Operators fear hike in interest rate will depress appetite for stocks

Operators have decried the decision of the Central Bank of Nigeria (CBN) to increase the interest rate, stating that it would depress investors’ appetite for equities shortly and undermine the bullish outlook of the market.

They argued that failed monetary policy had unwittingly expanded the money supply in the battle to exit recession while structural impediments that have stifled production and trade combined with excess liquidity exacerbated inflation.

According to them, when the interest rate is low, speculators move their funds from money market instruments to the stock market for higher yield, just as they move from stocks to other asset classes, especially fixed income securities when the interest rate is high.

For instance, the Chief Executive Officer, Wyoming Capital and Partners, Tajudeen Olayinka said a hike in MPR will immediately put pressure on investors to re-price financial instruments, whether it is an equity instrument or a fixed income instrument.

“Naturally and by default, in both instances, the direction of price movement would differ. Yields on fixed income instruments would rise, subject to system liquidity (i.e. demand and supply of instruments), while equity prices go down.

“This analogy suggests that CBN would do the ideal thing, by increasing supply of government securities, to be able to mop up perceived excess liquidity in the system.

“What has often played out however, is for CBN and the federal government to dodge responsibility for picking up the associated cost of a mop-up operation, perhaps, because of rising debt service obligations that is now threatening debt sustainability, and partly because of CBN involvement in fiscal operations.”

He added: “So, what CBN does, is to directly increase tightening around the banks, in a way to force the banks to increase deposit and lending rates simultaneously, and thus increase deposit mobilisation and savings in the economy.”

Meanwhile, the Nigerian Exchange Limited (NGX), extended losses for the second consecutive session yesterday, as market capitalisation depreciated further by N66 billion.

The All Share Index (ASI) decreased by 122.36 absolute points, representing a dip of 0.23 per cent to close at 52,186.52 points. Similarly, the market capitalisation lost N66 billion to close at N28.142 trillion.

The downturn was impacted by losses recorded in medium and large capitalised stocks, amongst which are; Nigerian Breweries, Nigerian Exchange Group (NGXGroup), Nigerian Aviation Handling Company (NAHCO), Guaranty Trust Holding Company (GTCO) and Oando Plc.

Analysts expect cautious trading as players digest the rate hike outcome of the Monetary Policy Committee (MPC) meeting, as the market expects more earnings reports and interim dividends.

GTI Securities Limited said “equities market closed trading activities for yesterday were negative, as sell-off was seen across four major market sectors, led by the Consumer goods sector.

“We expect cautious trading to continue through the week, as investors react to the recent Interest rate hike by the Apex bank and rising inflation.”

Market breadth closed negative, with 22 losers versus 13 gainers. Multiverse Mining and Exploration and Computer Warehouse Group (CWG) recorded the highest price gain of 9.88 per cent each to close at N1.78 and 89 kobo respectively, per share.

Academy Press followed with a gain 9.68 per cent to close at N2.04, while R.T. Briscoe Nigeria and The Initiates Plc (TIP) appreciated by 9.09 per cent each to close at 48 kobo each, per share.

On the other hand, NAHCO led the losers’ chart by 10.00 per cent to close at N5.40, per share. FTN Cocoa processors followed with a decline of 8.57 per cent to close at 32 kobo, while Nigerian Breweries lost 6.13 per cent to close at N49.75, per share.

Consolidated Hallmark Insurance declined by 5.71 per cent to close at 66 kobo, while Oando shed 5.50 per cent to close at N5.15, per share.

However, the total volume traded rose 15.87 per cent to 238.270 million shares, worth N3.336 billion, and traded in 3,814 deals. Transactions in the shares of LivingTrust Mortgage Bank topped the activity chart with 40.909 million shares valued at N49.091 million.

Nigerian Breweries followed with 30.379 million shares worth N1.513 billion, while United Bank for Africa (UBA) traded 26.708 million shares valued at N198.455 million.

Access Holdings traded 21.903 million shares valued at N199.093 million, while FBN Holdings (FBNH) transacted 17.859 million shares worth N196.625 million.