Inflation wipes GH¢92bn off investments over a 10-yr period
A whopping GH¢92.68 billion is the value of money lost in investments in financial instruments due to the effects of inflation between 2003 and 2013, virtually the size of the country’s Gross Domestic Product (GDP), which stood at GH¢93.46 billion at the close of 2013, a new research by Cambridge Capital Advisors Limited, a SEC-licensed and regulated investment banking firm, has pointed out.
This underscores how high inflationary trends, combined with a generally unstable macroeconomic environment, depress long-term nominal earnings, as well as wipe off the value of investments.
The size of the country’s GDP, over the period covered under the study, grew at an annual rate of 32.20 per cent, having increased from GH¢387.25 million in 1993 to GH¢6.61 billion in 2003 and GH¢93.46 billion last year. Comparatively, the size of all invested funds in the country (technically called Assets Under Management or AUM), based on available data, using 1993 as the base year, grew by 2.43 million per cent. Please note that the period from 1993 to 2003 covered only data from the Ghana Stock Exchange (GSE) and may explain the growth rate, coming from such as low base but the size of all investment funds in the country grew by 2.43 million per cent over the period under review.
The research clearly indicated that over the periods under review, the most common investment vehicles available to companies and individuals in the country did not yield the expected returns due to the impact of poor returns and compounded annual inflation, which hit a compounded rate of 3,576.07 per cent at the end of 2013.
The research, carried out by the SEC-licensed asset management firm, Cambridge Capital, and covering the 20-year period from 1993 to 2013, revealed that if an investor locked in GH¢1,000 in a risk free 91-day treasury bill in the base year (1993), it would yield GH¢128,000.00 , which achieved an annual average rate of 26.55 per cent.
However, when adjusted for inflation, the real return on the investment would amount to only GH¢4,075.
Inflation and returns
The study found out that over the period, an item, costing GH¢1,000 in 1993 would cost GH¢36,760 in 2013, due to the compounded effect of inflation, "The twin effect of inflation i.e. increase in costs, and negative real returns, points clearly to the development of new investment vehicles (structured assets) for the mass of investors, to assist them hedge against inflation, according to Cambridge Capital.
The research findings further showed that between 2005 to 2013, the Annual Average Return on Bank Savings Account, compared to the benchmark 91-Day Treasury Bill, was negative 10.56 per cent. What this means is that the 91-Day Treasury Bill, on average, yielded 10.56 per cent more than interest on savings account at the bank. Further, the 6-Month Fixed Deposit at banks, compared to the same benchmark, yielded a negative 6.47 per cent while Money/Fixed Income Market Collective Funds (2004-2012) performed better at an Average Annual Yield of 18.81 per cent. However, these are nominal, and not inflation, nor risk adjusted returns. Once adjusted for inflation and risk, the returns were, in most cases, negative.
However, capital/equity market collective funds returned an average of 62.70 per cent when compared with the composite index of the GSE over the period 2004 and 2012.
The Chief Executive Officer and Chief Strategist of Cambridge Capital Advisors Ltd, Mr Evron Rothschild Hughes, who led the team of researchers and presented the findings in Accra on October 9, said over the period, total assets under management increased from GH¢9.84 billion in 2004 to GH¢235 billion in 2013, equivalent to 2.43 million per cent growth.
The performance was buoyed by the inclusion of GH¢220.54 billion worth of Treasury bill portfolio and an increase of about GH¢43.16 billion in money market holdings by investment advisors.
Assets invested on the GSE rose from GH¢9.65 million in 1993 to GH¢1.26 billion in 2003.
The assets include investments on the GSE; short-term treasury bills (91-Day to 1-Year); foreign currency accounts; bank fixed deposits, as well as bank savings.
Other assets are managed money market assets; medium-term notes (two- to three-year instruments); managed equity market assets; long-term government bonds (5-7 Year); managed bond assets and life insurance premiums.
The rest are capital/equity market collective funds; money/fixed income market collective funds, as well as alternative, balanced and other collective funds.
Funds invested on the GSE was the highest at 22.71 per cent, followed by short-term government bills at 22.20 per cent, foreign currency deposited at banks at 21.49 per cent, bank fixed deposits at 14.84 per cent, and bank savings account at 12.99 per cent.
Interestingly, the proportion of money market and fixed income assets accounted for 76.08 per cent of total assets under management. It increased further, accounting for 76.36 per cent between 2004 and 2013 alone, when capital and equity investments accounted for 23.65 per cent of all investments, with alternative investments, an emerging area of investment, accounting for 0.27 per cent.
Where to invest
Expanding further on the suggesting alternative investments, Mr Hughes indicated they are clear indications that private equity, real properties, commodities, and other structured forms of investments, including derivatives, present better alternatives, or at least as part of a portfolio, to the traditional investments, and expressed the hope that the Securities and Exchange Commission (SEC) will expedite the process of deepening the regulations covering such investments".
For instance, in spite of the 2.43 million per cent growth in the volume of assets over the period under review, the average nominal returns stood at 26.55 per cent, with real returns pegged at 7.37 per cent.
The research uses data from the Bank of Ghana, GSE, the World bank, IMF, and Ghana Statistical Services among other sources", and the complete research findings can be downloaded from on Cambridge Capital's website by following this link http://cambridgecapitalgh.com/downloads/."
An interesting turn of events happened in 2011, when the total funds under investment, which stood at GH¢220.54 billion, reduced to GH¢203.3 billion at the end of 2012, possibly for fear of election violence and the subsequent election petition trial.
Policy and regulations
Speaking at the launch of the report, the Director-General of the Securities and Exchange Commission (SEC), Mr Adu Anane-Antwi, who underscored the importance of savings for national development and prosperity, explained that the review of the regulatory framework would create avenues for more financial instruments to deepen the savings culture in the country.
The director-general explained that the review of the investment and securities regulations would bring credit rating agencies, venture capital funds, commodity exchange, private equity funds and a wide array of operators in different sectors under the supervision of SEC.
"We have to develop more financial instruments on the market to encourage choice," suggesting that the country should adopt regulations that compel companies that invested in the country to list in the bourse after operating for a number of years determined at the start of the investment.
The Director General of the National Development Planning Commission, (NDPC) and Senior Economic Advisor at The Office of the President, Dr Nii Moi Thompson, said the transformation agenda, a matrix under the country’s development agenda, would seek to develop a set of sub-sectors christened “FIRE” – finance, insurance and real estate.
Dr Nii Moi encouraged Cambridge Capital to expand its financial literacy beyond corporate clients to the youth through churches and schools to increase the savings culture in the country.
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