Stock Market Down N1.3tn WoW as Investors Migrate to Fixed Income Market

Kayode Tokede

Following the increase in Monetary Policy Rate (MPR) to 26.75 per cent, by the Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN), the stock market segment of the Nigerian Exchange Limited (NGX) depreciated by N1.3 trillion Week-on-Week (WoW) as investors take comfort in Treasury Bills and other fixed income securities. 

Specifically, the overall market capitalization, which opened for trading at N56.929 trillion, dropped by N1.3 trillion or 2.33 per cent to close last week at N55.605 trillion.

Also, the NGX All-Share Index (NGX) depreciated by 2,337.91basis points or 2.33 per cent WoW to 100,539.40basis points from 98,201.49 basis points last week.

All market indices, NGX Banking, Oil & Gas and Industrial Goods were negative last week.

But experts said the hike in MPR to 26.75 per cent is targeted at further reducing liquidity from the banking system and jerk up cost of credit with adverse consequences on output.

 “Having done 750 basis points between February and May this year, I had predicted they would do a minimum of 50basis points or a max of 100basis points in July. I am glad to note that they chose the floor, which is a sign that a complete halt is most likely in their next scheduled meeting in September. But the adjustment to the asymmetric corridor around the MPR is a major source of concern for me.

“The MPC communique did not provide any explanation for increasing the SLR from +100 to +500 and the SDR from -300 to -100. By implication, with an MPR of 26.75per cent, banks will now get loans from the CBN at 31.75per cent while they will be remunerated for their excess deposits at 25.75 per cent. This will further squeeze liquidity from the banking system and jerk up cost of credit with adverse consequences on output and the equities market.

“The MPC communique should have made it clear why it was better to mask the tightening in the asymmetric corridor than reveal it in the MPR. May I observe that unlike previous MPC communiques, recent ones are silent regarding how the members voted. This information is useful at this stage even before their personal statements are published. I submit that as far as taming the current elevated inflation in Nigeria is concerned in view of its major non-monetary drivers, the fiscal side holds the ace,” financial expert and Director of the Institute of Capital Market Studies (ICMS), Nasarawa State University, Prof. Uche Uwaleke said.

Speaking, analysts at Cordros Research stated that, “In recent weeks, yields in the fixed income market have maintained an upward trend. Specifically, the average yield for longer-term securities has risen to 19.20per cent as of 23 July (June: 18.75 per cent).

“Concurrently, the average stop rate at the bond auction yesterday (22 July) increased by 52basis points to 20.96 per cent (June: 20.44 per cent).”

Analysts at Afrinvest research stated that the decision to hike in MPR contrasted its African peers, “for example, Kenya’s MPC held rate constant at 13 per cent in June while South Africa (8.25 per cent) and Egypt (27.75per cent) maintain status quo in their July meeting.”

They stated that for Nigeria, the decision to hike rate followed an uptrend in Headline inflation, for the 18th consecutive month, to 34.2 per cent

The analysts added that businesses may continue to strain under the weight of elevated borrowing costs — a necessary evil to starve decades-high inflation.