Stocks beat fixed income as inflation dampens returns

As the first half of the year draws to a close, equity investors saw market returns at +21.04% outshine fixed income market returns.

When the Monetary Policy Committee (MPC) of the Central Bank of Nigeria raised its benchmark rate last month, it gave hope to savers and bond investors, but the rise in 1-year Treasury bills since has been modest, observe market observers.

At its May meeting, the MPC raised its policy rate by 150 basis points (bps) to 13%. The inflation rate reached 17.7% in May, which means that the current real rate of return on all fixed income securities remains negative.

Amid rising inflation in Nigeria, investors are defying the expectations of many analysts as many do not fear equities for the rotation of funds into fixed income.

Local investors are increasing their holdings in the equity market due to attractive dividend yields, capital appreciation in the market versus the low yield environment in the fixed income market. Additionally, as bond investors grapple with inflation-adjusted yields, some Nigerian stocks have significantly outperformed the market in yields, making them attractive buys.

Ridwan Bello, Chairman of Rizq Group, an investment company, said: “The CBN’s monetary policy intervention to combat the rising rate of inflation by raising interest rates may be too late. The inflation rate which has risen for so long without adjusting the interest rate for so long has made it difficult for the intervention to catch up in fixing the inflation rate.

“Investment tools such as treasury bills cannot catch up with the double digit inflation rate. There is no incentive to invest in treasury bills which have a single digit return compared to a double-digit inflation rate.

Bello added, “You don’t judge the performance of the stock market by what prices are saying today, but by its performance over a period of time. Correlation is not causation, which means that good stock market performance could depend on other things.

“The Nigerian stock market was bullish while the global stock market was bearish.”

According to Bello, the stock market’s overall performance is the result of a few good sectors pushing the market forward, especially those that don’t have much competition from their international counterparts due to the Russian-Ukrainian war.

Yinka Abenuwagun, investment analyst at Value Alliance Asset Management, said that although stock market performance for June was down (-2.42%) after the MPC rate hike, “but not bad compared to what which was planned”.

He said the CBN’s reluctance to price interest higher in the fixed income market is prompting investors to turn to the equity market.

According to him, generally, investors look to either the equity market or the fixed income market to invest.

“The MPR should improve your real return, but it’s still low,” Abenuwagun said, adding that fixed income and bond market yields are still very low relative to the rate of inflation.

“Stocks are always a better option than leaving money in the fixed income market where inflation continues to erode your money and reduce your purchasing power,” he added.

According to the research analyst team led by Luke Ofojebe at Lagos-based Vetiva, a review of the markets in the sub-Saharan region shows that the Nigerian market has been one of the best performing with a return of 21.04% since the beginning of the year. Friday, just behind Zimbabwe.

“This impressive performance was fueled by increased participation from local investors seeking household names in the various sectors. Historically, we have seen rising oil prices drive sentiment in the local market, which is why the oil and gas sector has extended its impressive form from 2021 into this year,” Vetiva analysts said.

However, they believe other factors are contributing to the bullish sentiment, even though local fund managers and retail investors have limited alternatives at their disposal outside of the fixed income market.

They said: “As the government plans to tap into the domestic market to meet its financing needs and raise capital for its infrastructure projects ahead of the 2023 elections, we expect this to translate into an increase in yields.

“Furthermore, tighter monetary conditions around the world will add further pressure on policymakers to raise rates, in an effort to retain foreign investors in the bond market.”

On Friday, the value of Nigeria’s shares rose to 27.87 trillion naira. Looking at the performance of the stock market since the start of the year, many companies have made double-digit gains above 40%.

These include Wema Bank (337.5%); Meyer (447.8%); Cadbury (96%); Champion Breweries (59.1%); Guinness (132.1%); ZP (104.9%); Eterna (48.5%); Seplat Energy (98.5%); presco (87.9%); SCOA (86.5%); Fidson (80.1%); Airtel Africa (81.4%); Academy Press (134%); Learn Africa (92.3%) and NAHCO (124.6%).

The Coronation Merchant Bank economic research team led by Chinwe Egwim, in its June 22 fixed income update, said: “Opening market liquidity was reported at 89.1 billion naira on Friday, June 17, 2022. – 13 percent. The average NTB yield rose +51 basis points week over week (w/w) to close at 4.6%.

“In the last primary market NTB auction held last week on Wednesday, the CBN offered and allotted 34.9 billion naira worth of NTB to market participants, the stop rates changed across the three durations 91 days: 2.49% (previously 2.5%), 182 days: 3.79% (previously 3.84%), 364 days: 6.07% (previously 6.44%).

“Meanwhile, the average yield on OMO bonds rose +19 basis points w/w to close at 4.6%. With respect to the FGN bond secondary market, the average yield rose 6 basis points w/w. basis w/w to close at 11.2% There was buying interest in the middle of the curve.

Coronation Merchant Bank economists also noted that in the Eurobond market, yields rose for all sovereigns under their coverage (average yield rose +564 basis points w/w to 18, 6%).

“Risk sentiments have driven the current spike in yields in the Eurobond market. Monetary policy tightening in advanced economies and deficit financing issues related to the country’s current fiscal situation are some of the reasons for these feelings,” they added.

Read also: Retirees hit hard by inflation which erodes monthly wages

Financial Derivatives Company analysts had in their June presentation to the Lagos Business School said they expected official price inflation to rise towards 18% before falling, adding that the MPC would maintain a hawkish stance. to fight inflation. They said the MPC could further increase the MPR by 50 basis points in July.

“Institutional investors will rebalance their portfolio for attractive bond yields. Telecom stocks will continue to rally. Bank stocks will drift as they struggle to gain market share and cut costs,” they added.

In the five months to May 2022, the total value of domestic and foreign transactions on Nigerian Exchange Limited (NGX) was N1.506 billion compared to N933.65 billion in the corresponding period last year .

Investors reacted to the companies’ annual earnings as well as their scorecard and declarations of dividends in the first quarter, the dominance of domestic players over foreign players in the market and weak returns in the income market. fixed, which forced investors to consider more profitable stocks. in the stock market.

Additionally, local investors are taking advantage of the incredibly low stock prices on the NGX to increase their investments.

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