Investors ditch Nigerian stocks amid rising inflation
Rising inflation is making the stock market unattractive for investors, especially at a time when the bear run on the floor continues unabated, Othman Salami writing
The Nigerian stock market, lately, has been in the eye of the storm. At the start of the year, the stock market was on an uptrend. But things have gone south since May of this year. Naturally, stock trading is not one-way traffic. According to experts, it should work like a trading system where buying and selling takes place.
So, should there be a problem in the event of a sale? No. However, investors and market watchers are frowning as the selling continues unabated in the market.
The appreciation recorded from the beginning of the year to May was around 22%. But the situation has completely changed.
The punch previously reported that within a week stock market investors lost 1.7 trillion naira. It also recorded its biggest weekly and annual loss in October, with the All Share Index falling 6.7% to close at 44,396.73 points, the lowest since January.
Additionally, with a market capitalization of 27.163 billion naira in August to close at 23.88 billion naira as of October 31, 2022, approximately 12.09% was lost. This 12.09% equates to 3.28 billion naira lost over the three months.
In a desperate attempt to rein in inflation, the Central Bank of Nigeria raised the policy rate to 15.5% from 14% at the last Monetary Policy Committee meeting.
According to capital market stakeholders, this decision has had a negative influence on market activities, as seen in the market today.
Meanwhile, the selloff continued to eat away more at Nigerian stock investors. Investors are asking questions. Many of them wonder what has changed between when the market was on an uptrend and now losses are being recorded almost every week. The cause of the stock’s decline in activity remains largely inflationary pressure, according to market watchers.
Just last week, based on data from the Nigerian Bureau of Statistics, headline inflation accelerated to 21.09% from 20.77% in September.
Food inflation maintained its upward trajectory, accelerating to 23.72% with a monthly decline of 0.21%. Core inflation also rose to 17.76% in October.
Records show that the Central Bank of Nigeria, through the Monetary Policy Committee, is ready to raise the policy rate in a bid to contain inflation.
This vicious economic cycle weighs heavily on equity investors as it inadvertently leaves a negative effect on their purchasing power hence the need to sell their assets to get more money and hedge against the inflationary trend.
Some of these assets may not be unrelated to investors’ actions.
Interestingly, returns on fixed assets such as bonds and commercial paper remained the best bet for most investors, being one area of investing where inflation only had a positive impact. This is because the interest rate is higher during a period of inflation, which favors fixed income securities.
To get a good perspective on this undue impact of the inflation rate on the equity market, a capital market analyst, Olatunji Aje, said, “When you have excess, that’s when you think about the investment. When there is inflation, the level of customers and the market will always go down.
Speaking further, he said: “When there is inflation, the purchasing power of investors and people goes down. Sometimes you may have to sell some of your assets and some of your stocks to afford certain things during inflation.
“And when you sell more when the value of the money you have has been eroded, you will sell at any price. You will sell at a promotional price.
Managing Director of Afrinvest Consulting, Abiodun Keripe, during an interview with The punchsaid the impact of inflation on the stock market was dimensional.
He explained that the burden would fall on actual returns, particularly dividends and the cost of operations of NGX-listed companies.
He said: “You can scale this from two angles. In terms of yields, inflation will affect real yields.
“In this sense, investors are beginning to get distracted by fixed income instruments that easily respond to continued inflationary pressure with the promise of higher returns.
“They will start to move from the equity market to fixed income instruments where there is a promise of higher returns that reflect the pressure of inflation.
“The second part of this is for publicly traded companies who will also see a bit of pressure due to their operating costs.
“Operating expenses will experience some cost pressure. Raw material costs will increase. So basically the cost of sales and the cost of production will go up.
“It will impact the bottom line. This means lower profitability and, by extension, lower dividend payout, which will also distract and discourage investors.
“That’s the kind of impact it will have on the market, like distracting investors, diverting investors from the equity market to the fixed income market which is able to easily respond to inflationary pressures, being given that interest rates will move up.
“The cost of trading will likely increase, leading to a reduction in overall profitability. If investors receive dividends when earnings are lower, that, by extension, means lower dividends.
He argued, however, that companies could overcome the pressure once their prices adjust. “Once the company can adjust its results so that its sales increase significantly, it will offset the high inflationary pressure on the results.
“But if companies commit, they can now adjust the dividend payout so that the dividend payout ratio can increase so investors can receive higher dividends.”
In addition, Agusto and Co’s head of retail department Ayokunle Olubunmi said that more business takes place in a fixed income market compared to the equity market as it is more attractive to investors. .
“Generally, when you have high inflation, you notice that in response to that to encourage investors, interest rates go up easily. You will notice during inflation that the interest on bonds, treasury bills, etc. goes up easily. Indeed, they are fixed income instruments.
“They are more attractive than stocks. In this case, you will find that during the period of rising yields, you see people leaving the equity market for bonds, and they also invest in commercial papers,” Olubunmi said.
Explaining further, he noted that “during the MPC meeting, CBN increased the rate steadily. As a result, you will notice that the yield on asset-backed instruments, interest rates on bonds and commercial paper have increased.
“Of all these bond and monetary instruments, you know that your return is already fixed. There is no risk. So why do you want to go and leave your money in the capital market where you are unsure of your returns?
“During the period of inflation, you will notice that the rate increases. You will see people leaving the equity market for the fixed income market,” he concluded.
A stockbroker, David Adonri of HIGHCAP, said the question of whether soaring inflation contributed to some of the losses in the equity market was straightforward.
According to him, “At the beginning of the year, when the market started to gain rapidly, it appreciated by about 22% in May. From this May, the market started to take a hit when the Central Bank of Nigeria started raising the interest rate to the point that what the market gained from that 22% is only about 2.5%.
“So we can now say that year-to-date, the equity market has only gained about 2.5%,” Adonri said.
He added that “every time inflation rises, it depresses the stock market. The reason for this is that every time the monetary authority raises monetary policy, there will be interest rate hikes that will cause financial assets to migrate away from equities.
“This is what we have been experiencing since the beginning of the year.”
For his part, a senior capital market analyst, Rasheed Yusuf, said the dividend was what drew investors to stocks.
He explained that if listed companies could not pay dividends due to the high cost of production, coupled with low sales returns, these stocks would lose their appeal to investors.
“If there is high inflation, the prices of goods and services rise. This means that consumers will spend more to get what they bought before at a relatively cheaper price.
“And if you’re paying more for what you’ve already purchased at a relatively lower price, you’re spending more money, which means you’re taking it out of your investment.”
“The investment can be either the bank deposits or you sell your shares so you can buy the same amount of food you used to buy last year.
“To this extent, you will see a withdrawal of more funds from the banking system. You might even see a sell-off in some stocks.
“And when people are selling and not buying, that means less money is going into the industry.
“And because the price has gone up, people will buy less. If sales drop, it affects profitability, which in turn affects the attractiveness of your stock.
“It has a spiraling effect on the cost of production and selling because if your cost is too high, more people can’t afford it. As a result, they fall.
“And some companies will be in trouble because it’s general inflation.
“To this extent, the prospects of companies that are listed become questionable.”
“Can they make a profit so they can make dividends?” he asked, rhetorically.