Market participants believe that the Central Bank of Nigeria’s (CBN) latest hawkish stance to raise interest rates by 17.5% will dampen investor demand for equities and encourage investors to shift to the fixed-income market.
This is despite the fact that the equity market has been on a bullish streak since the beginning of the year, with the year-to-date (YTD) return rising to 2.74% at the close of trading the day before.
The Central Bank of Nigeria’s monetary policy committee voted in January 2023 to raise its benchmark interest rate to 17.5% from 16.5%.
This is the first interest rate increase in 2023, indicating that the central bank is maintaining the hawkish rate policy that began in 2022. Remember that the CBN raised interest rates by a total of 500 basis points last year in an attempt to contain the country’s rising inflation rate.
Despite the fact that headline inflation fell to 21.34% in December 2022 from 21.47% the previous month, the decision to tighten monetary policy was made.
According to the CBN governor, a marginal decline in December inflation numbers is insufficient to begin to celebrate, which influenced the decision to raise rather than hold or loosen.
What it means for the stock market: The operators who spoke with Naijaonpoint expressed surprise at the latest development, given that inflation is already on the decline.
They added that, as has been seen in the past, investors will shift their financial assets away from equities and toward money market instruments, causing the current bullish trend seen since the beginning of the year to revert to bearish activities.
Market loss: The market lost ground yesterday as a result of the interest rate hike, as bearish sentiment drove the local bourse.
The NGX All-Share Index finished 0.09% lower at 52,612.55 points. Dangote Cement gained 0.72%, Access Holdings gained 1.12%, and UBA gained 2.47%, but these gains were offset by losses at Zenith Bank (-0.41%), GTCO (-0.41%), and NB (-9.90%).
As a result, the year-to-date (YTD) return fell to 2.66%, while market capitalization fell N24.59 billion to N28.66 trillion.
What operators are saying
Mr. Olatunde Amolegbe, former President and Chairman of the Governing Council of the Chartered Institute of Stockbrokers (CIS) and Managing Director of Arthur Steven Asset Management Limited, responded to the development in a chat with Naijaonpoint, saying the CBN’s latest hawkish stance was unexpected.
We had expected a raise of about 50% and not up to 100%. We are in the middle of campaign season and a lot of spending is going on. It is very possible that they are looking at inflation rising again. They might be trying to hedge against inflation rising again due to political spending and the eminent removal of fuel subsidies. Political spending and petrol subsidy removal are likely going to fuel and spark inflation again.
This is a very aggressive move that is expected to increase the bond yield in the short run and also lead to a drop in stock prices which has started recovering, he said.
Mr. David Adonri, Executive Vice Chairman of Hicap Securities Limited, also told Naijaonpoint that when interest rates rise, investors tend to shift to fixed-income securities.
He noted that the recent hike will have a negative impact on the market, particularly on the equity side, which has only recently begun to recover.
He stated that it was unexpected to see another increase in the benchmark interest rate to 17.5% from 16.5% when inflation was declining.
It is expected that with the turnaround, the CBN is supposed to maintain the old rate. I think why they decided to increase the MPR rate is that they believe the decline in inflation last month was not sustainable and there is a possibility of rising again.
Every time there is an increase in interest rate, the yield on bonds and other fixed income securities will rise, financial assets will migrate to fixed income securities which will reduce the demand for equities and further have a run on the shares, he said.
Adonri noted that the compensating factor is that the market is in earning season which means that those companies that pay a good dividend will enjoy increased demand for their shares and may defy expectations of a major drop in prices.
What the data is saying
Whilst the outlook may seem gloomy for stocks as indicated by experts, the data suggest that is not the case in Nigeria.
- The last time interest rates were at unprecedented levels was between June 2016 and February 2019 at 14% flat throughout the period.
- However, stocks posted a positive return of 42.30% in 2017 and will go on to post losses of -17.81% and -14.60% in 2018 and 2019 respectively.
- However, in the dovish years of 2020 and 2021 when MPR averaged 12% (between 13.5% and 111.5%) the all-share index ended both years with a return of 50.03% and 6.07% respectively.
- This suggests asides from interest rates, several other factors determine the direction of interest rates.
