CBN rate hike ignites sell pressure on stocks

Investors in the Nigerian stock market have started reducing their equity exposure as they gradually shift to higher-yielding risk-free assets.

Investors began eyeing low-risk assets when the Central Bank of Nigeria’s Monetary Policy Committee (MPC) on Tuesday hiked Monetary Policy Rate (MPR) to 14 percent in a move to curtail inflation.

“These hawkish decisions could heighten the pace of capital flow reversals in emerging economies, as investors rotate out of gold and equities into fixed income investments, to take advantage of the higher yield environment,” Ibukun Omoyeni and Angela Onotu, research analysts at Vetiva Capital Management, said in a note on Wednesday to investors.

The 100-basis-point rate increase is the second straight hike this year. It is also the first time the key interest rate is raised in two successive MPC meetings under Godwin Emefiele as CBN governor.

The MPC left the cash reserve ratio unchanged at 27.5 percent, liquidity ratio at 30 percent and the asymmetric corridor of +100/-700 basis points around the MPR.

“The further rise in the MPR, if it translates to an increase in market rates, will narrow the interest rate gap and make naira bonds more attractive, which may be negative for the stock market,” analysts at CSL Stockbrokers said on Wednesday.

The Nigerian Exchange Limited’s (NGX) All Share Index (ASI), which had declined by 0.02 percent on Tuesday, when the news of rate hike broke, decreased further on Wednesday by 0.23 percent, signalling increasing sell-side pressure on the nation’s bourse.

“A continuous hike in rate will likely constrain the country’s fragile growth while achieving very little in terms of combating inflation and attracting foreign inflows,” the analysts said.

Lagos-based United Capital research analysts said they expect the continued hawkish tone to cause significant disruptions across all asset classes.

They said: “We foresee a surge in the money market and bond yields as more investors demand higher returns on fixed-income instruments. For equities, we also expect an adverse reaction in the equities market, as investors sell off equity exposures, shifting to higher-yielding risk-free assets.

“However, investors would continue cherry-picking companies with solid half-year 2022 earnings performance. For the next MPC meeting in September, we expect the MPC decision will largely fall on the stance taken by more advanced central banks in their aggressive rate cycle. Domestic inflation estimates will also be a significant consideration at the September MPC meeting.”

Read also: Borrowing cost to spike as CBN hikes rate to 14%

The NGX ASI and market capitalisation, the equities market’s performance indicators, decreased from preceding trading day’s highs of 52,308.88 points and N28.208 trillion respectively to 52,186.52 points and N28.142 trillion on Wednesday. The market’s positive return year-to-date printed lower at 22.17 percent.

Ayodeji Ajilore, investment research analyst at ARM Securities said: “There is the valuation and the fixed income yield direction argument. For valuation, it derives from the impact of the increase of the lending benchmark rate, which invariably could make for downward valuation adjustment, and trigger a sell-off.

“On the fixed income part, we have noted how dearth of alternative investment options, depth, and regulatory requirements (on the part of institutional investors) impact the market. We believe an expectation of growing yield without a peak in sight could mean well for the equities market, as risk-on sentiments resurfaces, especially for fundamentally sound tickers with dividend paying potentials.”

“The other part, however, is when the hike spikes yield to peak levels, incentivising patronage in high yielding assets (held for sales/trading) with potential fair value gain. This would significantly drive risk-off sentiments in the equities space, creating significant sell-offs in the process,” he added.

Akintoye Oyelakun, senior portfolio investment analyst at Cordros Asset Management, noted that every other rate should adjust to the increase in MPR as it is a benchmark rate.

He said the yields on treasury bills, fixed deposits, Open Market Operations, and bonds would move up because investors would reprice the assets by demanding higher yields. “Consequently, they would get more from low-risk assets,” he added.

Oyelakun said the recent MPR increase “would probably be negative for the stock market as investors will likely sell off equities,” adding: “However, equities would remain bullish if we have a good half-year performance and we see some dividend declaration.”