July 28, 2016

Portfolio Diversification Between Developed And Less Developed Economies

This study
examines the hedging effectiveness of portfolio investment diversification
between developed and developing economies; with focus on the Nigerian stock
asset vis–vis the stock assets of the United States (US) and United Kingdom
(UK). Its main contribution is in the analysis of optimal portfolio
diversification using optimal portfolio weight (OPW) and optimal hedging ratio
(OHR). Empirical findings show that the OPW and OHR are low, which indicates impressive
potential gains from combining Nigerian stock assets in an investment portfolio
with US and UK stock assets. In addition, exchange rate volatility is found to
pose stern limitation on the potential benefits of this portfolio
diversification arrangement. It is therefore recommended that the monetary
authority in Nigeria should pursue policies towards reducing exchange rate
volatility to the barest minimum. This will possibly attract more investors
from developed economies who might be willing to combine Nigerian stock in
their investment portfolio to minimize portfolio risk.

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Nigeria Economic Update (Issue 32)

Available data from the National Bureau of Statistics indicates a decline in oil and other petroleum production between 2015 and 2016. Crude oil production fell by 16 percent, from 777.5 million barrels in 2015 to 656.8 million barrels in 2016. This is also indicative of the number of exploratory rig count that fell from 15 rigs to 8 rigs in 2016. Similarly, Gas production declined by 10 percent to 2,711 million one thousand standard cubic feet (mscf) in 2016. The significant decline in crude oil and petroleum production, brings to perspective the extent of the damage caused on production pipelines by militants in the Niger Delta region in 2016. It is therefore important to invest national resources in maintaining domestic peace and security, especially in resource-rich regions of the country.

Nigeria Economic Review

Global economic growth remained fairly stable in 2016Q3 with baseline projections for global growth at 3.1 percent and 2.4 percent by International Monetary Fund (IMF) and the World Bank respectively. Growth in developed countries was moderate but unevenly distributed: while the U.S and the UK showed improvements, growth in other economies remained tepid. Among emerging countries, India witnessed higher growth while growth in China remained constant but the Chinese Yuan continued to appreciate. Given that India is Nigerias major crude oil importer, improving economic conditions in India may translate into rising demand for Nigerias crude oil. However, the continuous appreciation of the Yuan poses significant inflationary threat in Nigeria given the high level of imports from China. Subdued global demand, weak trade, uncertainties in commodity prices and consequences of the Brexit were the key constraining factors to growth over the period. In addition, growth in Sub-Saharan African countries remained generally slow on the account of low commodity price, political turmoil, and inconsistent government policies.