Interest Rate Hike Crashes Stock Market Investments By N782bn

The increase in Monetary Policy Rate (MPR) by the Central Bank of Nigeria (CBN) to 14 per cent recently crashed investors’ investment value on the Nigerian stock market by N782 billion in July 2022.

This drop in value arose as the apex bank’s decision on MPR forced investors to divest to the fixed income market where the interest rate is attractive.

The key performance indicator of the Nigerian Stock Exchange (NSE), the All-Share Index (ASI), went down by 2.82 per cent to close at 50,370.25 on July 31, 2022 from 51,829.67 points at which it opened trading for the month.

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Meanwhile, market capitalisation for the period lost by N782 billion to N27.163 trillion from N27.945 trillion.
The stock market in July has witnessed weeks of sentiment trading by investors amid impressive corporate earnings for the half year ended June 30, 2022 by some fundamental companies.
Capital market analysts attributed the decline during the month to the increase in Monetary Policy Rate (MPR) by the Central Bank of Nigeria (CBN) to 14 per cent, which has forced investors to divest to the fixed income market where the interest rate is attractive.
They also noted that ahead of next year’s general elections in the country, the prevailing insecurity and economic uncertainties as seen through the rising inflation and interest rates, in the face of naira devaluation and the soaring national debt, are sources of major concerns among equity and fixed income investors at this moment.
Speaking on the stock market performance in July, professor of capital market at the Nasarawa State University Keffi, Professor Uche Uwaleke, said “the hike in the MPR in quick succession from 11.5 per cent to 13 per cent in May and now to 14 per cent could signal panic on the part of the CBN and heighten uncertainty.”
According to him, this policy stance may not necessarily curb inflationary pressure given that the pressure is not coming from monetary factors but from high costs of petroleum products, electricity and insecurity, as well as the rising exchange rate.
“So, expect to see in the coming months higher cost of borrowing, widening government deficit, slower economic growth, rising unemployment and bearish stock market,” he said.

The vice president, Highcap Securities, Mr. David Adonri said: “Whenever CBN hikes interest rate to tighten monetary policy, the primary objective is to use it as a short-term tool to bring down inflation.

“However, it can also affect trade-offs in the capital market by shifting the balance between equities and debt. In this case, it causes financial assets to migrate more to debt due to increase in yield precipitated by the interest rate hike. Consequently, the price is likely to fall temporarily in equities until the policy runs its course.
“Monetary policy is a short-term tool to battle a structural economic instability in order to give room for appropriate fiscal policies implementation to address the cause of the imbalance. Therefore, the tightened monetary policy and attendant weakened demand make equities a buyer’s market now.”

An analyst at PAC Holdings, Mr. Wole Adeyeye said: “Investors may be looking at the risk-free securities in the fixed-income market as we expect yields to increase. Investors may likely sell part of their equity investments to buy treasury bills and bonds. Consequently, bears may dominate the equities market in the third quarter of 2022. Nevertheless, this creates an opportunity for investors that want to take advantage of cheap stocks in the market.”
Analysts at Afrinvest Limited said: “In August, we anticipate lingering macroeconomic headwinds and rising fixed income yields to sustain bearish momentum in the equities market despite the impressive H1, 2022 earnings by major corporates.”