Fixed income investments, as the name suggests, are investments that pay a fixed rate of return at fixed intervals. Examples are fixed deposits, corporate bonds and government bonds.
In constructing a portfolio, fixed income instruments are usually seen as short-term stabilizers that protect the downside of a long-term portfolio dominated by stocks and real estate. However, given Ghana’s historical investment environment, I think fixed income instruments should form between 20-50% of even a really long-term focused portfolio.
My reasons for this are as follows:
Historically high inflation rate. From 1965 to 2017, Ghana’s inflation rate averaged more than 27%. Investments in fixed income products, which at least return more than the inflation rate by necessity, would protect one’s investment against this persistent decline in purchasing power.
Underdeveloped stock market. Even after 30 years of existence Ghana’s bourse does not have up to 45 listed equities. Apart from this lack of depth, liquidity is relatively thin and the stock market is sensitive to withdrawals by offshore investors skittish about political risk.
Government’s size in the economy. The domestic component of government’s debt alone as at November 2018 of GH¢86.5 billion is larger than the capitalization of the whole stock exchange of GH¢60 billion. Include external debt and that would be roughly 3 times the market capitalization of the stock market. In comparison, US public stocks are worth about US$30 trillion compared to the national debt of about US$21 trillion. With government demanding much more money than listed stocks in Ghana, it is rational to assume that they will have to pay high premiums to keep attracting capital.
Now it is quite possible that we could have a significant change in the investment climate in Ghana in the coming years. After all, the oldest US stock exchange was founded in 1790, a full 167 years before Ghana even existed. It takes time for markets to develop but in the meantime, we have to allocate our capital in the best way possible to reduce risk. And that certainly includes adding fixed income products to your portfolio.