Stocks Gain N374bn On Rate Cut Boost

BY BUKOLA ARO-LAMBO AND OLUSHOLA BELLO, Lagos

Investors flocked to stocks yesterday  as the Nigerian equities market sustained its rally, gaining N374 billion in market capitalisation following the Central Bank of Nigeria’s 350-basis-point cut in the Monetary Policy Rate (MPR).

This was due to a reduction in interest rates on Nigerian Treasury Bills (NTBs) following the MPR cut.

The shift in returns in the fixed income market was already evident at the latest Treasury Bills auction, where stop rates fell across all tenors following the CBN’s decision to reset its benchmark interest rate to 23 per cent from 26.5 per cent.

The stop rates for the 91 day, 182 day and 364 day Nigerian Treasury Bills (NTBs) contracted by 80 basis points, 70 basis points and 73 basis points to 15.50 per cent, 15.80 per cent and 15.89 per cent respectively.

The stock market gain on the other hand, was attributed by analysts to expectations of portfolio rotation from fixed income to equities as investors anticipate a drop in money market yields following the MPC decision to cut MPR from 26.5 per cent to 23 per cent.

In market activity, the Nigerian equities market yesterday maintained its bullish trajectory, with the benchmark NGX All Share Index advancing by 0.23 per cent, as sustained buying interest continued to support investor sentiment across the bourse.

The All Share Index (ASI) gained 576.36 points, representing a gain of 0.23 per cent to close at 251,191.02 points. Also, market capitalisation rose by N374 billion, closing at N163.057 trillion.

A senior stockbroker, Tunde Oyediran, said the cut will drive higher transaction volume and share prices.

According to him, we are going to see a surge in transaction volume and an increase in equity prices. There will be more demand for equities than sellers, so prices will adjust upward. The fixed-income market will drop, and investors will migrate to equities.

Professor of Law and developmental economist, Prof. Tayo Bello, on his part, said the rate cut is expected to increase liquidity in the capital market. According to him, it should not come as a surprise if investors start migrating from the money market to the capital market.

“If you are to invest in treasury bills, fixed deposits, among others, you are not likely to get the same rates that have been in the market for this present trend. You are likely to have a reduced interest rate to be given in fresh placements and orders.”

The NTB decline came as investors placed N4.23 trillion bids for the N600 billion offered by the Debt Management Office (DMO), representing a bid to offer ratio of 7.1 times.

At the end of the auction a total of N497.58 billion was allotted implying a bid to cover ratio of 8.5 times. The latest auction followed the CBN’s decision to reduce the Monetary Policy Rate (MPR) by 350 basis points to 23 per cent, a move that has implications for yields across the fixed income market.

Head of Financial Institutions Ratings at Agusto & Co, Ayokunle Olubunmi, noted that the rate cut is expected to exert pressure on fixed income yields although it will support the ongoing rally in the equity market.

The managing director, Globalview Capital Limited, Mr. Aruna Kebira, attributed the recent rally to three factors. “The return of the Nigerian Exchange to the FTSE Russell Index is part of it. Then, the drop in MPR on Tuesday, which was very drastic, from 26.5 per cent to 23 per cent is very massive,” he said.

He said the third factor is the reduced sell pressure linked to the Dangote Refinery IPO, stating that “the pressure of selling to buy Dangote Refinery IPO has actually reduced. That was why on the first day when Dangote was doing presentation at the Exchange, people were busy selling. The sales have been made, so the market can now breathe. It is a normal run of play.”

Looking ahead, Kebira said the tapering of interest rates will have a massive impact, especially when tier one banks release their results.

“Going forward, this tapering with the interest rate is going to be very massive, especially when the four banks that we are expecting their Q2 results, Zenith Bank, Guaranty Trust Holding Company (GTCO), United Bank for Africa (UBA) and Access Bank, including Fidelity Bank and FCMB Group, by the time they release their results and declare interim dividend, I think we will see the market even better than this,” he added.

Analysts at Coronation Assets Management in an emailed note said, “We expect a further 100–150bps of compression over the next one to two auctions toward 15.00–15.50 per cent, and then a stall. The SDF reset to 20 per cent narrows that negative carry to around 340bps, which mechanically supports the bid, but it does not eliminate the constraint.”

On OMO rates and the direction of monetary easing, the analysts said, “If OMO stop rates begin following the MPR lower, the easing cycle has genuinely begun. If they hold near 20 per cent while NTBs rally, the segmentation deepens and the ‘not easing’ message is confirmed by action rather than communiqué.”

The analysts furthered that for FGN bonds and the yield curve, “the reset compresses the very front-most, produces modest gains in the 1–3-year sector, and leaves the long end anchored by 2027 supply and election risk premium.

“The net effect is bull steepening, more precisely, a disinversion, rather than a parallel rally. Money market fund and term deposit yields should reset 150–200bps lower over the next six to eight weeks as the SDF change passes through.”