Investors to exit stocks for fixed income on rate hike

Nigeria’s monetary policy committee (MPC) recent hawkish approach no doubt was informed by the need to dampen inflationary pressures to ensure price stability but the decision has its consequence on several of the nation’s assets classes which are expected to be disrupted.

Expectedly, bond yields would increase leading to lower prices, stocks valuation would decrease, leading to selloffs, while in the foreign exchange (FX) market, Naira appreciation is not expected until the oil sector recovers from recession. Also, the yield earned from investing in liquid, short-term debt securities like Treasury Bills (T-Bills) with less than one year maturity will increase.

The implication is that Nigeria’s stock market which appears to have been exempted from global market rout with a positive year-to-date (YtD) return of 23.12percent as at Wednesday will begin to see a dip as investors go for higher yields.

“We expect the hawkish tone to cause significant disruptions across all asset classes,” according to United Capital research analysts in their post-MPC note to investors. They see scope for a surge in money market and bond yields in the coming months.

In addition, they expect a negative reaction in the equities market “as investors selloff equity exposures in response to rising yields.”

“However, we expect companies with solid half-year (H1) 2022 earnings performance will remain attractive to investors particularly in July. For the next MPC meeting in July, we expect the MPC to revert to a ‘wait and see’ approach to gauge the impact of the recent hike on inflation and other key parameter objectives,” United Capital analysts added.

They also believe that despite being unsurprising, “the Monetary Policy Committee’s anti-inflationary tilt represents a sharp reversal from the prior pro-growth tone at previous meetings where the primary driver of inflation was believed to be solely structural inefficiencies and supply-side disruptions.”

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Though following a record N519billion loss on Tuesday, the Nigerian stock market took a surprising twist on Wednesday, May 25, rising by 1.24percent or recouping about N346billion. The market’s performance indicators – the Nigerian Exchange Limited (NGX) All-Share Index (ASI) and Market Capitalisation increased from 51,949.64 points and N28.006trillion respectively to 52,591.41 points and N28.352trillion.

Elizabeth Ebi, Group Managing Director, Futureview Group believes that the 13 percent nominal anchor “was a bit devastating”, adding that it will lead to massive sell-off on the Capital Market “as speculators would always look for an asset class with prospects of superior returns”.

“The impact of the new MPR would be a bit devastating on all Financial Assets. Bond yields would increase, leading to lower bond prices, stocks valuation would decrease, leading to selloffs and lower values for a limited period.

“This new rate would force investors to readjust, take profits, and enter back into the market at a later date, causing value stocks and stocks with strong fundamentals to rebound in another couple of months,” she noted.

“From a macro perspective, we expect the rate hike to result in an upward repricing of yields in the fixed income (FI) market, especially on the long end of the curve. In the equities market, higher interest rates suggest stock valuations could be discounted at higher interest rates, leading to lower target prices and profit-taking.

“In the foreign exchange (FX) market, we do not expect appreciation in the Naira until the oil sector recovers from recession. Instead, we expect increased election-related pressure on the Naira in the near term,” according to Ibukun Omoyeni and Angela Onotu, both analysts at Lagos-based Vetiva in their note to investors tagged ‘At last, the hawks carry the day’.

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“Nigeria joins other African economies like Egypt and Ghana in raising interest rates to curb inflation. On a comparative basis, however, Nigeria’s negative real rate of return is still above Egypt’s and South Africa’s levels.

If there were no capital controls, the MPR needs to rise to 15percent -15.5percent to match the current real rate of return in Egypt and South Africa, respectively,” Vetiva analysts said.

Also, Tajudeen Olayinka, Chief Executive Officer, Wyoming Capital and Partners who believes that the hawkish approach was not unusual and the impact being temporary on the Capital Market, noted that a securities market had self-correcting mechanism that would ultimately lead to an equilibrium between the money market and the capital market.

“The impacts on the capital market will be temporary. The market will correct itself after the initial sharp reaction. One of the initial fallouts is how the quoted companies shall adjust to the cost implications of the increase on MPR. But later, the money market and capital market shall come into equilibrium. There is nothing to worry about,” Olayinka added.