Equity investors will increase their investments in high-yielding risk-free assets

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Following the increase in the monetary policy rate (MPR) to 14.0%, financial analysts predicted an adverse reaction in the equity market, with investors selling their equity exposures and turning to risk-free assets at higher yield.

The Monetary Policy Committee (MPC) concluded its 286th meeting by deciding to further increase the monetary policy rate (MPR) by 100 basis points to 14.0% while maintaining the cash reserve ratio ( CRR) at 27.5%, the asymmetric corridor at +100/-700 basis points around the MPR, and the liquidity ratio was maintained at 30.0%. The most recent rise is in line with hawkish global central bank policy aimed at fighting inflation and increasing the appeal of local securities.

Reacting to this, the Chairman of the Association of the Capital Market Academics in Nigeria (ACMAN), Prof. Uche Uwaleke, said, “The rise in MPR in quick succession from 11.5% to 13% in May and now in 14% could signal panic from the Central Bank of Nigeria (CBN) and increase uncertainty.

He added that this policy stance would not necessarily reduce inflationary pressure as the pressure does not come from monetary factors but from high costs of petroleum products, electricity and insecurity.

“Ditto for the rise in the exchange rate. So expect to see in the coming months a higher cost of borrowing, a widening public deficit, slowing economic growth, rising unemployment and a bearish stock market,” he added.

Wyoming Capital & Partners CEO Mr. Tajudeen Olayinka noted that “naturally and by default, a rise in the MPR will immediately put pressure on investors to reprice financial instruments, whether equity instruments or fixed income instruments. In both cases, the direction of price movement would be different. Returns on fixed income instruments would increase, subject to the liquidity of the system (demand and supply of instruments) , while stock prices would fall.

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

For the equity market, he said, the revaluation of equities will hold very temporarily, as prices will subsequently recover when yields stagnate in the fixed income market, saying that “it also depends on the capacities of listed companies to adjust to cost variability and cost pressures in the short term. This is the current behavior of Nigerian financial markets. It does not happen that way in more developed markets of Europe and America, as they apply more synchronized monetary and fiscal policies.

Mr. Wole Adeyeye, an analyst at PAC Holdings, said: “Investors may turn to risk-free stocks in the fixed income market as we expect yields to rise. Investors can probably sell some of their equity investments to buy treasury bills and bonds. Therefore, the bears could dominate the equity market in the third quarter of 2022. Nevertheless, this creates opportunities for investors who want to take advantage of cheap stocks in the market.

Analysts at United Capital Plc added that, “Looking ahead, we expect the continued hawkish tone to cause significant disruption across all asset classes. We expect money market and bond yields to rise as that more and more investors are demanding higher returns on fixed income instruments.

For equities, they expected an adverse reaction in the equity market as investors sell their equity exposures, moving into higher-yielding risk-free assets, saying “however, investors would continue to select companies with strong first-half 2022 earnings performance.

“For the next MPC meeting in September, we expect the MPC’s decision to be largely based on the stance taken by central banks furthest along in their aggressive rate cycle. Domestic inflation estimates will be also an important consideration at the September MPC meeting.

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