Stocks to moderate rally as yields rise on rate hike

The outcome of Tuesday’s Monetary Policy Committee (MPC) meeting is sending conflicting signals to the financial markets on the policy direction of the monetary policy authority. While yields on fixed-income securities are expected to rise, Nigeria’s equities may moderate the recent rally, which has impressed many investors.

Nigeria’s Central Bank on Tuesday raised its benchmark interest rate, known as the Monetary Policy Rate (MPR), by 25 basis points to 18.75 per cent. The Monetary Policy Committee (MPC) left the Cash Reserve Ratio unchanged at 32.5 per cent and the liquidity ratio at 30 per cent. The asymmetric corridor was narrowed from +100/-700 basis points to +100/-300 basis points.

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“Rather than stem inflationary pressures and encourage FX inflows, I believe the hike may lead to inadvertent volatility in the market. Yields may gradually rise; even so, such market relations may be short-lived, pending clarity in the broader monetary policy stance.

“The rally in the equity market may take some breather, as a transitory rise in yield environment and overall volatility may subdue the risk on sentiment, which has spurred the strong 28.8percent year-to-date return,” said Abiola Rasaq, former Economist and Head of Investor Relations at United Bank for Africa Plc.

He says, “The increase in MPR by 25 basis points (bps) sends a negative and conflicting signal to the market on the policy direction of the monetary policy authority. The CBN, the administrative body and secretariat of the policy committee, has recently signalled a renewed accommodative stance, which may be justified given the liberalisation of the FX market.

“Notably, there has been a reduction of CRR of merchant banks, which is commendable and aligns with the fundamentals of this wholesale banking model, compared to commercial banking. In addition, the CBN is streamlining the CRR of commercial banks to ensure the mandatory deposits are not unduly punitive. These actions release more liquidity to the system and are indeed expected to encourage banks to lend more to the real sector,” Rasaq said.

“Interestingly, the market has steadily reacted to this presumed shift in monetary policy expectations, with some 150bps decline in the Sovereign yield environment. However, this new 25bps hike in the policy rate sends a confusing signal. The argument for this hike may be justified by the rising inflation and continued depreciation of the Naira, albeit this new hike may not address these problems now.

“Hopefully, there would be a clearer picture on monetary and fiscal policy orientation once a substantive CBN Governor is appointed and we have the full complement of Executive Cabinet when Ministers are appointed,” he said.

The MPC decisions were taken when the markets closed. At the Nigerian Exchange, the bulls continued their reign on Tuesday, July 25, as buy-side activities favoured value stocks. WHEN FILING THIS REPORT, the NGX ASI was at 65,991.02 points (10.02 am), while the market cap was N35.911 trillion.
“Concerning implications, we expect banks to continue to reap benefits from the elevated interest rate environment as net interest margins improve due to higher asset yields. Conversely, we expect the sector’s loan growth to decelerate as banks tighten their risk management frameworks.

“We also expect to see a rise in credit impairments. We anticipate that fixed-income securities yield will begin reflecting the rate hike on the secondary market. That said, the direction of yields will largely be dictated by the quantum of available system liquidity,” said FBN Quest analysts in their July 26 note titled “A less aggressive rate hike by the MPC”.

Vetiva analysts had anticipated a mixed session in the secondary market for fixed income “as investors digest the latest interest decision from the MPC”. Equities expect similar tepid trading sessions today “as sectors continue to trade mixed as investors look out for Q2 results of listed counters”.