‘Untamed inflation may weigh on market securities’

The seemingly weird inflationary trend, which took off from January 2015 at 8.2 per cent and currently at 9.4 per cent is set to take a toll on market instruments, as investorswould soon begin to price-in the anti-growth factor in the transaction of securities to get optimal reurns.

The development, which would lead to pricing the rising inflation to ascertain the real returns (interest rate discounted for inflation), is riding on the back of assessed diminishing value caused by successive monthly rise in inflation, especially in the last few months.

The National Bureau of Statistics (NBS) had last week, released its September 2015 Consumer Price Index (CPI), which showed a year-on-year increase in headline inflation to 9.4 per cent, representing 31-month high.

The inflation level, which stayed flat at 9.2 per cent year-on-year between June and July this, recorded a 0.1 per cent month-on-month rise in September, making it the eighth successive increase so far in 2015, while analysts are painting a gloomy picture for the rest of the year.

Already at 9.4 per cent, headline inflation rate has moved further away from the six per cent to nine per cent target band of the Central Bank of Nigeria (CBN), inching closer to the double-digit mark.

Analysts had attributed the rising price level to weakening macroeconomic fundamentals around foreign exchange prices, which have had debilitating impact on the cost of production and prices of goods and services.

While the CBN is still committed to stabilizing aggregate price level in the economy through its monetary policy tools, our analysis of the macroeconomic ambience suggests that the apex bank may not be employing a major tool to curtail mounting pressure on prices in the near term.

The slowing Gross Domestic Product’s growth, coupled with the rising inflation, places the monetary authority in a situation of dilemma in using a major policy tool such as Monetary Policy Rate (MPR) in addressing price and output concerns,” the Head of Research at Afrinvest Securities Limited, AyodejiEboh, said in a note to The Guardian at the weekend.

An analysis of yields in the Treasury-Bills and bond market showed that between January and October 2015, average yields have declined from 14.3 per cent and 15.3 per cent to 8.3 per cent and 14.2 per cent respectively.
“Factoring the rise in inflation within the period, average real returns on investment has declined significantly between January and October 2015 from 6.1 per cent to 1.7 per cent. We expect investors to continue to price market securities at much more higher yields to compensate for the rising inflation,” the security advisory company said.

But NBS had noted that the rise in September inflation was consequent on increases in the food and non-food divisions like the alcoholic beverage, tobacco and kola; clothing and footwear; and housing, water, electricity, gas and other fuels.

Food inflation rose to 10.2 per cent from 10.1 per cent in August on the back of the Eid El Kabir celebrations which mounted pressure on food prices such as meat, fish, bread and cereals as well as fats and oil staples.

However, the core index (index of all items less farm produce), fell to 8.9 per cent from nine per cent in August, attributable to price easing in liquid fuels, house rents and garments.