Stock market sees major dip as MPC hikes benchmark interest rate

Nigeria’s equities market recorded major decline by 1.38percent or N773billion on Tuesday after the Monetary Policy Committee (MPC) at the end of its two-day bimonthly meeting raised the Monetary Policy Rate (MPR) by 400 basis points (bps) to 22.75percent.

The MPC also changed the asymmetric corridor from +100/-300 to +100/-700 around the MPR, raised the Cash Reserve Requirement (CRR) from 32.50percent to 45percent while the liquidity ratio was held constant at 30percent.

After the stock market’s negative start to this new week, its further dip on Tuesday confirms some analysts expectation that the bearish sentiment.

With the hike of MPR, analysts foresee the attractiveness of fixed income instruments dampening the inflow of funds into the equities market this week.

“The equity market would likely take a breather, as portfolio managers begin to realign asset allocation strategies towards higher yield fixed income instruments, at the expense of equities.

“Bank stocks will likely take the most hit, especially as dividend payments may not likely reflects 2023FY profitability given the rational need to maintain higher retention ratio to shore up capital positions ahead of CBN announcement of new capital requirements and the immediate capital need to absorb higher risk weighted assets arising from impact of Naira depreciation on dollar-denominated assets.

“Likewise, non-financial companies with relatively high leverage ratios would session a spike in finance cost and ultimately lower profitability, hence, the equity market is likely to see a halt in the exceptional rally seen year-to-date, as these new policy measures alter the fundamentals of both financial and non-financial stocks,” said Abiola Rasaq, former economist and head investor relations for United Bank for Africa Plc.

MTNN, FBN Holdings, Multiverse Minning and Exploration, and Wema Bank led the league of major laggards on Tuesday.

Multiverse decreased from N17 to N15.30, down by N1.70 or 10percent; FBN Holdings dropped from N34 to N30.60, losing N3.40 or 10percent, while MTN N share price was down from N247.50 to N222.90, losing N24.60 or 9.94percent.

The Central Bank of Nigeria (CBN) hike of benchmark interest rate to 22.75 percent is the first time in eight months.

At the close of trading on Tuesday, the Nigerian Exchange Limited (NGX) All-Share Index (ASI) and Market Capitalisation decreased from preceding day’s 101,995.21 points and N55.810trillion to 100,582.89 points and N55.037trillion. The market’s year-to-date (YtD) return printed lower at 34.52 percent.

“We still expect a positive return from the NGX All-Share Index this year, but we also expect investors to return to fixed-income instruments (T-bills, commercial paper, FGN bonds, corporate bonds),” said Coronation research analysts in their recent note on how to deal with high interest rates.

Investors exchange mostly the shares of Transcorp, Access Corporation, UBA, Zenith Bank and NASCON. In 8,919 deals, investors exchanged 267,641,639 shares valued at N5.895billion.

“Negative sentiment has prevailed in the local bourse for weeks, with market breadth which measures the ratio of gainers to losers staying below the 1.00x mark for the past five weeks, settling at 0.25x last week,” Meristem analysts had said on in their February 26 note to investors.

Though, they acknowledge the possibility of bargain hunting activities on stocks that experienced declines in the previous week, adding that their projection leans towards a bearish outlook for the Nigerian equities market.

“Last week, the local bourse posted the biggest weekly loss in over a year, with the benchmark index down 3.44percent, while our Model Equity Portfolio (MEP) shed 2.60percent, outperforming by 84 basis points (bps).

“Our tactical decision to significantly lower our notional weight in Dangote Cement, as well as the addition of Geregu, were primary drivers of the MEP’s outperformance. Dangote Cement, having rallied to fundamentally unjustified levels, necessitated the profit-taking exercise. For Geregu, given the increasing momentum in the ticker, we have managed to build a notional market weight, as advised last week.

“Elsewhere, our banking holdings cost the portfolio 44bps. We expect banking audited earnings by the end of the month to support sentiment. Meanwhile, we have begun increasing our notional weight in Seplat Energy and Airtel Africa. This week, we will continue to increase our weights in Seplat and Airtel as liquidity permits, while monitoring other positions actively,” said Lagos-based CardinalStone research analysts in their note to investors.