Nigeria’s Stock Market Sheds N772bn in July as Investors Switch to Fixed Income Securities

The stock market arm of the Nigerian Exchange Limited (NGX) in July 2022 fell by N772 billion to N27.163 trillion as investors moved their assets to the fixed income markets due to the recent hike in the benchmark monetary policy rate (MPR).

Data compiled by THISDAY showed that the stock market in July opened trading at N27.935 trillion.
In July, the market witnessed weeks of sentiment trading by investors amid impressive corporate earnings for half the year ended June 30, 2022 by some fundamental companies.

According to analysts, the 14 per cent MPR hike by the Central Bank of Nigeria (CBN) forced investors to shift to the fixed income market where return on investment is more attractive.
The recent MPR hike was in line with central banks’ global hawkish policy stance to combat inflation and increase the attractiveness of local securities.

THISDAY findings showed that most NGX indices recorded decline in July 2022 to underline the stock market’s bearish outcome.

For instance, the NGX Consumer Goods Index with 8.13 per cent drop to 573.27 basis points recorded the highest decline in July, followed by Insurance Index that dropped by 6.33 per cent to close July at 167.04 per cent.

Also, the NGX banking index depreciated by 4.92 per cent to close 378.21 basis points, to join the top three worst indices performance in the month under review.

However, most capitalised stocks: MTN Nigeria Plc, Dangote Cement Plc, Guaranty Trust Holding Company Plc, among others contributed to market negative performance in July.

Specifically, the stock price of MTN Nigeria depreciated by N608.6billion in market capitalisation when it stock price depreciated by N26 to close at N200.10, from the N230.00 it opened for trading, while Dangote Cement was down by N170.41billion in market capitalisation.
The cement giant saw its stock price dropping by N10.00 or 3.6 per cent to close trading in July at N265.00 from N275.00 it opened for trading.

In addition, Zenith Bank Plc recorded N31.4billion decline in market capitalisation when its stock price depreciated by N1.00 or 4.61 per cent to close trading in July at N20.70 per share.

Commenting on the stock market performance in July, Professor of capital market at the Nasarawa State University Keffi, Prof. Uche Uwaleke explained that: “The hike in the MPR in quick succession from 11.5 per cent to 13 per cent in May and now to 14 per cent could signal panic on the part of the CBN and heighten uncertainty.

“This policy stance may not necessarily curb inflationary pressure given that the pressure is not coming from monetary factors but from high costs of petroleum products, electricity and insecurity. Ditto for the rising Exchange rate.

“So, expect to see in the coming months higher cost of borrowing, widening government deficit, slower economic growth, rising unemployment and bearish stock market.”

On his part, the CEO, Wyoming Capital & Partners, Mr. Tajudeen Olayinka noted that: “Naturally and by default, a hike in MPR will immediately put pressure on investors to reprice financial instruments, whether it is equity instrument or fixed income instrument.

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

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

“For equity market, he said the repricing of shares will hold very temporarily, as prices subsequently recover when yields stagnate in the fixed income market, saying “this is also subject to capacities of listed companies to adjust to the variability of costs and cost pressures in the short run. This is the current behaviour in the Nigerian financial markets. It does not happen this way in more developed markets of Europe and America, because they operate a more synchronized monetary and fiscal policies.”

The vice president, Highcap Securities, Mr. David Adonri said, “Whenever CBN hikes interest rate to tighten monetary policy, the primary objective is to use it as a short-term tool to bring down inflation.
“However, it can also affect trade-offs in the capital market by shifting the balance between equities and debt. In this case, it causes financial assets to migrate more to debt due to increase in yield precipitated by the interest rate hike. Consequently, the price is likely to fall temporarily in equities until the policy runs its course.

“Monetary policy is a short-term tool to battle a structural economic instability in order to give room for appropriate fiscal policies implementation to address the cause of the imbalance.
“Therefore, the tightened monetary policy and attendant weakened demand make equities a buyer’s market now.”

On his part, an analyst at PAC Holdings, Mr. Wole Adeyeye said: “Investors may be looking at the risk-free securities in the fixed-income market as we expect yields to increase. Investors may likely sell part of their equity investments to buy treasury bills and bonds.
“Consequently, bears may dominate the equities market in the third quarter of 2022. Nevertheless, this creates opportunity for investors that want to take advantage of cheap stocks in the market.”

Also, analysts at United Capital Plc stated that, “Looking ahead, we expect the continued hawkish tone to cause significant disruptions across all asset classes. We foresee a surge in the money market and bond yields as more investors demand higher returns on fixed-income instruments.”
For equities, they anticipated an adverse reaction in the equities market, as investors sell off equity exposures, shifting to higher-yielding risk-free assets, saying “however, investors would continue cherry-picking companies with solid H1, 2022 earnings performance.

“For the next MPC meeting in September, we expect the MPC decision will largely fall on the stance taken by more advanced central banks in their aggressive rate cycle. Domestic inflation estimates will also be a significant consideration at the September MPC meeting,” analysts at United Capital added.

Kayode Tokede

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