The Central Bank of Nigeria (CBN) decision to raise interest rates by 15.5% has further dampened investor appetite for equities as investors continue to shift their financial assets away from equities and toward money market instruments.
The MPC voted to raise interest rates to 15.5% to combat rising inflation.
The Central Bank raised the interest rate from 11.5% to 14% in the previous two meetings, but with inflation remaining above 20.52% in August, the CBN raised the rate to 15.5% to combat rising prices for goods and services.
For the month of September, inflation is now 20.77%.
Despite these rate hikes and their impact on capital markets, particularly equities, investment experts who have made money for wealthy clients over the years believe that now is a good time to start accumulating stocks.
Why you should consider stocks
According to market analysts, when the interest rate is low, speculators move their funds from money market instruments to the stock market for higher yield, just as they move from stocks to other asset classes, especially money market instruments when the interest rate is high.
- If microeconomics improves and inflation starts dropping it will then favour the equity market which will start seeing stabilization.
- There is certainly an impact on the equities due to higher interest rates, but investors should not make the mistake of thinking these moves means you should abandon the stock market entirely.
- Rather than avoid the market following the sell-offs, there’s still money to be made if investors are in the right sectors.
- That means looking at some of the sectors that have been the best-performing despite the struggling economy.
- They noted that since the share prices of the companies quoted in this sector are dropping, it is more attractive to invest in.
- In typical Naijaonpoint style, we spoke to some financial experts to get a view of what equities they can invest
What the financial analysts are saying
Mr. David Adonri, Executive Vice Chairman, Hicap Securities Limited said:
- “As interest rates rise, the financial assets will then migrate from equities to the debt market or fixed income securities, which means the prices of equities will fall. It is an opportunity to buy stocks.
- Areas elastic in demand like consumer goods and banking stocks are likely to be stocked to pick up during interest rate hikes.
- “Investors should take a position in Food and pharmaceutical companies such as Okomu Oil Plc, Presco Plc, BUA Foods Plc, GSK Plc, Neimeth Pharmaceuticals Plc, and May & Baker Plc.
- “ Banking sector is always the veritable area, particularly during this period of an interest rate hike and inflation. Banks such as Zenith Bank Plc, UBA Plc, GTCO Plc, Access Bank Plc Fidelity Bank Plc, and Stanbic IBTC are good investment destinations. Oil and gas stocks are also likely to benefit from inflation.
- Most of these companies with good records which have declined so low as investors migrate to fixed income offer investment opportunities to investors because they are likely to recover as the economy is being adjusted. Like the banking stocks that have fallen so low are likely to recover very quickly when the economy has adjusted”.
According to Managing Director Cowry Asset Management Limited,Mr. Johnson Chukwu
- “Dividend-paying companies offer better opportunities, especially those that pay an interim dividend.
- Financial stocks like GTCO, Zenith Bank, Access Holdings, Fidelity Bank, and consumer goods stocks like Guinness Nigeria, and Nigerian Breweries that paid interim dividends are good picks.
- The reason is that cash is king when the cash is coming regularly you can invest either in fixed-income securities or reinvest in equities”.
Kasimu Garba Kurfi, Chief Executive Officer and Managing Director, APT Securities and Funds Limited said:
- “The stocks when the interest rate is high such as this time. Invest in stocks that give double-digit dividend yields such as GTCO, Zenith, and UCAP, and stocks with double-digit earnings yields such as WAPCO, Fidelity Bank, and Transcorp. Dangote Cement, Dangote Sugar, Vitafoam, Fidson, BUA Foods, Nigeria Flour Mills, Presco, and also stocks that their prices are below 52 weeks low such as UBA, Access Holdings, GTCO, Transcorp, AIICO, and AXA-Mansard”.
Mr. Mike Eze, Managing Director of Crane Securities Limited, said: Taking an active stock-picking approach can throw up some interesting investment opportunities on the back of rising interest rates.
Take banks, as an example. Banks earn more when interest rates rise, based on the simple fact that they can charge more on the money they lend – interest income and operating profit margins benefit.
- Also, on that basis, take a look at companies with a decent sum of cash in the bank. Cash-rich companies also benefit from rising interest rates because they earn more on their cash reserves.
- So all those companies that have been cutting costs and accruing cash during and post-pandemic will now reap even greater rewards simply for having cash piles that are now paying their own way.
- The banking sector is always veritable, particularly this last quarter of the year. Banks such as Zenith Bank Plc, UBA Plc, GTCO Plc, Access Bank Plc Fidelity Bank Plc, and Stanbic IBTC are good investment destinations for this period.
- “When they were marked down for interim dividend, their prices started going down, which is to investors’ advantage. This is a good area to invest in now as against the end of the year when they will pay their dividend. Investors should gravitate towards those high-flying banks.
- Stocks will likely fall further before they start to pick up again as has been the case in recent years.
- Therefore a staggered approach to buying stocks should be explored, where you buy in tranches and take advantage of falling prices.
