Nigerian Stocks Going To Zero?
The front page of Business Day Newspaper on Monday , November 21st has this grim headline of Nigerian stocks going from hero to zero. This is quite unsettling on the surface, knowing that Business day is a reputable financial newspaper that has proven dependable over the years. Indeed stock market prices have been on a constant decline since the second half of the year.
However, there is a need to put the matter in proper context. The NGX All Share Index peaked at 54,085 on May 27, 2022 before dropping gradually to 44,492.73 on November 18, 2022, this translates into a decline of about 17.7%. The index is one price that shows aggregate movement in price of all stocks listed on the exchange, so we could have a stock that has lost 40% while another has lost only 5%.
There is we need to properly dimension the matter. The reason stock prices have been falling in Nigeria is because the profit on Fixed income investment has been rising. Therefore institutional investors like Pension Funds have been selling their stock holdings to buy fixed income investments. These investments now yield about 15-22% , depending on if you are investing in corporate bonds, treasury bills, commercial papers or Federal Government bonds.
This increase in yield can be attributed to the increase in the Monetary Policy Rate (MPR) by the Central Bank of Nigeria. We have seen MPR move from 11.5% earlier this year to 15.5% at the end of September. The decision of the CBN was aimed at putting inflation under control and also make Naira investments to be more attractive. Especially at a time that central banks of developed economies are all increasing their interest rates to curb inflation as well. Nigerian inflation has risen from 15.6% in January to 21.09% in October. The CBN understands that failure to increase rates will make capital to leave Nigeria in search for higher rates abroad, so they did not have any other choice.
The CBN Monetary Policy Committee will be meeting today and tomorrow again and they will consider whether another MPR increase is necessary . There is a possibility that they slow down in the rate hike or they increase it by a small margin of of about 0.5%. This is because of the possibility that inflation may be slowing down in the United States as Inflation rate in October was 7.7 % compared to 8.3% in the previous month.
Any further increase in MPR by the CBN will further affect stock prices. However, this need not be a problem for investors with a long term outlook. As long as the listed companies are still growing in all key performance measures like market share, revenue, cash flow etc. For instance , we are talking about interest rate increases, that is obviously good for the banks since their major source of income is interest income. So it is ironic banks’ share prices are falling at a time they are making more money. There are also other sectors that are doing well under the current economic condition.
The MPC meeting holding today and tomorrow will be the last for the year. This should guide individual investments for the rest of the year. Therefore we are of the view that loss of share price at the moment is actually a good thing and the Business Day headline should have been ” Nigerian Stocks Are On Sales!”.