The Central Bank of Nigeria (CBN) raised the benchmark interest rate by 150 basis points (bps) to 15.5% on Tuesday, September 27, 2022, marking the third straight rate increase this year.
On July 19, 2022, the Apex bank raised the benchmark interest rate to 14% from 13%, a 100 basis point increase, following a 150 basis point increase on May 24, 2022, from 11.5% to 13%. This brings the total increase this year to 400bps. The increase in interest rates has pushed borrowing costs to their highest level since 2006. The main reason the CBN gives for the interest rate hike is to contain spiralling inflation in the face of soaring food prices, higher energy costs due to COVID-19 fallout, Russian-Ukraine-induced supply chain disruptions, and the country’s continued insecurity. As a result, Nigeria’s inflation has been limited to supply-side inflation and galloping dimensional inflation. The country’s annual inflation rate increased for the seventh consecutive month in August 2022, reaching a 17-year high of 20.5%. It increased by 3.71% from 2020 to 16.95% in 2021, and by 1.85% to 13.25% in 2020 from 11.40% in 2019. Changes in interest rates have an impact on both the economy and the stock market. Generally, it makes borrowing more or less expensive for individuals and businesses. The economy’s impact takes longer to reflect, but the stock market’s reaction is frequently more immediate. Except for the financial sector, an increase in interest rates hurts corporate earnings. However, in the long run, it affects everyone because an increase in interest rates raises discount rates, which may result in lower future discounted valuations and reduces the company’s overall value.
How the interest rate hike has affected the stock market
The bourse closed bullish in Q1 ’22, before the first interest rate hike in May 2022 and amid Russia’s invasion of Ukraine.
Every month, the Bourse saw positive price movements leading to a bull-run throughout January 2022, during which the All-Share Index closed with an 8.3 percent gain in January 2022, extending the Ytd (January – February 2022) gains to 10.1% and 0.61% in February 2022, respectively.
Overall, the Nigerian Exchange Limited (NGX) market capitalisation increased by N3.02 trillion in the first quarter of 2022, ending March 31, 2022, at N25.312 trillion, up from N22.297 trillion when it opened for trading on January 4, 2022.
The NGX All-Share Index (ASI), which tracks the general market movement of all Exchange-listed companies, increased by +8.96 basis points to close at 46,904.48 basis points on March 31, 2022, up from 43.046.78 basis points on January 4, 2022.
It represents a 20.13% year-on-year growth and a bullish run in Q1 ’22 when compared to the same period in 2021. On March 30, 2021, the NGXASI closed at 39,043.15 basis points, down from 41,147.39 basis points at the start of the year.
In H1 2022, the stock market continued its overall bullish run with a comparatively better performance.
Market capitalization increased by N5.64 trillion or 25.3% to N27.935 trillion in H1 2022, up from N22.297 trillion when trading began on January 4, 2022.
As a result, the ASI rose by 8,770.81 basis points or +20.36% in 6-month YtD gains to close at 51,817.59 basis points on June 30, 2022, up from 43,046.78 on January 4, 2022, while it fell by -7.87% or -3,240.11 basis points in the same period in 2021.
Breaking it down further, the market remained bullish in Q2 (April – June 2022), with the NGX ASI rising 10.62% to close at 51,817.59 bps on June 30, 2022, respectively up from 46,842.86bps on April 1, 2022.
However, following the first interest rate hike on May 24, 2022, the market experienced a bearish run in June 2022, with the NGXASI falling by 0.3% to 51,817.59bps from 51,914.54bps on June 1, 2022.
The overall bullish run in H1 2022 was due to improved corporate earnings (2021FY, H1 ’22), dividend payout to shareholders in H1 2022, low yield in the fixed income market, and growth from cyclical sectors due to a rise in global oil prices, which was able to offset the decline in June 2022.
For example, as global oil prices rose due to supply chain disruptions caused by the Russia-Ukraine war, the NGX Oil and Gas Index outperformed other indices, rising 58.06% to 545.34 basis points in H1 2022 from 345.01 basis points when trading began. The market fell in June 2022 due to increased uncertainty amid significant policy unwinding. According to the results, the impact of the interest rate hike had yet to fully impact the market as of the end of H1 2022. Fixed income investments, which are expected to benefit from an increase in interest rates, have declined. In other markets, investors reduced their exposure to risk assets by shifting into fixed income assets in response to rising interest rates in response to spiraling inflation, but this was not the case in Nigeria, where the fixed income market return was found to be +8%, lower than the 10.1% return in H1 2021.
The market after the second and third hikes on July 19 and September 27, 2022, respectively
The Bears arrive in July 2022, the month of the second interest rate hike. The NGXASI rose by +0.93% between July 1 and July 19, 2022, but fell by 2.82% by the end of July 2022, from 51,829.67bps on July 1, 2022, to 50,370.25.
The market remained bearish until the third interest rate hike on September 27, 2022, when it fell another 5.6% between August 1 and September 27, 2022. This is expected to continue in the fourth quarter of 2022, owing to expectations of higher fixed-income yields, upcoming elections, and economic uncertainties.
The trend backs up the preceding assertion. Data gathered shows a negative relationship between the monetary rate and the All-Share Index over the years and a positive relationship between the MPR and fixed income yield. A rise in interest rates resulted in poor equity market performance but an increase in yield, whereas a fall in interest rates resulted in a good performance but a decline in yield. A look back at the reaction of the NGX ASI and yield on MPR, for example, revealed that in November 2014, when the CBN voted for a 100 basis point increase in MPR from 12% to 13%, the Treasury bill rose by 98 basis points. In contrast, yields fell by 103 basis points when 200 basis points reduced the MPR in November 2015.
In line with established trends, the equities market has begun to experience outflows of funds as the hike in the MPR begins to take a gradual toll on the market, as it has dipped by 0.095% since the CBN announced the third hike in interest rates on September 27, 2022. By the close of business on September 29, 2022, the ASI and market capitalization had dropped by 0.42% to close at 48,964.83 points.
The fixed income market is already expanding. The bond market average yield increased by 2 basis points to 13.43% as of September 29, 2022.
Our expectation is that as interest rates rise, the equity market will remain bearish, while yields will rise until the interest rate hike has taken its full toll on the equity and debt markets. Of course, as yields rise, the price of fixed-income securities falls. As a result, investing in fundamentally strong stocks, taking early profits in the stock market, particularly on overvalued stocks, and early shorting of bonds trading at a premium for reinvestment at a higher rate are critical and necessary.
