The performance of the Nigerian stock market continued to largely reflect investor apathy towards equities. A major contributor to the apathy toward equities is largely the effect of Nigeria’s monetary tightening by the central bank, which has led to high returns on fixed income securities.
Following the market hammering in October, the year-to-date yield of the Nigerian Stock Exchange (ytd) plunged to a low of +3.64% (as of Monday 7 November) after a peak of nearly +27% in May.
The market has fallen victim to profit taking and selling by investors rebalancing their portfolios in favor of higher yields in the fixed income market.
In his presentation at the Lagos Business School (LBS) November Breakfast, Bismarck J. Rewane, MD/CEO of Financial Derivatives Company Limited, urged investors to diversify their portfolio between stocks, bonds, real estate, gold and funds exchange traded (ETF) and fixed index annuities.
According to him, investors who wish to opt for collateral should consider a cash collateral and a term deposit; while those who want to hedge should short underperforming stocks.
Among other factors, he identified that the stock market is booming in inflation (inflation will remain high in the fourth quarter of 2022 and 2023. Financial Derivatives Company forecasts 21.32% in October); heightened uncertainties (poor communication on debt restructuring, naira redesign, and exchange and foreign exchange policies); and price correction (Is Airtel too expensive?).
He noted that bond yields rose in the same direction as interest rates, further noting that stock market performance is inversely related to interest rate rises.
“There is an inverse relationship between bonds, stocks and interest rates. Rising inflation technically raises bond yields and lowers bond prices. When the cost of borrowing increases, bond prices generally fall. High interest rates are good for bondholders, but discouraging for bond issuers. Equity investors will sell stocks for higher bond yields.
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“Most stocks performed underwhelmingly in October 2022.
“There was aggressive selling of liquid stocks for higher yielding stocks. Airtel, the most capitalized stock, recorded the highest loss. All sectors are on a losing streak, at the exception of Oil & Gas Bargain hunting and cherry picking are having a positive effect on Oil & Gas stocks Banking sector loses more than 6% YTD (YtD), so that 9 banks are fighting Moody’s downgrade,” noted the CEO of Financial Derivatives.
“Rising deficit financing makes sovereign debt more attractive than equities. Nigeria is now downgraded one notch by Moody’s due to: rising debt, likelihood of sovereign default. The country’s total debt stock is 42 trillion naira ($103.3 billion), increased by 370% over the past 10 years, accounting for 23.4% of GDP. In addition, external debt increased by 1,483% to $40 billion (N16.6 trillion).
“Revenue realization represents only 42% of planned half-yearly revenue. Debt service amounts to 114% of revenue; 66% of recurrent expenditure financed by borrowing. Financing of the public deficit by printing money – Ways and Means Advances (WMA) increased by 3,500% to N22 trillion in 10 years.
“Debt monetization causes inflation through its impact on great power currency. 20 billion naira of WMA to be securitized, converted into a 9% 40-year bond, could shift the yield curve, with long-term yields falling below short-term yields.
“More than 94 central banks have raised rates this year to fight rooftop inflation. More than 50 central banks have raised interest rates by more than 100 basis points (bps). again raised their interest rates by 75 basis points – sixth consecutive increase. There would be a flight to stronger economies – the United States, etc… and a shift to new fixed income securities, “added the ‘analyst.
The equity market saw a lackluster performance due to high yields in the fixed income market and dwindling investor appetite for risk ahead of the 2023 presidential election.
“Average bond yields have risen as much as 250bps since the start of the year and around 380bps since the end of Q1’22. We expect the yield environment to remain elevated due to tight liquidity conditions in the market,” said Tunde Abidoye, Head of Equity Research Team at FBNQuest during his presentation at the company’s media roundtable in Lagos recently.
He noted: “The September headline inflation rate rose to 20.77%, making it the eighth consecutive month of rising inflation. The rate of increase slowed to 25 basis points from 88 basis points in August. Upward pressure on food prices remains the main driver. However, the dynamics of food inflation slowed down in September; it rose 22 basis points to 23.3% from 110 basis points in August. The core (non-food) measure was down 40 basis points to 17.6%, slowing from a 94 basis point rise to 17.2% in August.
“In an effort to curb inflationary pressures, the Monetary Policy Committee (MPC) at its September meeting voted to raise the policy rate by 150 basis points to 15.5% and the cash reserve ratio (CRR ) by 500 basis points We see the headline rate around 22.5% YoY (y/y) by the end of 2022, before slowing to around 18.6% by the end of 2023 .
“The committee’s rationale for the aggressive rate hike was the need to rein in rising inflation which is now at a 17-year high of 20.5%, and to close the gap between the policy rate and the inflation. Average bond yields have risen up to 250 basis points since the start of the year and around 380 basis points since the end of the first quarter (Q1) 2022. We expect the yield environment to remain elevated due to the tight liquidity conditions in the market. We see the MPR unchanged at 15.5% by the end of 2022. However, much depends on the path of inflation,” Abidoye said.
In their October stock performance review, Vetiva Research analysts noted that the All-Share Index extended its monthly losses (m/m) to a fifth consecutive month, falling 10.58% m/ m, “as inflationary pressures weighed on investor confidence. in the stock market”.
“Losses were broad-based, with all sectors except industrials closing lower m/m. Sentiment in our conviction stocks was also negative, with stocks down 3.04% m/m. Our consumer picks were among the worst performers, as our picks contributed a 1.01% loss, due to investor concerns about the impact of inflation on consumer consumption, coupled with the weak third quarter (Q3) 2022 financials,” Vetiva Research said the analysts.
Amid negative and positive closing trading sessions, the Nigerian stock market rose 0.81% or 194 billion naira in the trading week ending Friday, November 4.
Industrial stocks helped the market end the week in the green despite the selloff in banking, insurance, consumer goods and oil & gas stocks.
According to them, Meristem research analysts said in a recent note that “the mood in the equity market remains broadly bearish, given the low level of activity (market width decreased to 0.47x from 1 .00x the previous week.) Gains last week were mainly driven by buying interest in top stocks.
“We expect investors to continue to favor the fixed income market given the attractive level of yields. Additionally, the expectation of a hike in stop-out rates at the treasury bill auction scheduled for this week adds even more credence to our assertion.
“Thus, absent any headline bargain-hunting activity, we expect the market to close in the negative region this week,” Meristem research analysts added.
Their counterparts at United Capital Research, in their Nov. 7 investment view for this week, held back a short-term expectation of continued selling pressure in the Nigerian stock market. They recommend, however, that “the market is only good for investors with patient capital. We advise speculators to trade with caution.