To Invest Or Not To Invest During The Storm? Moment Of Truth For Nigerian WealthTech Startups
Making the case for wealthtech
Perhaps with the exception of the Johannesburg Stock Exchange (JSE), trading in the stock markets across Africa is an extreme sport for the average person.
A combination of factors including numerous stock market crashes, unpredictable government policies, currency devaluations, and the fact that stock market trading is a class privilege that ensures that the most valuable assets on the exchange are out of reach to the low-class and middle-class income earners, have always made it difficult or mostly impossible for the average person to invest.
Beyond investing in stock markets, the argument that the typical, standard bank savings account is an opportunity to save and invest is flawed by the fact that typical savings accounts are, in reality, anything but a veritable wealth creation channel.
For instance, in Africa’s largest economy and most populous country, Nigeria, the average savings account returns about 1-4% per annum. With an inflation rate around the upper boundaries of 11%, Nigerians with savings accounts get a real return of about -7% per annum. Elsewhere in Africa, it’s a similar picture.
It is with a view to eliminating these drawbacks and challenges that a new breed of fintech startups, known as “wealthtech” or “wealth management startups” helping people invest and save securely while promising rich returns, have been popping up around the continent, with most of them in Nigeria.
Nigerian wealthtech at a glance
Wealth management startups are to Nigeria what digital lenders are to Kenya. There are up to 49 known digital lenders in Kenya, no other African country has more.
In Nigeria, there are currently 20+ wealthtech platforms/investing apps giving individuals freedom and flexibility in making rewarding investments and savings. No other African country has more. And this doesn’t even include crowdfunding platforms like Farmcrowdy (Crowdyvest) and ThriveAgric.
Both provide a solution to the low returns on savings accounts offered by traditional financial institutions.
Others are Afrinvestor, Payday Investor, I-invest, Eyowo, Overwood, Carbon, and even platforms supported by commercial banks such as ALAT by Wema, FBN Edge and the mobile app of Stanbic IBTC Bank. All these wealth management platforms offer savings/investment options that are cheap and accessible over mobile devices.
“Wealthtechs are basically channels and not endpoints,” Feranmi Ajetomobi, Head of Brand Engagement at Cowrywise, tells WeeTracker.
“They help with seamless access to regular investment instruments. Hence, in terms of ease of access and cost, they are still very much the best option for investing in this period. However, it is also important to select suitable options.”
In addition, currency devaluations and the need to shield savings/investments from local currency fluctuations have given rise to another crop of Nigerian wealthtech startups that are making it possible for Nigerians to easily invest in U.S. stocks.
This is where the likes of Rise, Bamboo, Chaka, Trove, and a few others are starting to make waves. Even the more traditional Nigerian wealthtechs like Cowrywise and PiggyVest have since keyed into this and introduced options that allow users to earn in foreign currency.
To invest or not to invest during the storm?
With over 2.2 million cases worldwide and more than 148,000 deaths (as of 17 April 2020, 15:05 WAT), the COVID-19 pandemic has brought global economies and stock markets across the world to their knees. Panic selling by investors has greatly impacted markets and disruption in global trade has crippled economies.
With lockdown orders and movement restriction measures keeping a third of the world’s population grounded amid economic uncertainties, the average individual faces a torrid time with finances.
As mankind’s primordial instincts have made survival, safety, and security the priorities of the times, things like saving and investing have taken the backseat naturally. But the message from a number of wealth management platforms is that “crisis can also be opportunity.”
Is it advisable to invest in these times? Eke Urum, CEO of Rise, says: “it depends.”
As he tells WeeTracker: “Money you need in the next few months or less than a year? Probably not. Money that you can afford to lock away, or you want to keep in dollars or that is part of your long term ongoing investment, then absolutely.”
But is now even a good time to invest?
“Counterintuitively, the best times to invest, if you can afford it, is during the storm,” says Urum.
“You can find high-quality assets at cheap prices. Another way of putting it is that expected future returns are highest when prices are low. Which is usually around periods like this. So if you have the cash, pace your investments for sure since we don’t know when the storm will break, but please invest.”
Those words seem to be in keeping with the ideologies of one of the richest and most famous investors in the world.
With more than seven decades of investing experience and a net worth of USD 76.1 Bn (real-time net worth as of 17 April 2020), Warren Buffet has experienced wars, recessions, economic crises, and many more market ups and downs.
During the 2008 financial crisis when investors were running amok to sell their stocks, Warren Buffet was buying.
He advocates looking at the long term instead of short term. This is what he said in 2008:
“Be fearful when others are greedy, and be greedy when others are fearful. And most certainly, fear is now widespread, gripping even seasoned investors. To be sure, investors are right to be wary of highly leveraged entities or businesses in weak competitive positions.
“But fears regarding the long-term prosperity of the nation’s many sound companies make no sense. These businesses will indeed suffer earnings hiccups, as they always have. But most major companies will be setting new profit records 5, 10, and 20 years from now.”
While Cowrywise’s Ajetomobi somewhat shares some of those sentiments, he advises that caution should not be thrown to the wind and only reliable investment instruments should be considered.
“In a time like this, more of your cash should be placed in accessible and low-risk instruments. A go-to option is the money-market. This doesn’t mean you shouldn’t push some funds to other options like dollar investments, for instance,” he says.
“Right from the onset, we have only invested savings of users in guaranteed options. Adherence to this is monitored by our trustee, Meristem Trustees. It is the singular reason why rates for our regular plans dropped in March. It is currently impossible to offer anything above those if you are investing for the short-term in instruments like treasury bills,” he adds.
Ajetomobi also mentioned that his colleague, the famous “Ope from Cowrywise” has suggested that people reduce deposits into locked plans and focus more on building accessible emergency funds using money market mutual funds.
On his part, Urum who runs Rise; a startup that facilitates investments in dollar assets, issued a reminder that stocks might be down, but real estate and fixed income are still there, and there are platforms that offer U.S. dollar protection.
As examples, he cites some of his personal favourite anecdotes in investing or “investdotes”, if you will:
“Blackstone bought 3,000 properties during the recession. They bounced back and made so much they took the real estate unit public as a stand-alone, billion-dollar company called Invitation Homes.
“On an individual level, my immediate boss invested USD 500 K in stocks and real estate in 2008 and was sitting on more than USD 2 Mn by 2014. You had properties worth USD 100 K bought for like USD 45 K. Stocks trading at like 5X earnings. We’ll see those types of valuations again soon.”
As a parting word, he says:
“Investing is for patient people and the best risk management strategy is to have a long time horizon.”
Disclaimer: None of this is financial advice.