will eventually matter again.” This too shall pass!

  • The major stock markets around the world have crashed many times before and have always bounced back. “The past is no guarantee of future results, but the good news is that in every case, markets have come back, and often have made sizable gains in the months immediately following the downturn” This is not the end! It may take a while, maybe years but it will bounce back. (Source:https://www.fidelity.com/viewpoints/market-and-economic-insights/bear-markets-the-business-cycle-explained )

In summary, let me quote the very profound statement by His Excellency Nana Akufo Addo,

“we know how to bring the economy back to life, what we do not know is how to bring people back to life”.

This is to say that, I have confidence that this storm will pass, the local and global economy will bounce back. Do not panic, stay safe, spread calm not fear and make smart choices! If you need further clarity on what to do, please contact a licensed financial advisor.

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Tags: covid19 | investments | finance |