The stocks sector of the capital market has continued to be severely impacted by rising interest rates, insecurity, and other domestic economic issues as well as uncertainty in the global economy, with investors losing N1.484 trillion in the third quarter (Q3).
The all share index (ASI), which tracks the performance of publicly traded stocks, decreased by 5.39 percent to end the third quarter at 49,024.16 basis points (bps), down from the opening price of 51,817.59 bps on July 1, 2022.
Similar to this, market capitalization, which represents the entire market value of all outstanding shares of listed businesses, decreased by N1.484 trillion to close at N26.451 trillion from an opening value of N27.935 trillion.
The Monetary Policy Committee of the Central Bank of Nigeria (CBN) voted twice to raise the Monetary Policy Rate (MPR) during that time, from 13% to 15.50%. The MPR has already been increased by 150bps in May.
The Committee additionally decided last month to raise the Cash Reserve Requirement (CRR) to a minimum of 32.5 percent.
Remember that the local stock exchange had a return of 21.3% from the previous year (2021) to the first half (H1) of 2022.
Vice President of Highcap Securities David Adonri said the following regarding the performance of the stock market: “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 debts due to an increase in yields 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 to give room for appropriate fiscal policies implemented to address the cause of the imbalance. Therefore, the tightened monetary policy and attendant weakened demand make equities a buyer’s market now.”
Moses Igbrude, the Independence Shareholders Association’s publicity secretary, added that the country’s increasing insecurity is also a contributing factor to the stock market’s downward trend.
He said: “Investors prefer where their funds and investments are safe. Other social and economic challenges are affecting the market. The Federal Government should address these issues to reverse this ugly trend.”
“Investors may be looking at the risk-free assets in the fixed-income market as we expect yields to improve,” said Wole Adeyeye, an analyst at PAC Holdings. Investors might sell a portion of their equity holdings in order to purchase bonds and treasury bills.
“Consequently, bears may dominate the equities market in the fourth quarter of 2022. Nevertheless, this creates an opportunity for investors that want to take advantage of cheap stocks in the market.”
Ambrose Omordion, the chief operating officer of InvestData Consulting Limited, said the market was turbulent in Q3 due to profit-taking and a combination of bargain-hunting.
He claims that the rate hike adjustment has sparked a new wave of sector rotation and selling pressure in the market as a result of the strong hawkish monetary policy practiced by some nations to prevent the collapse of their economies.
Omordion noted that despite the World Bank and IMF’s warnings to central banks to reconsider and prevent sending the world economy into recession, the country’s high debt profile would not survive this growing rate.
“We see that is already happening in the UK, China, Japan and others. It is time for the Nigerian central bank and its Monetary Policy Committee to have a rethink before things go out of hand.”
To ensure that the 2022 fiscal year would conclude on a positive note, he emphasized the need for a stronger and more lively economy that would have an impact on the capital market.
“We need to finish the year strong. The low valuation of NGX, high earnings and dividend yields on improved earnings released so far in the year, coupled with the expectation of third-quarter corporate earnings are expected to shape the market direction.
“However, with inflation hitting 17 years high above 20 per cent, many players stay on the fence, waiting to confirm direction before jumping in, as the outlook for the economy and the financial market remains unpredictable,” he said.
He did, however, add that there are some stocks that investors should be aware of because the NGX index action correction has created opportunities for investors to buy certain sectors and firms with high dividends, high yields, and good earnings growth.
“Despite the lingering high-interest rates atmosphere, rising inflation and slowing industrial output as a result of policy changes and uncertainty around the globe, there are sectors, industries and individual stocks that are still seeing positive activities from traders and investors.”