In order to mobilize domestic resources for profitable ventures, the stock market is crucial.
Since it indicates the reallocation of assets among various economic units within an economy, the stock market is recognized as a crucial element of the majority of economies.
Market performance is correlated with an economy’s overall health. The stock market lost more than N1 trillion in eight trading days last week as a result of the Central Bank of Nigeria’s (CBN) decision to tighten monetary policy by raising the Monetary Policy Rate (MPR) by 100 basis points to 14%, the second increase this year, in an effort to rein in rising inflation.
Specifically, during eight trading days, the market value of listed securities on the Nigerian Exchange Limited (NGX), which was at N28.208 trillion on July 19, 2022, the day the rate hike was announced, fell to N27.162 trillion, closing on Friday.
The performance of listed companies is tracked by the all-share index (ASI), which decreased 3.8% from 52,308.88 to 50,370.25.
As a result, since the announcement, the majority of the blue-chip stocks driving market capitalization in the equity sector have been declining.
The banking industry was largely impacted. Insurance, consumer products, and oil & gas are some other industries that will also be impacted by the rate increase.
The most hit equities in the banking industry were GTCO, United Bank for Africa, and Access Bank, while Mansard and NEM were impacted in the insurance sector.
The consumer goods industry saw stock declines for Nigerian Breweries, Cadbury, and Nestle. Oando’s value decreased as well in the oil and gas industry.
Due to the fact that just Lafarge WAPCO was out during that time, the industrial goods were defensive.
On a percentage basis, the banking sector declined by 4.43 percent and insurance stocks fell 2.75 percent. Consumer goods saw a 5.92% drop.
One week later, the industrial sector fell by 0.71 percent and NGX oil/gas lost 1.16 percent.
In spite of increasing inflationary pressure and other exogenous variables, the equities market maintained a bullish trend throughout the year, rising by N5.64 trillion in the first half (H1).
In H1, 2022, the market capitalization increased by N5.64 trillion, or 25.3%, from the N22.297 trillion it was when trading began on January 4, 2021, to complete the half year at N27.935 trillion.
Additionally, the ASI increased from 42,716.44 basis points when trading began to 51,817.59 basis points by the end of the first quarter of 2022, a rise of 21.31 percent or 9,101.15 basis points, the greatest performance in 14 years. In the first quarter, the index increased by 9.95% to close at 46,965.48 basis points (Q1 2022).
Ambrose Omordion, the chief research officer of Investdata Consulting Limited, claimed that the market lost almost N1 trillion in eight trading days from the N5 trillion reached in six months as a result of CBN tightening and recessionary fears.
He emphasized the necessity for an active engagement of fiscal and monetary authorities to reverse the trend by citing the impact of the macroeconomic headwinds on corporate operations in Nigeria.
He specifically made the point that the government must develop new measures to address issues preventing the country’s economic growth given the rising degree of insecurity, abduction, unemployment, weak naira, rising inflation, and declining income.
“We are aware that the cost of diesel and increased insecurity are the main factors driving up prices and inflation. The CBN’s decision to raise the rate was motivated by the expectation of higher, galloping inflation now that pump prices had climbed.
“This is not the only strategy to control inflation; the economic managers also need to have some influence over fiscal decisions.
“The pricing of commodities has been impacted by the country’s rising insecurity; the government must address the issue of insecurity so that farmers may return to their farm,” he said.
According to David Adonri, vice president of Highcap Securities, the increase in interest rates in June 2022 caused equities to decline 3.4% in that month.
He argued that even while the effects of a rate hike on debt are not yet obvious, a second increase in rates in July 2022 could result in more losses for stocks.
According to Adonri, data from the capital market demonstrated that the strategy delayed equities with little effect on debt.
He claims that the worry of a recession may be warranted if this market slowdown is compared to the rising cost of production, together with the disruptions brought on by insecurity.
Beyond monetary measures, he emphasized that only fiscal policy action could stop the economy from entering a recession because it is a long-term fix for the structural imbalance causing the economic disruption.
Uche Uwaleke, a professor of finance and capital markets at Nasarawa State University in Keffi, said that the tightening of monetary policy would most likely result in a gloomy stock market.
He noted that the majority of sectoral indices will experience declines, with the exception of the oil and gas index, which will keep responding to rising international crude oil prices.
In his view, fund managers will be forced to rebalance their portfolios away from equities and toward fixed income assets as a result of monetary tightening brought on by growing inflation.
With the U.S. currently in a technical recession and many economies experiencing high inflation, he predicted that this scenario would play out in most developed and emerging markets, and that investors would sell stocks to invest in safer asset classes.
Operators contend that the stock market is most negatively impacted by tightening monetary policy and rate increases because all other investment opportunities become more appealing and risk-free at such time.
For people who are risk averse, money market instruments are a good option because, once the rate is high, their yield will also be high, making them more alluring.
Even though there are still some stocks that can offer better returns than the inflation level despite the rate hike, there is always opportunity in the market when one knows how to play the market. However, the fear of a recession is always present.
Because there are five phases of the economic cycle in every economy—early growth, mid-expansion, late expansion, early contraction, and late contraction—this is the case.
In addition, three variables—national output production, growing inflation, and interest rates—determine the course of the economy. Industrial output will decrease when inflation and a country’s interest rate are both high, which would have a significant negative influence on the economy and send those economies into recession, as is the case right now in Nigeria.
Because of the rate hike’s increased cost of financing, the US economy is technically in a recession.
The CBN has already indicated that the country’s economy is in the early stages of contraction, which could result in recession if essential measures are not done to buck the trend.
Remember how the money supply skyrocketed after the government implemented expansionary monetary and fiscal measures to lift the economy out of recession in 2020?
Due to the production sector’s limited ability to absorb the excess cash, which was intended to spur output growth, it began to divert increasingly toward the stock market.
As a result, equities unexpectedly increased by 50% in 2020. The 2020 climate of low interest rates lowered the debt market and drove yields to fall, which at the same time encouraged financial assets to move to equities.
However, the debt market began to revive in 2021, which led to financial assets migrating to debt as yields increased.
As a result, equity prices fell to 6.07 percent in 2021. 2020 saw significant inflation along with a recession. However, in 2021, the domestic and global economies began to reopen, and supply linkages were reinstated.
Because of this, the high rate of inflation began to decline as the economy emerged from the crisis. The inflation rate steadily decreased from its top of 18.17 percent in March 2021 to 15.4 percent in November 2021 before beginning to rise once more and reaching a peak of roughly 18.6 percent in June 2022. Due to the abrupt outbreak of war in Ukraine and the resurrection of COVID-19 in China, which disrupted supply chains and drove up the price of commodities, the inflation rate also began to soar in major economies around the world at the same time.
Advanced economies like the United States and the United Kingdom have implemented strict monetary policies since the beginning of the year to control inflation and, as a result, normalize their economy by hiking interest rates.
Nigeria started tightening monetary policy by first lifting MPR by 150 bps to 13% in June 2022 and more recently by 100 bps to 14% in July 2022. Nigeria was in a similar, if not worse, condition at the time, which was exacerbated by FX hardship and the debt crisis.