Indices plummet by N129b in five trading days
Market operators have bemoaned the recent decision by Monetary Policy Committee (MPC) to increase interest rate from 12 to 14 percent, stating that it may depress investors’ appetite for equities.
They argued that in portfolio management, the logical assumption is that relationship between interest rate and stock market is reverse. Indeed, the stock market indices have plunged by N129 billion on the announcement of decision last week Tuesday.
Specifically, market capitalisation of the Nigerian Stock Exchange (NSE) dropped by N129 billion or 1.3 per cent from N9, 687 trillion recorded last week Wednesday to N9,558 trillion yesterday, while the All- share index fell by 362.62 points from 28,205.96 to 27,831.95
Reacting to the development, a stockbroker and the Chief Executive Officer of Sofunix investment, Olusola Oni explained that when interest rate is low, speculators move their funds from the money market instruments to the stock market for higher yield.
He added that the same speculators move from the stock market to other asset classes, especially, fixed income securities when the interest rate is high.“In portfolio management, the logical assumption is that relationship between interest rate and stock market is inverse. This implies that when interest rate is low, speculators move their funds from the money market instruments to the stock market to make a kill.
“As a corollary, the same speculators move from the stock market to other asset classes, especially, fixed income securities when the interest rate is high.“By this logic, one can assume that the current increase in the MPR would boost investment in the fixed income securities while it may depress investors’ appetite for equity investment.”
However, he noted that there are many exogenous factors that affect investment decision at the level of investment objective, adding that the stock market mirrors the economy.The Managing Director of Highcap securities, David Adonri explained that when interest rate increases, it favors fixed income investments and drives assets from equity.
“The rate at which interest rate may crowd out the productive sector because Iam sure it is only government that can issue fixed income securities at high interest rate.
“I understand that foreign investors are asking for a yield of about 20 per cent so the productive activities in real sector may not be profitable at that interest rate so we may have government crowding out the productive sector together with the equities market.
“The big decisions have been taken already, the flexible exchange rate is a major one that will impact positively on the economy, then the partial deregulation of the price of petrol is another major one. So far, those two policies will appropriately manage the demand side of the economy.
“It is left for the fiscal entities to come up with measures that would stimulate the supply side of the economy that means, they have to come up with incentives that would enable supply of goods in the economy to be stimulated.”
The President, Renaissance Shareholders Association of Nigeria, Timothy Olufemi said: “ It will be hard to get good returns on investment at 2016 year-end. The year is definitely going to favor less forex dependent companies.
“There will be great losses to Forex & interest rate on loans. There will be greater apathy to stocks market investment going forward in 2016. Times are hard,” he added.
The Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN), had on July 26, 2016, favored the increase of the Monetary Policy Rate by 200 basis points, saying it is to curtail negative rates against inflation level and attract foreign investment.
Against expectations of financial analysts that the Monetary Policy Rate would remain unchanged at 12 per cent, CBN, has kept the rate at which it lends to banks at 14 per cent, which serves as the barometer for the direction of interest rate charged by banks.
The apex bank said when considered from the standpoint that the primary mandate of the CBN was to maintain price stability, the committee decided to focus on its mandate by checking inflationary pressures.
CBN added that members of the committee agreed that the economy was passing through a difficult phase, adding that the concern was that headline inflation had risen significantly in June.
Source:© Copyright Guardian Online