Nigeria’s equities market started taking a breather in early trading on Wednesday as portfolio managers realign asset allocation strategies towards higher yield fixed income instruments, at the expense of equities.
As at 11.12 a.m on Wednesday, the market was down by 0.56 percent as higher interest rate stokes bearish sentiment in the market.
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The Monetary Policy Committee (MPC) on 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.
“With the 400 basis points (bps) hike in MPR to 22.75 percent in the just concluded MPC meeting, we expect to see market react negatively, as yields in the fixed income space remain attractive,” said Vetiva Research analysts.
In early trading on Wednesday, the Nigerian Exchange Limited (NGX) All-Share Index (ASI) decreased from preceding day’s 100,582.89 points to 100,017.38 points.
In their post-MPC commentary, CardinalStone Research analysts said” Since the start of the year, bearish sentiments have continued to rattle the fixed-income market as unprecedented issuances at NTB and Bond auctions fuel higher yields”.
In their view, the strong hawkish actions of the CBN are likely to fuel higher yields in the fixed-income market in the near term.
“For the equities market, the higher interest rate is less compelling for valuation and could further stoke bearish sentiment in the market.
“Nevertheless, sell-offs may present decent entry opportunities in fundamentally sound stocks, such as those with positive interest sensitivities to their margins, robust cash and low leverage”.
The analysts believe that savvy investors may also look for tactical opportunities to earn dividend income as full-year numbers begin trickle in March/April and onwards.
Read also: Stock market sees major dip as MPC hikes benchmark interest rate
“The recent moves are also positive for the FX market, with associated inflows likely to support CBN’s recommencement of dollar sales to the BDCs. We, therefore, see latitude for improvement in FX liquidity and potential naira gains in the near to medium term,” CardinalStone Research analysts noted further.
“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,” Abiola Rasaq, former economist and head investor relations for United Bank for Africa Plc said on Tuesday.
