The stock market’s activities last Tuesday took a negative turn as a result of the third consecutive increase in the Monetary Policy Rate (MPR), which was intended to stabilize prices. This was not good news for those working on the trading floor of the Nigerian Exchange Limited (NGX).
Indeed, the Central Bank of Nigeria (CBN) has aggressively tightened monetary policy, pushing the MPR from 14% to 15.54% to combat growing inflation, and this has caused the stock market to lose almost N96 billion in just three trading sessions.
The value of listed stocks, which was N26,547 trillion on the eve of the announcement on Monday, September 26, 2022, decreased by N96 billion (in three trading sessions) to close at N26, 451 trillion on Friday. The all-share index (ASI), which gauges the performance of listed companies, also fell by 194.19 points or 0.4%, from 49,218.35 to 49,024.16.
The stocks market reversed earlier gains to finish the market with a N15 billion loss in a swift response to the announcement.
Due to the majority of the blue-chip stocks driving market capitalization, such as Nestle, Bua Cement, MTN Nigeria, and GTCO, going downhill since the announcement, the index has been negatively impacted by a significant sell-off with a large traded volume.
In fact, the low valuation of the NGX, high earnings and dividend yields on improved earnings released thus far in the year, combined with the expectation of third-quarter corporate earnings, have not been able to move the market indices as sell-offs in large company shares have dragged the key performance indices amid inflation hitting 20% and a 17-year high.
Due to the uncertain nature of the economy’s future, investors are being cautious in response to the development and delaying investing until the market’s orientation has been confirmed.
Ambrose Omordion, the chief research officer of Investdata Consulting, stated that the rate hike adjustment has caused the market to experience additional selling pressure due to “strong, hawkish monetary policy across the globe.”
He noted that because the pressure is not just coming from monetary causes but also from high prices for petroleum goods, electricity, and insecurity as well as the rising currency rate, the policy approach may not necessarily be effective in reducing inflationary pressure.
In order to address Nigeria’s growing insecurity and food shortage issue, he advised the economic managers to have some budgetary influence.
As a result of the nation’s high debt profile, this rate would not be sustainable, especially as the World Bank and IMF continue to urge central banks to reconsider their policies in order to prevent the global economy from entering a recession.
“We see that is already happening in the UK, China, Japan and others. It is time for the Nigerian central bank and its Monetary Policy Committee to have a rethink before things go out of hand,” he warned.
When investors were positioning themselves for the third quarter earnings and interim dividend declaration in 2021, market activity during that time period revealed that the stable interest rate, which was in the equities market’s favor, sparked a massive mop-up in shares, leading to a massive price increase across sectors.
For instance, as of September 29, 2021, the shares of GTCO, United Bank for Africa (UBA), and Unity Bank were worth N27.90 kobo, N7.60 kobo, and 52 kobo, respectively. As of September 29, 2022, those shares were worth N17.80 kobo, N6.95 kobo, and 43 kobo.
Similar to this, the shares of AIICO, Axamansard, Sunu, Cornerstone, and Lasaco in the insurance sector decreased from 95, N2,43, 45, 58, and N1,19 kobo to 52, N1,67, 32, 56, and 90 kobo, respectively, throughout the course of the time.
Ella Lakes and FTN Cocoa both had stock price declines from N4.25 kobo and 48 kobo to N3 60 kobo and 29 kobo under the agro-allied subsector.
Price growth over the same time in 2021 can be attributed to the environment of low interest rates and strong inflation that year, which resulted in a real return on equity of -10.91% and a real return on debt of -10.65%.
Recall that the yields on debt instruments fell to the low single digits in 2020 following the expansionary monetary policy of H2.
At the conclusion of Q3 2021, the yield on the 364-day Treasury Bill was around 5.34%, and the yield on the 10-year Bond was approximately 12.5%.
The bond market’s attractive yield and the strong business fundamentals made the secondary market section of the stock market very positive starting in Q3 2021.
Because of improved corporate performance and impressive scorecards produced by quoted companies in the first quarter of 2022, the market capitalization increased by N3.02 trillion. The positive outlook continued into the first quarter of 2022.
According to information available from the NGX during that time, market capitalization increased by N3.02 trillion to end at N25.312 trillion on March 31, 2022, up from the N22.297 trillion it was when trading began on January 4, 2021.
In the first quarter of 2022, the ASI also increased by 9.95% to close at 46,965.48 basis points. Since the majority of indices ended the quarter on an upward note, sectoral performance was likewise positive.
The NGX Oil and Gas Index saw the largest gain of 28.12%. It was closely followed by the NGX Banking Index, which had growth of 8.55%, and the NGX Premium Board Index, which saw growth of 6.34 %.
Others included the NGX Pension, NGX Industrial Goods, NGX 30, and NGX Lotus II, which increased by 6.34, 5.63, 5.39, 4.37, and 1.18 percent, respectively.
However, the (NGX) sustained losses for the third straight day to start June trading on a negative note yesterday, as market capitalization fell further by N9 billion after the first increase in interest rates in May 2022.
The All-Share Index decreased by 16.13 absolute points, or 0.03 percent, to settle at 52,974.15 points at the reopening of trading for June.
As a result, investors lost N9 billion in value, bringing the market worth down to N28.559 trillion.
GTI Securities forecast a market decline based on market performance since fixed income rates will likely continue to appeal to investors in the near future.
Additionally, according to Vetiva Dealings and Brokerage, the start of June was somewhat subdued as investors continued to trade cautiously due to the higher yields in the fixed income sector and the present adverse sentiment in the stock market. Equities fell 3.4% in June 2022 as a result of the increase in interest rates.
Although the market ended the first half of the year (H1) on a positive note, rising by N5.64 trillion or 25.3% to close at N27.935 trillion in H1 2022 from the N22.297 trillion it opened for trading activities on January 4, 2022, due to bargain hunting and investors realigning themselves in anticipation of the 2021 full year dividend declarations, the market later experienced a downturn in July 2022 with the announcement of the second interest rate hike.
The ASI, which rose by 0.9% between July 1 and July 19, 2022, then fell by 2.8% at the end of July 2022 from 51,829.67, which was the reading on July 1 of that year, to 50,370.25.
The downturn continued through August 2022 as capitalization was reduced by N227 billion due to sell-offs in the majority of highly capitalized stocks, particularly BUA Cement. In absolute terms, the index dropped by 419.93 points, or 0.83 percent, to settle at 49.
Since then, the market has continued to fall, losing 5.6% between August 1 and September 27, 2022. Analysts are predicting a bleak future due to rising national insecurity, other macroeconomic difficulties, as well as uncertainty surrounding the global economy