Rate hike may depress investors’ appetite for equities

The near-term outlook for Nigeria’s stock market looks slightly good in favour of speculators who may be heading to the ‘attractive’ fixed income market following last Tuesday’s outcome of the Monetary Policy Committee (MPC) meeting.

The MPC which determines the policy direction for the next two months rose from its two-day meeting this week and decided to increase Monetary Policy Rate (MPR) to 14percent from 12percent; retain Cash Reserve Ratio (CRR) at 22.50 percent; while liquidity ratio was retained at 30percent.

“Following the decision of MPC to increase interest rate by 200bps (to 14.0% from 12.0%), we expect speculative play to dominate sentiment within the equities market in the subsequent trading days of the week as investors move capital to safety in the fixed income”, according to research analysts at Lagos-based United Capital plc.

Though, some value stocks are throwing up bargains that could further push the coming session into the green, analysts see the logical assumption in interest rate hike playing up in portfolio management against equities.

“With the MPC’s decision to hike the benchmark interest rate by 200bps (to 14%), we expect markedly mixed reaction in banking stocks with likely further gains for Tier-I banks who are net placers on interbank market and should benefit from the rate hike. We expect this to steer the broad market index higher in the coming session amidst continued bearish sentiment in other key sectors,” said research analysts at Lagos-based Vetiva Capital Management.

Before now, the market suffered remarkable decline as macro headlines dominated price action with inflation at record 11-year high of 16.50%. Investors had focused on macroeconomic commentary and half year earnings report, despite that some heavy names particularly in the banking sector notified the NSE of late filling of results, which in analysts view raises some concerns about their financial position.

“In portfolio management, the logical assumption is that relationship between interest rate and stock market is inverse. This implies that when interest rate is low, speculators move their funds from the money market instruments to the stock market to make a kill.

“As a corollary, the same speculators move from the stock market to other asset classes, especially, fixed income securities when the interest rate is high.  By this logic, one can assume that the current increase in the MPR would boost investment in the fixed income securities while it may depress investors’ appetite for equity investment”, said Sola Oni, Chief Executive Officer at Lagos-based SOFUNIX Investment told INVESTOR.

“But the fact remains that it is not always so as economists would say ceteris paribus which means all things being equal. There are many exogenous factors that affect investment decision at the level of investment objective. As for the economy, the stock market mirrors the economy”, he said, while noting that it may not have immediate negative impact on the stock market.

Last week, stock investors lost approximately N394billion as market sentiment remained broadly negative.The benchmark performance indicator – the All Share Index (ASI) declined by 1,146.01 points or 3.98% to 27,659.44 points from 28,805.45 points recorded at the beginning of trade. Likewise, the equities market capitalisation decreased from N9.893 trillion to N9.499trillion at the close of trading last week.

Iheanyi Nwachukwu