Finance – Bora Capital Advisors

The Case for ETFs

In the evolving landscape of investment, Exchange-Traded Funds (ETFs) have emerged as a powerful tool for investors seeking diversification, cost-efficiency, and flexibility. Over the past few decades, ETFs have transformed the way individuals and institutions approach portfolio management, offering an accessible and innovative means to participate in various markets. This overview delves into the fundamentals of ETFs, exploring their structure, benefits, and the reasons behind their surging popularity among investors worldwide. Whether you’re a seasoned investor or just starting out, understanding ETFs is crucial for making informed decisions and optimizing your investment strategy.

The Structure of ETFs

ETFs are investment funds that trade on stock exchanges, similar to individual stocks or shares. They hold assets such as stocks, commodities, or bonds and many others. ETFs are structured as open-ended funds, meaning they can issue and redeem shares continuously. They are typically designed to track the performance of a specific index such as the S&P 500, particular sector, commodity, or asset class, while others have specific investment strategies. They are created such that investors exchange baskets of underlying assets for ETF shares.

As ETFs trade on stock exchanges, you can buy and sell them throughout any trading day at prevailing market prices. This allows investors to obtain greater flexibility and real-time trading opportunities.

One of the main advantages of ETFs is their ability to provide instant diversification. By investing in an ETF, investors gain exposure to a broad range of assets within a single security. By spreading investments across various assets, sectors, regions, and asset classes, ETFs help mitigate risk and enhance the potential for stable returns.

ETFs offer a cost-effective way to achieve diversification. Buying individual stocks or bonds to replicate the holdings of an ETF can be expensive due to transaction costs and management fees. ETFs provide instant diversification at a lower cost due to their typically low expense ratios and trading fees. They generally have lower expense ratios compared to mutual funds. They are passively managed, meaning they track an index rather than relying on active management, which reduces management fees.

Types of ETFs

Below are a few of the most popular types or forms of ETFs:

Stock ETFs: Track an index of stocks.

Bond ETFs: Invest in government, corporate, or municipal bonds.

Commodity ETFs: Track the price of a commodity, like gold or oil.

Sector and Industry ETFs: Focus on specific sectors or industries, such as technology or healthcare.

International ETFs: Invest in stocks or bonds from specific countries or regions.

Inverse and Leveraged ETFs: Designed to deliver multiples of the performance of the index they track or to perform inversely to the index.

The surging popularity among investors worldwide

An analysis carried out by PwC, suggests that the assets under management (AUM) of global Exchange-Traded Funds (ETFs) have experienced an impressive Compound Annual Growth Rate (CAGR) of 18.9% over the past five years. From December 2022 to the end of 2023, AUM grew by over 25%, reaching a new record of nearly US$11.5 trillion. Additionally, PwC reports that the number of asset managers offering ETFs has more than doubled since 2013, rising from 233 to 582 over that period, with 60% of the top 100 asset managers now offering ETFs. This underscores the significant opportunities asset managers have identified in the ETF market over the past decade, with no signs of this trend slowing down, according to PwC’s survey results.

The ETF market continues to evolve, offering innovative products that cater to diverse investment needs. From leveraged and inverse ETFs to actively managed ETFs, the variety available allows investors to tailor their portfolios to specific strategies and market conditions.

The flexibility of being able to buy and sell ETF shares throughout the trading day at market makes them particularly attractive compared to mutual funds, which can only be traded at the end of the trading day.

Further, most ETFs disclose their holdings on a daily basis, allowing investors to see exactly what assets they are invested in. This level of transparency helps investors make informed decisions and understand the underlying risks.

Risks of Investing in Exchange-Traded Funds (ETFs)

While ETFs offer many advantages such as diversification, cost-efficiency, and liquidity, they also come with certain risks. Understanding these risks is crucial for making informed investment decisions. Here are some risks associated with investing in ETFs:

Market Risk

This refers to the potential for an entire market or market segment to decline in value. Since ETFs often track broad indices or sectors, their value can be affected by overall market movements. If the market or sector declines, the value of the ETF will also decline. Also, since ETFs trade like stocks, their prices can be volatile and influenced by market conditions.

Tracking Error

Tracking error occurs when an ETF does not perfectly replicate the performance of its underlying index. This can happen due to several factors, including management fees and trading costs. High tracking error can lead to returns that differ from those of the target index, affecting the investor’s expected performance.

Liquidity Risk

While many ETFs are highly liquid, some may have low trading volumes, making it harder to buy or sell shares without affecting the market price. This is especially those that invest in less liquid markets or specific sectors. This can make it harder to buy or sell shares without impacting the market price.

Currency Risk

For ETFs that invest in international markets, currency risk is a consideration. Changes in exchange rates can impact the value of the ETF’s underlying holdings. If the local currency of the investments weakens against the investor’s home currency, the returns can be negatively affected even if the underlying assets perform well.

Investing in ETFs

Investing in ETFs involves a few key steps to align with your financial goals.

1. First, define your investment objectives, whether they are long-term growth, income, or diversification.

2. Conduct thorough research to select ETFs that match your goals, considering factors like underlying assets, performance history, expense ratios, liquidity, fund size, and tracking error.

3. Next, open and fund a brokerage account, choosing the right type for your needs (e.g., individual, retirement). Once your account is set up, place an order to buy ETFs using market, limit, or stop orders. You could also talk to your fund manager to assist you in such transactions.

After purchasing ETFs, regularly monitor your investments to ensure they continue to align with your goals. Rebalance your portfolio periodically to maintain your desired asset allocation, and be mindful of the tax implications of your ETF transactions.

ETFs represent a versatile and accessible investment option that combines the benefits of diversification, cost-efficiency, and liquidity. They allow investors to easily gain exposure to a wide range of assets, sectors, and geographic regions through a single investment vehicle. With low expense ratios and the ability to trade throughout the day on stock exchanges, ETFs offer flexibility and transparency. Whether you’re seeking long-term growth, income generation, or risk mitigation, ETFs provide a practical solution that can be tailored to fit different investment strategies and goals. By understanding the risks, monitoring performance, and maintaining a diversified

Source: ETFdatabase

Diversifying Your Portfolio with Offshore Investments

In today’s interconnected global economy, investors have unprecedented access to a variety of international markets. Offshore investing, which involves placing capital in markets outside of one’s home country, has become an increasingly popular strategy.

Investing offshore typically refers to investing in assets or financial instruments issued and traded outside of one’s home country. For someone living in Ghana, investing offshore could involve putting money into stocks, Government bills or bonds, mutual funds, real estate, or other investment vehicles that are issued and traded in developed markets such as the US, Europe and others. This gives you access to diverse economies, geographic areas, and a wider range of companies. In doing so, the investor stands the chance to increase potential returns under different market conditions.

For investors in emerging markets or developing countries, investing in developed countries provides several key advantages. Developed markets, are typically characterized by greater economic stability, mature financial systems, well-established regulatory environments and higher liquidity. These attributes can offer emerging market investors a potentially safer haven for their capital, reducing the risk associated with the volatility often found in their home economies.

A key objective for investors in emerging countries investing offshore is to have access to international or global asset classes that are highly rated, such as sovereign debt of US and European countries, as well as to gain access to markets with greater stability, mature companies that have a tried and tested record, and economies that underpin a large proportion of the wealth of the global economy. Ultimately, such investments will seek to improve the rating of your portfolio and therefore reduce the risk of default or low performance.

On the other hand, investors from developed countries often look to emerging markets for the potential of higher returns and growth opportunities that may surpass those in their home economies. Emerging markets, including countries in Africa, Asia, and Latin America, are often characterized by rapidly growing economies, expanding middle classes, and increasing consumer demand. These factors can drive significant growth in industries such as infrastructure, consumer goods, and financial services.

For developed market investors, emerging markets offer the allure of investing in regions with higher growth rates. While developed markets may offer stability, their growth rates are typically lower, and returns on investments in these markets can be modest. In contrast, emerging markets, though more volatile, present opportunities for substantial capital appreciation. Investing in these markets allows developed market investors to capture growth potential that might not be available in more mature economies.

What are the Potential Benefits of Investing Offshore?

1. Diversification: One of the primary advantages of offshore investing is diversification. Investing offshore allows portfolio diversification across different countries and currencies. By spreading investments across different geographical regions, sectors, and currencies, investors can reduce their exposure to risks specific to any single country or market, thereby reducing the risk associated with having all your investments concentrated in one country or region. This helps protect against local economic downturns and market volatility.

2. Access to Global Opportunities: Offshore investing may offer access to a broader range of investment opportunities, including sectors and industries that may not be well-represented in one’s country. An investor from Ghana may have access to technology, pharmaceuticals, and high-end manufacturing, which can provide higher returns than locally available options. Offshore investments may offer access to investment opportunities that are not available domestically, such as other emerging markets, specific industries, or niche sectors. While Ghana is considered as an emerging market, offshore investing provides access to other high-growth emerging markets such as China, India, and Brazil. Additionally, investors can tap into stable, developed markets like the United States, Europe, and Japan, which can offer a balance of growth and stability. These markets can offer substantial returns compared to more established, slower-growing economies.

3. Currency Hedge: Holding assets denominated in different currencies can provide a hedge against currency risk and help protect the value of your investments if your home currency depreciates. For instance, investing in assets denominated in foreign currencies other than the Ghanaian cedis can help to hedge against the risk of the local currency depreciation. Holding investments in stronger currencies like the US dollar, euro, or British pound can protect and potentially enhance the value of your investment portfolios.

4. Participation in Global Economic Trends: Investing offshore allows investors to benefit from global economic trends and innovations. For example, investing in international technology companies enables investors to gain from advancements and growth in the global tech sector, which might not be as pronounced locally. By investing in global financial markets, investors can benefit from diverse financial trends and economic cycles, gaining exposure to both high-growth and stable regions. There is the opportunity to invest in commodities, natural resources, and global infrastructure projects, allowing for participation in worldwide demand and development. This diversification helps mitigate domestic economic risks and positions investors to capitalize on global opportunities. Overall, investing offshore enhances portfolio resilience and growth potential by tapping into dynamic and innovative global markets.

5. Estate Planning and Wealth Preservation: Investing offshore can be a powerful tool for estate planning and wealth preservation, offering several advantages to investors looking to secure their financial legacy for future generations. Some offshore jurisdictions often have robust legal frameworks designed to protect investors’ assets, shielding them from potential claims, creditors, or legal disputes. By placing assets in offshore trusts, foundations, or other legal structures, investors can ensure that their wealth remains intact and is managed according to their wishes. These structures can also facilitate smooth wealth transfer across generations, minimizing the impact of inheritance taxes and ensuring that heirs receive their inheritance efficiently. Additionally, offshore investments can provide confidentiality, helping to maintain the privacy of the investor’s financial affairs and protect their family’s financial security. Investors could aim to invest offshore as part of long-term diversification strategy.

While investing offshore offers numerous benefits, it also comes with specific risks that investors need to consider carefully. Understanding these risks is crucial for making informed investment decisions and mitigating potential downsides.

What could go wrong with Investing Offshore?

Currency risk is a critical factor in investing offshore. Fluctuations in exchange rates can significantly impact investment returns when converted back into the local currency. These fluctuations are influenced by economic factors and geopolitical events, making them unpredictable and potentially eroding the overall value of investments.

High inflation in the country where you are investing can erode the value of the underlying assets, leading to returns that fall short of expectations. When these diminished returns are converted back into your home country’s currency, the impact of inflation can make the investment less profitable or even result in a loss, resulting in poor investment.

Market volatility poses additional risks in investing offshore, especially in emerging markets. Economic instability, political unrest, or sudden policy changes can lead to significant market fluctuations and potential losses for investors. Offshore investments, if done in some emerging markets, may also suffer from lower liquidity compared to domestic investments, meaning they may be harder to buy or sell quickly without affecting market prices. This lack of liquidity can be particularly challenging during periods of economic uncertainty or market stress, limiting investors’ ability to react swiftly to changing conditions.

Furthermore, investing offshore carries the risk of the unknown, including factors that are difficult to anticipate or quantify. This can include unexpected changes in local business environments, cultural differences impacting investment outcomes, or unforeseen geopolitical events that affect market stability. Such unknowns can introduce additional uncertainty and complexity into investment decisions, requiring thorough due diligence and risk management strategies to mitigate potential impacts.

Offshore investing presents a compelling opportunity for investors seeking diversification, potential higher returns, and exposure to global economic trends. Despite its benefits, offshore investing comes with inherent risks. Successfully navigating these risks requires thorough research, careful planning, and the assistance of knowledgeable advisors. With prudent risk management and a strategic approach, investors can harness the benefits of offshore investing to achieve long-term financial growth and stability.

Pension Funds and the Domestic Debt Exchange

The Government of the Republic of Ghana announced on July 31, 2023 that it was inviting Pension Funds holding domestic notes and bonds of the central Government, E.S.L.A. Plc and Daakye Trust Plc to exchange approximately GH¢31 billion principal amount of Eligible Bonds for a package of new bonds.

Holders of the eligible bonds who validly tender their holdings would receive in exchange for their Eligible Bonds, the same aggregate principal amount distributed across new tranches of the Government’s outstanding Bonds that were issued in February 2023 and maturing in 2027 and 2028 as part of the Domestic Debt Exchange Program (DDEP).

The new bonds will have an average coupon of 8.4%, in addition to a 15% increase in the principal value. Further, there will be two additional cash payment instruments with a 10% coupon (“New Interest-Only Bond”).

Table 1 below indicates the details of the exchange.

At the end of the offer period, Pension funds agreed to exchange GH¢29 billion out of the existing GH¢31billion bonds for the new notes maturing in 2027 and 2028, representing about 94% exchange success rate.

The Implications for Pension Funds and Pension Pay-outs

Excessive Exposure to a Single Issuer

Prior to the DDEP, most pension funds had about 75% exposure to the Government of Ghana (GoG). However, post DDEP and conversion of ESLA and Daakye bonds to GoG bonds, most pension funds exposure to the GoG is around 80 – 90%. Thus, the need to find alternative investment instruments. The DDEP has however taken off ESLA and Daakye bonds which served as alternative instruments, thus, narrowing the broad stream of qualifying issuer choices by pension funds.

By pension funds having a significant portion of their portfolio in GoG securities, there is also the likelihood on missing out on potential higher returns from other investment opportunities with higher risk and return potential.

Higher Risk to Potential Default in 2027 and 2028

Whiles the maturity profile of the Universal Banks, per their restructured bond terms cover 2027 to 2038, pension funds, who have the capacity for long term investment have maturities spread over only two (2) years, 2027 and 2028. Should the Government default, these funds will be badly hit as they carry the highest potential default at the moment.

Figure 1 – Maturity Wall of Restructured Domestic Bonds Present Concerns for 2027 and 2028

Liquidity

The pension funds which usually hold long-term bonds have had the maturity dates of all bonds moved to 2027 and 2028 (4 to 5 years). Shortening the maturity dates means that the bonds will mature sooner than originally anticipated. This could lead to an influx of principal repayment into the pension fund’s portfolio. While this might increase the fund’s liquidity in the short term, it could also pose challenges in reinvesting those funds to maintain a steady income stream, especially if suitable investment opportunities with similar risk and yield profiles are limited.

However, in the short-term, the market uncertainty created by the domestic debt exchange has led to a loss of confidence that is affecting the tradability of Government bonds. Investors may shift their preferences towards other types of investments or assets, such as equities or alternative fixed-income securities. This shift in preference can further reduce the tradability of the bonds.

For schemes that focus on coupons, they might have their income and liquidity disrupted. This is because the payment dates have all been bulked up into two (2) specific dates in each year, i.e. February and August of each year until maturity. There is thus infrequent coupon payments, disrupting the income and planned payments on debt obligations.

Increased Income

In the short-term, interest is reduced, but the 15% increase in the principal value provides increased income upon maturity. Thus, even though in the short term the pension funds will receive less income from coupons, there is the possibility of gaining more than anticipated income in the long term if the increased face value received at maturity is reinvested at a better market rate. This is however dependent on the prevailing interest rates upon maturity which can consequently increase the overall income or returns compared to what would have been under the original bond structure.

A pension fund with a stronger financial position is better equipped to navigate market fluctuations and economic challenges. This can lead to overall portfolio growth and help the pension fund achieve its long-term investment objectives.

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The information contained in this blog is being provided for educational purposes only and does not constitute a recommendation from any Bora Capital Advisors entity to the recipient. Bora Capital Advisors is not providing any financial, economic, legal, investment, accounting, or tax advice through this blog to its recipient.

This report reflects the views and opinions of Bora Capital Advisors Ltd, and is provided for information purposes only. Although the information provided in the market review and outlook section is, to the best of our knowledge and belief correct, Bora Capital Advisors Ltd, its directors, employees and related parties accept no liability or responsibility for any loss, damage, claim or expense suffered or incurred by any party as a result of reliance on the information provided and opinions expressed in this report, except as required by law. The portfolio performance data represented in this report represents past performance and does not guarantee future performance or results.

Ghana’s Monetary Policy Rate Hike and Your Investment

The primary objective of the Bank of Ghana is to pursue sound monetary policies aimed at price stability and creating an enabling environment for sustainable economic growth. Price stability in this context is defined as a medium-term inflation target of 8±2%, for which the economy is expected to grow at its full potential without excessive inflation pressures.

To achieve the objective of price stability, Bank of Ghana had granted operational independence to employ whichever policy tools were deemed appropriate to stabilise inflation around the medium-term target. The Bank of Ghana’s framework for conducting monetary policy is Inflation Targeting (IT), in which the central bank uses the Monetary Policy Rate (MPR) as the primary policy tool to set the monetary policy stance and anchor inflation expectations in the economy.

On July 24, 2023, the Monetary Policy Committee (MPC) of the Central Bank announced a 0.5% hike in the Monetary Policy Rate (MPR) to 30.0%. This implied that Ghana’s borrowing rates have now gone up by 16.5 percentage points in less than two (2) years, hitting the highest rate in more than ten (10) years.

The drive to fight Ghana’s inflation by raising interest rates has been going on for over a year and half, resulting in diverse effects on the economy, consumers and investors

Effects on the economy

Ghana’s Real GDP growth slowed to 3.3% in 2022, down from 5.4% in 2021 due to the combined effect of macroeconomic instability, global financial tightening, and the lingering impact of the Russia-Ukraine war. The outlook is skewed to the negative due to possible shocks from a prolongment of the war and a tighter global financial market. The World Bank projects the country’s growth to slow further to 1.6 % in 2023 and remain muted in 2024, before returning toward its potential.

The higher MPR set by the MPC is consequently increasing the cost of borrowing for businesses. With higher borrowing costs, businesses might postpone or reduce their investment plans. Projects that were previously economically viable at lower interest rates might become less attractive, leading to a slowdown in capital expenditure. Startups and small businesses, which often rely on external financing, might find it particularly challenging to secure affordable loans. Thus, it may become a challenge for such businesses to invest in new projects and / or expand their operations. This can contribute to and even further slow down economic growth and hinder job creation.

According to the 2022 Report of the Centre for Affordable Housing Finance in Africa, the average loan amount offered by lenders in Ghana, ranges from GH¢80,000 (US$9,930) to GH¢1,600,000 (US$198,650) for cedi mortgages and US$15,000 (GH¢120,815) to US$35,000 (GH¢281,900) for dollar mortgages. In relation to a mean national household income of GH¢2,828 (US$350) per month and a monthly household expenditure of GH¢1,071 (US$133), the affordability of mortgage and housing in general, remains far-fetched.

Mortgage rates are closely tied to the prevailing interest rates in the economy. As central banks raise the policy rate, commercial banks adjust their lending rates, causing mortgage rates to rise as well. Higher mortgage rates mean that borrowers will have to pay more in interest over the life of their loans. This can lead to increased monthly mortgage payments, making homeownership more expensive. Thus, a potential reduction on the demand for such mortgages. On the flip side, there could be slower home sales and potentially downward pressure on housing prices. Homeowners with adjustable-rate mortgages or existing mortgages with higher rates might find it less appealing to refinance when rates are higher.

The local currency can also be sensitive to policy rate changes. A higher interest rate in a country can attract foreign investors seeking better returns on their investments. As a result, there might be increased demand for the local currency to invest in financial assets, leading to currency appreciation. All things being equal, a higher rate can encourage foreign capital inflows, as investors seek to take advantage of the higher yields available. This influx of foreign funds can drive up demand for the local currency, leading to its appreciation. The increase can makes financial assets, such as government bonds and other fixed-income instruments, more attractive to investors. This yield advantage can lead to increased demand for the local currency.

Bonds

Bond prices and policy rates have an inverse relationship. When rates rise, newly issued bonds offer higher yields, making existing bonds with lower yields less attractive. This leads to a decrease in bond prices. As bond prices decrease, the total return from holding existing bonds could be lower. This can impact fixed-income portfolios, especially for investors holding long-term bonds.

Equities

There can be short-term fluctuations in stock prices with changes in rates as investors consider the likely effects on the profits or revenues of listed companies. A rate hike can lead to higher borrowing costs for consumers, affecting their spending patterns. If consumers cut back on spending due to higher interest rates, companies might experience reduced revenues. High interest rates also result in high financing cost which together with the reduced revenue will lead to lower profits, potentially impacting stock prices.

Real Estate

Real estate developers and homebuyers may face higher borrowing costs due to increased interest rates. This can lead to decreased demand for real estate, affecting property values and potentially impacting real estate investment trusts (REITs) that rely on borrowing.

Fixed Deposits

As interest rates rise due to a rate hike, the interest rates offered on new fixed deposits tend to increase, leading to higher returns for depositors. With higher interest rates on fixed deposits, they can become more attractive compared to other lower-yielding savings vehicles. Savers seeking a secure and predictable return might be more inclined to invest in fixed deposits.

Overall, the monetary policy rate serves as a tool that allows the central bank to influence borrowing costs and, consequently, economic activity and inflation. By adjusting this rate in response to changes in economic conditions, the central bank aims to keep inflation within a target range and ensure stable prices over the medium to long term.

The effectiveness of the monetary policy rate depends on various factors, including the overall economic conditions, the level of interest rates in the economy, fiscal policies, and external economic influences. Central banks use a mix of monetary policy tools and carefully assess economic indicators to determine appropriate adjustments to the policy interest rate in pursuit of their policy objectives.

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The information contained in this blog is being provided for educational purposes only and does not constitute a recommendation from any Bora Capital Advisors entity to the recipient. Bora Capital Advisors is not providing any financial, economic, legal, investment, accounting, or tax advice through this blog to its recipient.

This report reflects the views and opinions of Bora Capital Advisors Ltd, and is provided for information purposes only. Although the information provided in the market review and outlook section is, to the best of our knowledge and belief correct, Bora Capital Advisors Ltd, its directors, employees and related parties accept no liability or responsibility for any loss, damage, claim or expense suffered or incurred by any party as a result of reliance on the information provided and opinions expressed in this report, except as required by law. The portfolio performance data represented in this report represents past performance and does not guarantee future performance or results.

When The Central Bank Posts Losses

According to The Official Monetary and Financial Institutions Forum (OMFIF), an organization that tracks central banking and economic policy, central banks globally recorded losses in a bid to manage their reserves in 2022 amid bond-heavy allocations that took a major hit as a result of aggressive monetary policy tightening around the world and other country-specific factors. According to the OMFIF report, currency interventions in 2022 by monetary authorities to prop up their financial units against a resurgent dollar also contributed to portfolio losses on central bank reserves. The U.S. bond market, the largest in the world for example, had the worst-ever year on record in 2022, undertaking multiple 75 basis-point hikes over the last year to curb stubbornly-high inflation, before decelerating its pace.

Some Central Banks that have recorded losses globally include;

The Reserve Bank of Australia (RBA) recording a 2022 book loss of 37 billion Australian dollars, which more than wiped out the central bank’s equity.
The UK Government facing £150 billion bill to cover Bank of England’s losses (According to the Financial Times of July 25, 2023).
The Swiss National Bank (SNB) in early January reported a record preliminary loss of 132 billion francs for 2022.
In September 2022, the central bank of the Netherlands notified the country’s government in a letter that it projects net interest losses amounting to a potential EUR 9 billion for the years 2023 through 2026.
Ghana’s central bank, unfortunately was not left put of the hit. In its 2022 Annual Report and Financial Statements, The Bank of Ghana (BoG) recorded a loss of GH¢60.8billion having posted a GH¢1.2 billion profit in 2021.

Is it typical for a Central Bank to record looses?

Central banks can report losses especially during seasons of economic downturns. This can be as a result of various factors.

Central banks often hold various assets on their balance sheets, such as government bonds, foreign exchange reserves, and other financial instruments. During economic downturns, the value of these assets can decrease due to market fluctuations, reduced demand, or credit risks. As a result, the central bank may experience losses on the value of its assets.

Central banks may implement certain policies in a bid to stimulate borrowing and spending. Such a policy may be to lower interest rates. When interest rates are lowered, the central bank’s income from its assets, such as government bonds, also decreases. This reduction in income can contribute to losses.

In the face of currency volatility during an economic distress, central banks that hold foreign currency reserves as part of their monetary policy strategy can make losses if the currency depreciates in value relative to its domestic currency.

When a central bank records losses, it can have various implications for banks and the broader economy. The effects depend on the specific circumstances, reasons for the losses, and the actions taken by the central bank in response.

The Case of Ghana’s Central Bank

According to BoG’s 2022 Annual Report and Financial Statements, the loss of GH¢60.8billion is attributed to a decline in the Group’s net worth position due to the impact of the Domestic Debt Exchange Programme (DDEP) and impairment of some assets, which accounted for approximately 88.5% of the loss amount.

BOG steps to recover from loss

It’s important to note that central banks usually aim to manage their operations and respond to challenges in ways that minimize negative impacts on the broader economy and individuals.

In its Annual Report, the Central Bank, outlined these measures as their approach to recovery. These include:

Retention of profits to help rebuild capital until equity firmly returns to positive region;
Refrain from monetary financing of the Government of Ghana’s budget. In this respect, action has already been taken with a Memorandum of Understanding on zero financing of the budget signed between the Bank of Ghana and the Ministry of Finance on 26 April, 2023;
Take immediate steps to optimise the BoG’s investment portfolio and operating cost mix to bolster efficiency and profits; and
Assess the potential need for recapitalisation support by the government in the medium-to-long term

Ghana’s Central Bank, currently having a negative shareholders’ equity need recapitalisation as a prudential requirement, i.e., improve their balance sheet in order to return to a positive equity position.

What to expect

The effects of central bank losses can be complex and interconnected with broader economic dynamics. The specific implications is dependent on the effectiveness of the central bank’s actions, the economic context, and to some extent, government policies.

If a central bank records losses and local banks are struggling to meet minimum capital requirements, the situation can pose significant challenges for the financial system and the broader economy. The combination of central bank losses and weak banks can create a complex and potentially destabilizing scenario.

Local Banks, who have taken losses and struggling to meet minimum capital or solvency requirements may tend to reduce their lending activities in an attempt to conserve capital. This can lead to a credit contraction, making it difficult for businesses and individuals to obtain loans for investment, consumption, and other essential activities. Reduced lending can ultimately slow down economic growth.

There is the potential for increased market volatility. Asset prices, including stocks, bonds, and other financial instruments, could experience sharp declines due to uncertainty and lack of confidence. The GSE Financial Sector Index is already reflecting this as the index keeps declining on a year-to-date basis.

It is expected that there will be a close coordination between regulatory authorities, the central bank, and the government. Effective coordination is necessary to restore confidence, stabilize the financial system, and implement appropriate policy measures.

To address these challenges, governments, central banks, and regulatory authorities would need to implement a combination of monetary, fiscal, and regulatory measures. These might include capital injections, liquidity support, recapitalization of banks, policy adjustments, and efforts to restore market confidence. The aim would be to stabilize the financial system, restore trust, and prevent further deterioration of economic conditions.

Considering the huge negative equity position, until the Central Bank of Ghana has moved into positive equity regions, one questions whether the BoG has the moral right to revoke the license of any Bank that lacks sufficient capital.

Given the current high inflation rate in the country and year end target of 38.1%, it is important that the Central Bank refrain from further deficit financing on the Government in order to strengthen its money market operations and also demonstrate that even with a negative equity position, it can sustain the economy adequately.

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The information contained in this blog is being provided for educational purposes only and does not constitute a recommendation from any Bora Capital Advisors entity to the recipient. Bora Capital Advisors is not providing any financial, economic, legal, investment, accounting, or tax advice through this blog to its recipient.

This report reflects the views and opinions of Bora Capital Advisors Ltd, and is provided for information purposes only. Although the information provided in the market review and outlook section is, to the best of our knowledge and belief correct, Bora Capital Advisors Ltd, its directors, employees and related parties accept no liability or responsibility for any loss, damage, claim or expense suffered or incurred by any party as a result of reliance on the information provided and opinions expressed in this report, except as required by law. The portfolio performance data represented in this report represents past performance and does not guarantee future performance or results.

The Real Estate Investment Trust (REITs) Space

REITs, or Real Estate Investment Trusts, are companies that own, operate, or finance income-generating real estate. They are designed to give individual investors the opportunity to invest in a diversified portfolio of real estate and make it possible for such investors to earn dividends from real estate investment assets without having to go out and buy, manage or finance property themselves. This is done by pooling capital from multiple investors to invest in such a portfolio. The portfolio may include office buildings, apartments, shopping malls, resorts, hotels, self-storage facilities, warehouses, and mortgages or loans. Most REITs focus on a particular type of property, but some hold multiple types of properties in their portfolios.

REITs may be traded on major stock exchanges, allowing investors to buy and sell shares like any other publicly traded stock.

The Ghanaian REIT Market

To qualify as a REIT, a company must comply with certain provisions or regulations.

In Ghana, REITs are required to meet certain standards set by the Securities and Exchange Commission (SEC) in the Securities Industry (REITS) Guidelines 2019, including:

the company shall be engaged in the business of investing in income generating real estate;
at least 75% of its revenue shall derive from rents, mortgage interest and investment income from indirect property ownership;
at least 75% of its total assets shall comprise of real estate;
at least 80% of its distributable profit, for each accounting period, shall be distributed to shareholders;
the company shall list on an exchange within three (3) years as a REIT;
its leverage ratio does not exceed 40% of gross asset value; and
it shall not invest more than 40% in a single property.

Main Types of REITs

Equity REITs:

These are the most common type of REITs and primarily invest in and own income-generating real estate properties such as residential buildings, commercial office buildings, retail centers, and others. Income is generated through rents from tenants, with a significant proportion distributed to shareholders. The value of equity REITs is largely driven by the performance and valuation of the underlying real estate properties.

Mortgage REITs:

Also known as mREITs, these focus on investing in real estate mortgages or mortgage-backed securities. They provide financing for real estate by originating or purchasing mortgage loans. They generate income primarily through the interest that is earned on these mortgage investments.

Developmental REITs:

These REITs may specifically target properties or projects that are in the development or construction phase, with the goal of generating returns through the completion and subsequent leasing or sale of the developed properties.

The Advantages with investing in REITs

The below are why investing in REITs could be to your advantage.

Gain Exposure to Real Estate

Investing in real estate typically requires a significant amount of capital and expertise in property management. A major reason to invest in REITs is the exposure they provide to real estate without you directly purchasing individual properties. Thus, there is the opportunity for individual investors or smaller institutions to invest in real estate without the significant financial commitment for due diligence or the particular risks that come along with investment in individual properties.

Earn High Profits

To qualify as a REIT, particularly in Ghana, companies are required to pay out at least 80% of their taxable income to shareholders as distributable profits. That makes REITs a good source of dividends. All things being equal, these profits may be relatively high as compared to other financial market instruments.

Investors can also benefit from potential capital appreciation of the underlying real estate properties held by the REIT. If the value of the properties held by the REIT increases over time, the value of the shares can also appreciate.

Portfolio Diversification

REITs offer a distinctive risk/reward profile that doesn’t always perfectly correlate with stocks or bonds. Since they are not directly tied to traditional markets, REITs can bolster your portfolio when markets take a nose-dive. This diversification can also help reduce risk because performance variations among individual properties or sectors are spread out.

The major risks in investing in REITs

The property location, quality, tenant mix, lease terms, and market conditions can impact rental income and property values. If the properties are in underperforming markets, experiences high tenant turnover, has poor facility management, it may affect the overall performance of your investment.

REITs are directly influenced by the performance of the real estate market. Changes in real estate supply and demand, economic conditions, and interest rates can impact property values, rental income, and occupancy rates. A downturn in the real estate market can negatively affect the performance of REITs.

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The information contained in this blog is being provided for educational purposes only and does not constitute a recommendation from any Bora Capital Advisors entity to the recipient. Bora Capital Advisors is not providing any financial, economic, legal, investment, accounting, or tax advice through this blog to its recipient.

This report reflects the views and opinions of Bora Capital Advisors Ltd, and is provided for information purposes only. Although the information provided in the market review and outlook section is, to the best of our knowledge and belief correct, Bora Capital Advisors Ltd, its directors, employees and related parties accept no liability or responsibility for any loss, damage, claim or expense suffered or incurred by any party as a result of reliance on the information provided and opinions expressed in this report, except as required by law. The portfolio performance data represented in this report represents past performance and does not guarantee future performance or results.

The US Debt Ceiling, The Ghana Cedi

About The US Debt Ceiling

The debt ceiling is a statutory limit on the amount of debt that the United States government can issue to fund its operations and meet its financial obligations. It sets a maximum level of outstanding debt that the government is allowed to have at any given time. The debt ceiling is set by Congress and serves as a mechanism to control government spending and borrowing.

The purpose of the debt ceiling is to ensure that the government does not excessively accumulate debt without the oversight and approval of Congress. It serves as a mechanism for Congress to exercise control over the nation’s borrowing authority and to debate and make decisions on fiscal policy.

When the US Treasury reaches the debt ceiling, it means that it has borrowed up to the maximum limit allowed by law. At that point, the Treasury cannot issue any more debt to meet its obligations, such as paying bills or servicing existing debt. If the debt ceiling is not raised or suspended by Congress, the Treasury must rely on extraordinary measures, such as reallocating funds or suspending certain government payments, to continue financing its operations.

Failure to raise the debt ceiling and take appropriate measures to avoid default could have severe consequences for the US economy and financial markets. It could lead to a loss of confidence in the US government’s ability to meet its obligations, increase borrowing costs, and disrupt the functioning of various sectors, including government services, Social Security payments, military operations, and more.

The debt ceiling has been a subject of political debate and contention in the past, with Congress often engaging in negotiations and discussions on spending priorities, fiscal policies, and deficit reduction measures when considering whether to raise or suspend the limit.

Debt ceiling suspended until 2025

As at the end of May 2023, the US did not raise the limit, but suspended it entirely until 2025.

Potential Impact of the Debt Ceiling on the Ghanaian local currency

The US debt ceiling negotiations primarily impact the US economy and financial markets. However, they can have indirect effects on other countries, including Ghana and its currency, the Ghanaian cedi. Here are a few potential ways in which US debt ceiling negotiations could affect Ghana:

Global Financial Market Volatility

The US dollar is a global reserve currency, and any significant disruptions or uncertainties in the US economy can lead to increased volatility in global financial markets. During debt ceiling negotiations, if there are concerns about the US government’s ability to meet its obligations, it could lead to market instability and risk aversion among investors. This could result in capital outflows from emerging markets like Ghana, leading to downward pressure on the Ghanaian cedi.

Investor Sentiment and Risk Perception

Investor sentiment plays a crucial role in currency valuation. If the US debt ceiling negotiations create uncertainty or dampen investor confidence in the US economy, it could have a spillover effect on other economies. In such situations, investors may prefer to move their investments to safe-haven assets, such as the US dollar, which could weaken the local currency.

Commodity Prices

Ghana is a major exporter of commodities like gold, cocoa, and oil. Changes in global market conditions, including those influenced by US debt ceiling negotiations, can affect commodity prices. If market volatility or economic uncertainty arises from the negotiations, it could impact commodity prices and subsequently affect Ghana’s export revenues and currency valuation.

Foreign Aid and Investment

The US plays a significant role in providing foreign aid and investment to various countries, including Ghana. If US debt ceiling negotiations result in reduced government spending or changes in aid policies, it could indirectly affect Ghana’s economy and its currency. Reductions in aid or investment inflows can impact Ghana’s fiscal position, balance of payments, and overall economic stability, potentially influencing the value of the Ghanaian cedi.

It’s important to note that the actual impact on the Ghanaian cedi would depend on various factors, including the nature and outcome of the US debt ceiling negotiations, global market conditions, and Ghana’s own economic fundamentals. The interconnectedness of global financial markets means that events in one country can have repercussions in others, and the US debt ceiling negotiations are one such example.

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The information contained in this blog is being provided for educational purposes only and does not constitute a recommendation from any Bora Capital Advisors entity to the recipient. Bora Capital Advisors is not providing any financial, economic, legal, investment, accounting, or tax advice through this blog to its recipient.

This report reflects the views and opinions of Bora Capital Advisors Ltd, and is provided for information purposes only. Although the information provided in the market review and outlook section is, to the best of our knowledge and belief correct, Bora Capital Advisors Ltd, its directors, employees and related parties accept no liability or responsibility for any loss, damage, claim or expense suffered or incurred by any party as a result of reliance on the information provided and opinions expressed in this report, except as required by law. The portfolio performance data represented in this report represents past performance and does not guarantee future performance or results.

The Bond Space

A Bond is a debt security where the issuer issues the bond for purchase by the bondholder (the lender / the investor). It is a fixed income security, as a bond usually gives the investor a regular and fixed interest payment referred to as coupons.

Investing in bonds can be a prudent choice for investors looking for stability, income, and diversification in their portfolios. They are mainly issued by Governments (treasury bonds) and Corporations (corporate bonds) when they want to raise money for projects or refinance existing debts.

By buying a bond, you’re giving the issuer a loan, and they agree to pay you back the face value of the bond on a specified date (maturity date), and pay you coupons, usually twice a year.

Newly issued bonds normally sell at or close to 100% of the face value (par). If it sells below that amount, it is said to sell at a discount and premium if it sells above par.

Investing in a diversified bond portfolio can help reduce risk. Spreading your investments across different types of bonds, issuers, and maturities can help mitigate the impact of a default or a decline in the value of a particular bond.

Bonds provide a steady stream of income through periodic interest payments. If you reinvest these payments, compounding can enhance your overall returns.

Bonds typically offer lower returns compared to stocks but are generally considered less risky. However, there are differences in risk levels among bonds. Typically, corporate bonds are considered more risky than their treasury equivalents. For treasury securities, the credit rating of the issuing country determines their relative risk, whiles longer dated securities from an issuer carries more risk than shorter dated ones. Corporate bonds with lower credit ratings, usually offer higher yields to compensate investors for the increased risk.

The credit quality of the issuer is an important consideration. Credit rating agencies assign ratings to bonds based on the issuer’s ability to repay its debt obligations. Higher-rated bonds (e.g., AAA or AA) have lower default risk but may offer lower yields. Lower-rated bonds (e.g., BB or B) carry higher default risk but may provide higher yields.

Some Risks associated with investing in bonds

Inflation risk – When inflation increases, bonds can have a negative real rate of return.

Interest rate risk – Interest rates and bond prices are inversely related. If interest rates rise, the price of your bond tend to fall (and vice versa). The longer the time to maturity of a bond, the greater this risk.

Liquidity risk – There is the risk of having to sell a bond at discounted prices due to the lack of a ready market or buyer.

Default risk – Bonds depend on the issuer’s ability to repay the debt, so there is always the possibility of default of payment.

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The information contained in this blog is being provided for educational purposes only and does not constitute a recommendation from any Bora Capital Advisors entity to the recipient. Bora Capital Advisors is not providing any financial, economic, legal, investment, accounting, or tax advice through this blog to its recipient.

This report reflects the views and opinions of Bora Capital Advisors Ltd, and is provided for information purposes only. Although the information provided in the market review and outlook section is, to the best of our knowledge and belief correct, Bora Capital Advisors Ltd, its directors, employees and related parties accept no liability or responsibility for any loss, damage, claim or expense suffered or incurred by any party as a result of reliance on the information provided and opinions expressed in this report, except as required by law. The portfolio performance data represented in this report represents past performance and does not guarantee future performance or results.

The Equity Space

Equities, also known as stocks or shares, represent ownership stakes in a company. Stocks are issued by companies when they decide to raise capital by selling ownership in the company to investors.

In exchange for buying these shares, investors become partial owners of the company and are entitled to a number of rights, key amongst which is a proportional share in the company’s distributed profits, known as dividends.

Equities are often seen as a long-term investment, as the stock market tends to experience volatility in the short-term but has historically shown overall growth over longer periods of time. However, like any investment, there are risks associated with investing in equities and investors should carefully consider their goals and risk tolerance before making any investment decisions.

Before you buy those shares

Assess the broader industry trends for potential growth, competition, and any regulatory changes that may impact the industry. Some industries are more sensitive to economic cycles, meaning their performance is closely tied to economic conditions. During economic downturns, these industries may experience declines in revenue and profitability. Further, industries that are heavily regulated face the risk of changes in government regulations, compliance requirements, and legal challenges. New regulations or legal issues can impact a company’s operations, profitability, and stock performance.

Review Company financials to gain insights into the company’s revenue, profitability, debt levels, etc. Look at the company’s financial trends over the past few years. Assess if the company has been able to consistently grow its revenue or if there are any significant fluctuations. Consider the factors driving the company’s growth or decline. This can help you make an informed decision about whether the company is a good investment opportunity or not.

Evaluate Company leadership to ascertain whether the management has the expertise and track record to drive growth and navigate challenges. Look for transparent and effective corporate governance practices as well as their strategic vision. Evaluate their ability to adapt to changing market conditions and look for indications that the management team has a clear plan and is capable of executing it effectively. It is crucial to determine if members of the management team have a significant ownership stake in the company. This can align their interests with shareholders and indicate a commitment to the company’s success.

Value the business by comparing the company’s current stock price to its earnings, revenue, and other key metrics to determine if it is overvalued or undervalued. This involves assessing the worth of the business based on various factors, such as its financial performance, future growth prospects, industry dynamics, and comparable company analysis. The goal is to determine whether the current market price of the company’s stock represents a good investment opportunity.

Know your risk tolerance. Stocks can be volatile. Be prepared for potential stock price fluctuations. That is, understand your personal ability and willingness to accept the potential risks and fluctuations associated with investing in stocks. It involves assessing your comfort level with uncertainty, potential losses, and market volatility.

Some Risks associated with investing in equities;

Market Volatility: Stock markets can be volatile, with prices fluctuating frequently. Market volatility can be influenced by economic conditions, geopolitical events, investor sentiment, and other factors. These fluctuations can lead to gains or losses in the value of stocks.

Company-specific risk: Investing in individual stocks exposes you to company-specific risks. Factors such as competition, management, financial health, and legal issues can all impact a company’s performance and, in turn, its stock price.

Liquidity risk: Certain equities may have lower trading volumes, making it difficult to buy or sell them at desired prices. Illiquid stocks can result in wider bid-ask spreads and may take longer to execute trades. This can pose challenges when trying to enter or exit positions. Stocks that are not actively traded may be difficult to sell quickly.

Systematic Risk: Systematic risk refers to risks that affect the entire market. Factors like economic recessions, interest rate changes, political instability, or natural disasters can impact the stock market as a whole, potentially causing prices to decline across different stocks.

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The information contained in this blog is being provided for educational purposes only and does not constitute a recommendation from any Bora Capital Advisors entity to the recipient. Bora Capital Advisors is not providing any financial, economic, legal, investment, accounting, or tax advice through this blog to its recipient.

This report reflects the views and opinions of Bora Capital Advisors Ltd, and is provided for information purposes only. Although the information provided in the market review and outlook section is, to the best of our knowledge and belief correct, Bora Capital Advisors Ltd, its directors, employees and related parties accept no liability or responsibility for any loss, damage, claim or expense suffered or incurred by any party as a result of reliance on the information provided and opinions expressed in this report, except as required by law. The portfolio performance data represented in this report represents past performance and does not guarantee future performance or results.

Portfolio Diversification: The Concept & Importance

An investment strategy is not complete without a risk management plan which is very crucial whether you are investing in a stable, declining or a recovering market environment.

A risk management plan should keep your losses at levels that are acceptable whiles ensuring that you are able to meet short term emergencies that may arise during the investment period. One effective strategy to adopt is DIVERSIFICATION.

Investment diversification is a strategy used to manage risk by spreading your investments across various asset classes and assets. Its purpose is to reduce the potential impact of poor performance in any single investment on your entire portfolio. By diversifying, you aim to minimize the risk associated with putting all your investment resources in one place. This occurs as you apportion your investments in a manner that ensures that an adverse event impacting one asset will be offset by the good performance of other assets. Different assets and asset classes will also be affected differently by general economic trends thereby minimizing overall impact.

Here are a few key points to consider when it comes to investment diversification:

Different Asset Classes

Diversification involves investing in different types of assets such as stocks, bonds, real estate, commodities, cash equivalents, etc. Each asset class carries its own risk and return characteristics. By investing across various asset classes, poor performance in one asset class may not necessarily result in the poor performance of the entire portfolio. Allocating investments to various asset types can reduce losses, i.e. if one loses value because of fluctuating prices, the others could remain unaffected or may even gain value.

Different Industries / sectors

Within each asset class, diversifying across different sectors can help mitigate risk. For instance, within the stock market, you might invest in companies from various sectors like technology, healthcare, finance, consumer goods, and energy. Thus, if you happen to buy shares, select ones in industries that are not directly related, e.g. banking, technology, and manufacturing. This way, if one sector performs poorly, the others may offset the losses.

Different Maturity Lengths

While diversifying, maturity lengths help to reduce risk. Investors must consider their own liquidity needs and expectations. Instead of investing in an instrument or instruments with similar maturity profiles, you can create a portfolio of assets with staggered maturities. For example, you might invest in bonds with one-year, three-year, five-year, and ten-year maturities. This strategy allows you to have a continuous stream of maturing bonds, providing flexibility to reinvest or access funds as needed.

Different Geographical locations

It is a good practice to find investment alternatives in other countries that have a positive economic outlook. Economic conditions and market cycles can vary across regions. By investing in different countries, you can reduce the impact of a downturn in any one country on your portfolio.

Risk Tolerance

Consider your risk tolerance and investment goals when diversifying your portfolio. Conservative investors may lean towards a higher allocation of bonds or cash equivalents, while more aggressive investors may have a higher allocation of stocks or alternative investments.

Some Risks associated with diversifying

It is however necessary to note that while diversification is generally considered a risk management strategy, it is important to understand that it does not completely eliminate risk.

Further, too many diversified assets in a portfolio can lead to higher management costs.

Diversifying into unfamiliar asset classes or investments without proper knowledge and research can increase the risk. It is important to understand the characteristics, risks, and dynamics of each investment before including them in your portfolio.

The Way Out

To mitigate these risks, it is crucial to regularly review and monitor your portfolio, stay informed about market conditions, and maintain a balanced approach to diversification. Regularly assess your portfolio and make adjustments as necessary to maintain a diversified allocation. Changes in market conditions, economic factors, or your own financial situation may necessitate adjustments to your diversification strategy.

It is also advisable to seek professional financial advice to ensure your diversification strategy aligns with your investment goals, risk tolerance, and time horizon.

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The information contained in this blog is being provided for educational purposes only and does not constitute a recommendation from any Bora Capital Advisors entity to the recipient. Bora Capital Advisors is not providing any financial, economic, legal, investment, accounting, or tax advice through this blog to its recipient.

This report reflects the views and opinions of Bora Capital Advisors Ltd, and is provided for information purposes only. Although the information provided in the market review and outlook section is, to the best of our knowledge and belief correct, Bora Capital Advisors Ltd, its directors, employees and related parties accept no liability or responsibility for any loss, damage, claim or expense suffered or incurred by any party as a result of reliance on the information provided and opinions expressed in this report, except as required by law. The portfolio performance data represented in this report represents past performance and does not guarantee future performance or results.