Financial economist and Professor of Capital Market at the Nasarawa State University, Keffi, Uche Uwaleke, on Tuesday warned that the impact of the latest rate hike by the Central Bank of Nigeria (CBN), the second in two consecutive meetings of its Monetary Policy Committee (MPC) may not yield the desired result of helping to tame inflationary pressure in the country.
Uwaleke, while citing his earlier article titled, “Crystal gazing the Nigerian Stock Market in 2022,” said that the tight monetary policy meant to rein in inflation will result in higher fixed income yields that would make equities investment less attractive.
Instead, Uwaleke, who spoke as a guest lecturer at the July 2022 virtual monthly forum of the Finance Correspondents Association of Nigeria (FICAN), expressed worry that the second half of this year 2022, will witness exchange rate challenges, due to the continued exit of foreign investors from the domestic market, made worse by the increased demand for forex by politicians ahead of the 2023 general elections.
The former Commissioner for Finance in Imo State, who spoke on the theme: “impact of electioneering on fixed income and equity markets in Nigeria,” also expressed worry over rising yields in the fixed income market, with the Debt Management Office (DMO) third quarter calendar expecting that bonds would sell at coupon rates of between 12.5% and 13.5%.
According to the pioneer President of the Association of Capital Market Academics of Nigeria (ACMAN), the impact of electioneering on equity and fixed income markets, he continued, is mostly felt in the second half of a penultimate election year, following which pre-election years in Nigeria are characterized by tension and uncertainties ahead of the general elections with adverse consequences for the economy and the equities market in particular.
To overcome the headwinds expected to characterize the investment climate for the second half of this year, therefore, he urged players in the Nigerian stock market to follow the time-honoured path of cautious investment in asset allocation, risk management and portfolio diversification.
Amid worry over the soaring cost of servicing the nation’s debt, he warned that arising from these factors, among others, Nigerians should brace up for a bearish stock market, and negative real rate of return in the weeks ahead.
He further predicted that there will also be the rebalancing of portfolios away from equities to fixed income securities, because, according to him, “domestic Investors’ sentiment is usually weak as they seek to reduce their market exposure when elections draw closer. The intensity of the impact is usually a function of the degree of political tension and uncertainties arising from political activities.
“While the ASI depreciated in September for all penultimate election years, it appreciated in January for all election years except 2015. January 2015, was the election year that ushered in the present administration, characterized by high tension and uncertainty, compounded by the fall in international crude oil price and the rumoured break-up prediction of Nigeria in 2015 by the United States National Intelligence Council.”
According to him, the bear run experienced in the stock market in the second half of 2014, largely on account of the political tension, lingered into January 2015, as a way out, he suggested investment in “mispriced stocks, the application of ‘Tobin-Q’ or ‘Kaldor’s V’ and Price/Earnings ratios is advised. Ultimately, the best strategy to shield the headwinds is to stay with securities that have solid fundamentals as well as ensure a well-diversified portfolio of investments particularly during electioneering periods.”
Uwaleke further warned that the second half of a penultimate election year is not for risk-averse investors as recent evidence from the stock market supports “a buy-in-September-Sell in January strategy, all things being equal.”
During an electioneering period, he stressed, “investors are advised to take a longer term perspective as H2 of pre-election year is a good time to identify and take positions in undervalued stocks, especially in dividend aristocrats.”