The Nigerian equities market gained a record N350 billion last week as investors swooped on stocks in search of higher returns following a cut in the Monetary Policy Rate (MPR) by the Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN).
In a surprise move last week, the CBN’s MPC had resolved to reduce the MPR by 100 basis points to 11.5 per cent from 12.5 per cent.
The move is expected to encourage more bank lending in order to stimulate economic activities.
The MPR is the rate which the apex bank lends to commercial banks and often determines the cost of funds.
The cut in MPR by 100 basis points to 11.5 per cent is expected to further drive down yields in fixed income securities, hence, investors shifted to the equities market where they hope to reap higher returns.
The renewed demand for equities lifted the market capitalisation by N350 billion to close at N13.755 trillion, while the Nigerian Stock Exchange (NSE) All-Share Index (ASI) rose by 2.92 per cent to close at 26,319.34. The NSE ASI has crossed the 26,000 points for the first time since March 2020.
Also, volume and value of trading rose by 46.3 per cent and 68.9 per cent 1.567 billion shares worth N20.559 billion exchanged in 18,396 deals, from 1.139 billion shares valued at N12.692 billion that were traded in 17,109 deals the previous week.
The MPC last week further eased monetary policy by cutting the MPR by 100 basis points to 11.5 per cent, the third rate cut in 2020.
This propelled a shift from fixed income securities to equities market due to lower yields in the former.
Market analysts said they anticipate a sustenance of the positive performance in stock market going forward.
“We expect the market might continue to benefit as domestic investors seek alpha-yielding opportunities in the face of increasingly negative real returns in the fixed income market. However, we advise investors to trade in only fundamentally justified stocks as the weak macro environment remains a significant headwind for listed companies,” analysts at Cordros Research said.
“When the MPR cut was announced, Cordros Research had said the “fixed income market was likely to see a downward adjustment in yields as a consequence, making the equities market even more attractive and worth a second look,” they stated.
The analysts had said that combined with the recent decision to lower the savings deposit rate, the rate cut firmly establishes the CBN’s dovish stance, with output growth as the priority, and all but pushes any focus on inflation to the sidelines.
“Though lower rates are intended to compel banks to extend more credit to the real sector, we note that banks concerns will still lie around asset quality and systemic risk. Consequently, we do not expect any significant growth in domestic credit or aggregate demand, especially given the historical ineffectiveness of the MPR in stimulating output and also the negative impact of the pandemic on household income. We also note that the CBN did not address the issue of the exchange rate, and forex illiquidity, which in our view, are major hindrances to any meaningful economic recovery,” they said.
The shift of investors to the equities market for higher returns is understandable when the gains posted by some stocks last week are compared with yields in fixed income that are below three per cent.
For instance, Nigerian Breweries Plc appreciated 25.1 per cent, while Cornerstone Insurance Plc chalked up 16.3 per cent. Lafarge Africa Plc gained 15.7 per cent, just as Consolidated Hallmark Insurance Plc appreciated by 9.6 per cent. Trans-Nationwide Express Plc appreciated by 9.3 per cent just as International Breweries Plc and Prestige Assurance Plc added 9.1 per cent apiece. Flour Mills of Nigeria Plc, Presco Plc and LASACO Assurance Plc garnered 8.5 per cent, 8.1 per cent and 8.0 per cent in that order.