Stocks shed N1.83trn as higher interest rates depress valuations

Nigeria’s stock market lost about N1.83trillion in the trading week ended Friday March 1 as investors moved to seek higher yields in the fixed income market following decisions of the Monetary Policy Committee (MPC).

In the MPC meeting week, the market saw four days of negative closes as against just one day of positive close.

The Nigerian Exchange Limited (NGX) All-Share Index (ASI) and Market Capitalisation decreased week-on-week (WoW) from preceding week’s 102,088.07 points and N55.861trillion respectively to 98,737.06 points and N54.027trillion.

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“February was a red month for the NGXASI, as higher interest rates in the fixed income market, soured interest in the equity space. As a result, the ASI lost 1.16percent month-on-month (m/m). Likewise, the bearish sentiment in the market filtered into our conviction stocks, leading to a 7.1percent m/m decline,” said Lagos-based Vetiva Research analysts in their February performance review.

The market’s record dip by3.27 percent in the trading week under review spurred a decline in the positive return year-to-date (YtD) to 32.07 percent.

“We anticipate a negative effect on the equity market, with potential selloffs, as investors reallocate funds to the fixed-income market to take advantage of the elevated yields. On the other hand, we expect the higher yields to further spur foreign investors interest in the domestic fixed income market,” Meristem research analysts said in their post-MPC note.

The Monetary Policy Committee (MPC) last Tuesday 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.

“We see scope for higher-for-longer interest rates in the domestic market, which could drive fixed-income fund managers into a short-duration strategy. In the equities space, higher interest rates could depress valuations. “However, savvy investors could prioritise allocations to stocks with strong positive earnings correlation to interest rates (such as banks), high dividend income, and low leverage,” said CardinalStone Research analysts in their key highlights from CBN’s recent engagement with foreign portfolio investors.

According to United Capital research analysts, “We expect yields in the fixed-income market to trend higher given the CBN’s disposition to deploy orthodox monetary policy tools (example OMO auction) to mop-up excess liquidity”.

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“For the equities market, we expect the bearish sentiments we have observed in recent weeks to persist. This is hinged on the resultant effects of the increase in interest rate on fixed income yields,” United Capital research analysts said in their post-MPC note.