The Short Term Gains of Long Term Securities

Dear Speculators,

Our world today is filled with uncertainty, both politically and economically. This high level of uncertainty has had both negative and positive effects on the bond market across the global economy. When investors are uncertain about the economic future, they troop to bonds which are regarded as safe havens. Bond prices has risen so high that the yields are now at historic lows in Western economies. Although, Nigeria currently enjoys political stability, the economy is in a terrible shape. This has encouraged more investors to dump equities for bonds in order to diversify, reduce the volatility in their portfolio and boost returns. Arguably, Nigerian treasury bonds may be the most attractive asset in the Nigerian market today.

However, with bonds performing so well and stocks doing just the opposite in the last year, this presents a buying opportunity in the stock market. It might be a bad day to sell equities, but it definitely is a good day to buy them. In the short term, bonds may outperform stocks but in the long run, stocks always outperform bonds. We think bonds are very good assets to hold in the short term but not in the long term (which is totally opposite to the nature of the asset, but who cares?) as prices start to rise quickly when investors start buying in during a turmoil, but are fairly stable in the long term. With the current uncertainty in the Nigerian economy, bonds are poised to perform fantastically well this year but as soon as an economic recovery begins in the country, we advise investors to dump them. The yield on bonds are rigid and interest rate sensitive. On the other hand, stocks provide both dividend returns and capital gains, which should push share prices up very fast when company earnings are boosted by a stronger economy and higher consumer spending.

At this moment, we expect long term investors to be hunting for undervalued stocks while short term investors should be buying up treasury bills and bonds. Bonds may have won the battle, but equities will definitely win the war!

Signed:
Emeka Ucheaga,
Managing Partner,
Emeka Ucheaga Advisory

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