Elevated fixed income yields expected to dampen stock market

Nigeria’s stock market, which posted a return of over 39 percent in the first quarter, is on course to see a decline in its fortunes in the second quarter.

Analysts anticipate a slowdown driven by three factors, rising fixed income yields due to interest rate hikes, a decline in dividend payouts compared to Q1, and the potential dilution of banking stocks due to the recently announced recapitalisation exercise.

Gbolahan Ologunro, portfolio manager of FBNQuest, said the bullish momentum that dominated the local bourse in the first quarter is expected to slow down substantially in the second quarter.

“This will be driven by the trioka impact of elevated fixed-income yields, fading impact of corporate actions, and the attendant impact of the ongoing recapitalisation exercise in the banking sector,” he said.

At the end of the first quarter, the Nigerian equities market delivered a return of 39.47 percent despite a bumper rate hike by the Central Bank of Nigeria.

However, at the end of the first trading week in the second quarter, the market saw bearish sentiments, which continued on Monday with the market decreasing by 0.38 percent or N222 billion. This pushed the year-to-date return lower to 37.81 percent.

The Monetary Policy Committee last month raised the monetary policy rate, also known as the benchmark interest rate, by 200 basis points to 24.75 percent. This followed a 400-basis-point hike in February.

The Treasury bill environment has witnessed elevated yields with average stop rates of 20 percent at the last five auctions, with the current effective yield on a 1-year instrument coasting around 26.8 percent. Issuances have also been concentrated at the short end (Treasury bills), which has housed 69.0 percent of total government domestic capital market borrowings in 2024.

Ologunro said the elevated fixed-income yields will likely engender investors to switch funds from the equities market to take advantage of higher returns on government instruments, given rising inflationary pressures amid the absence of corporate actions to catalyse buying sentiments.

He said that in the second quarter, companies will be declaring fewer dividends compared to the first quarter.

“In addition, the impending dilutive impact of the recapitalisation exercise in the banking sector will make investors exhibit cold feet towards banking stocks, given that the large equity capital raise required by banks also has negative connotations for dividend declarations in the near to medium term,” he said.

Last month, the CBN announced a 10-fold jump in minimum capital requirements for banks, nearly two decades after the last exercise.

The minimum capital requirement was jacked up to N500 billion for those with international authorisation, N200 billion for commercial banks with national authorisation, and N50 billion for those with regional authorisation.

A Lagos-based stock market analyst expects investors to flock to the fixed income market.

“I think the market will remain bearish, given the attractive yields in the fixed income market.”

He said recapitalisation will not affect the bank stocks “because it will happen in two years and the tier one bank can easily raise it through right issue or mergers and acquisitions. Also, tier one bank stocks are still very solid.”

He said that dividend payout is more likely to have an effect on the performance of the equities market. “A lot of investors positioned for dividend payouts in Q1 and since there won’t be much of it in Q2, the market might be bearish. That said, positive Q1 financial results could spur rally around a few stocks and lead investors back to the equities market.”

Olaolu Boboye, lead economist at CardinalStone, said Q2 will be a bit challenging because banks “are a very exciting place investors look at”. “However, the regulatory directive on banks has been very strict recently and might affect investors’ sentiment towards it. Market sentiment towards banks will be poor,” he said.

Boboye noted that most banks have released their full-year reports

“The market was expecting higher dividends than was declared by the banks, because the prices of bank stocks were higher but dividend yields were lower. So I’m skeptical that there will be mixed feelings towards them but maybe when their Q1 number comes out, it may spur a bit of excitement,” he said.

He said the consumer goods sector has also struggled for a while from foreign exchange instability and high interest rate environment. “But we’ve seen them restructuring like Cadbury.”

“We’ve seen a lot of them doing debt restructuring in the FMCG; so looking at these companies, excluding their FX losses can give an insight of what the future for them might look like, which might spur some excitement in that space,” Boboye said.