Analysts in the Nigerian financial markets on Tuesday agreed that the decision of the Central Bank to hike its benchmark Monetary Policy Rate beyond expectation by 400 basis points, more than double the 150bps envisaged by Cordros Capital, a Lagos-based investment banking group, for example, will likely lead to a correction in equity prices on the short-run.
Also, contrary to their expectation that the CBN would hold other parameters constant, the meeting “in line with the CBN’s goal to extensively mop up excess liquidity,” raised the CRR to 45.00%, 125bps higher than the previous rate of 32.50%, while widening the asymmetric corridor to +100bps/-700bps (previously: +100bps/-300bps), retaining the liquidity ratio at 30.00%.
Cordros anticipates a further negative impact on the equities market performance, which has started with.the NGX All Share index closing 1.4% lower on Tuesday.
This, the analysts said is “likely due to negative sentiment from investors, as rising fixed-income yields typically reduce the appeal of equities.
“Overall, the MPC’s hawkish stance is expected to further heighten risk-off sentiments in the local market, as domestic investors, who make up the majority of market participants (c.92.0% as of January 2024), may opt for safer assets amid rising fixed income yields. Consequently, we anticipate a prolonged bearish market trend driven by yield movements and the uninspiring corporate earnings reported thus far.”
It is, however, good news for the fixed income market, which has remained bearish in recent weeks due to tighter liquidity conditions, selloffs induced by positioning for higher Primary Market Auction (PMA) issuances, elevated stop rates at the PMA, among others.
“Sequentially, we maintain our expectation of an uptick in bond yields over the medium term. Aside from the impact of the higher MPR, our prognosis also takes into account expectations of a sustained imbalance in the supply and demand dynamics, more so that the FGN’s 2024FY borrowing needs remain sizeable,” Cordros Capital added.
Agreeing, analysts at Arthur Steven Asset Management Limited, another investment banking group also based in Lagos, see the “scope for the government securities to increase in rate and to attract investors.”
In a reaction to the decision sent to clients, the company believes that “the stocks market will start to correct,” such that the market could witness consistent bear trend for some time.
