Stock market falters 2.33% as CBN hike weighs on investors’ sentiment

Onome Amuge

The Nigerian stock market suffered a decline in the week ending Friday, July 26, 2024, driven by the Central Bank of Nigeria’s (CBN) recent decision to increase its benchmark interest rate. Market analysis indicated that the move had a ripple effect across the economy, with investors responding by pulling back from the market, resulting in lower stock prices.

The Nigerian Exchange Limited (NGX) suffered a noticeable dip as its All-Share Index (ASI) and market capitalisation fell 2.33 percent, amounting to N1.32 trillion in value erosion.

The week began on a positive note with small gains, but the market took a downturn as the CBN announced on Tuesday (July 23) that its Monetary Policy Committee (MPC) had decided to hike the Monetary Policy Rate (MPR) by 50 basis points, raising it from 26.25 percent to 26.75 percent.

In its efforts to contain rampant inflation in the economy, the CBN’s move to increase the MPR appears to have inadvertently dampened investor enthusiasm for equities, as the yield on fixed income investments became more attractive. As a result, the NGX experienced a drop in its All-Share Index and market capitalisation. The ASI plummeted by 1,337.91 points, declining from 100,539.40 points on the previous Friday to 98,201.49 points by the close of the review week.

The market capitalisation, a key indicator of investor sentiment, followed a similar path, retreating from N56.929 trillion to N55.605 trillion over the course of the review week. The downward trend was underscored by four consecutive days of negative closes, eclipsing the modest gains of a single trading day.

This pattern, analysts noted, suggests that investors were cautiously hedging their bets in response to the CBN’s decision and its potential implications for the overall economy.

The market’s decline was compounded by a spate of lacklustre financial results released by various companies during the review week. As these reports failed to meet investors’ expectations, the prevailing sentiment took a further hit, leading to widespread selling pressure in the market.

The industrial and banking sectors bore the brunt of the market’s losses, plunging by 5.89 percent and 2.94 percent respectively, as investors reacted to the CBN’s rate hike and underwhelming corporate earnings. This was followed by  decreases in the consumer goods sector (0.73%), insurance (0.27%), and oil & gas stocks (0.54%), all of which experienced a market-wide pullback amid the prevailing cautionary sentiment.

Amidst a prevailing trend of market turbulence, the NGX All-Share Index’s 1.85 percent slump in July proved a minor setback for investors, who could still take solace in the overall positive market outlook for the year, with a commendable year-to-date return of 31.33 percent.

While the overall annual return provides a glimmer of hope for the Nigerian stock market, the CBN’s rate hike has reignited fears about the longevity of these gains, as investors weigh the potential impact of rising interest rates and inflation on the market’s performance. These concerns are amplified by the realisation that, even with a positive year-to-date return, the current macroeconomic environment poses unique challenges to the market’s capacity to maintain its growth trajectory.

With the CBN’s hawkish stance on interest rates aimed at taming inflation, financial analysts have highlighted the unintended effects of this approach on the broader financial sector. The resulting increase in interest rates has, in turn, triggered a shift in investor preference towards fixed income securities, as the promise of higher returns makes these instruments more attractive.

This preference for the safety of fixed income is expected to endure as long as the CBN persists with its hawkish approach to monetary policy, potentially signalling a prolonged period of subdued investor confidence in the equity market.