Rising inflation is making the stock market unattractive to investors, especially at a time when the bearish streak on the stock market has not abated. uthman salami write
The Nigerian stock market, of late, has been in the eye of the storm. At the beginning of the year, the stock market was on a bull run. But things have been going bad since May of this year. Understandably, stock trading is not a one-way trade. It is expected to function as a trading system where purchases and sales are made, according to experts.
So should there be a problem when there is clearance? No. However, investors and market watchers are surprised when sell-offs continue unabated in the market.
The appreciation recorded from the beginning of the year to May was around 22 percent. But the situation has completely changed.
the punch had previously reported that in one week, stock investors lost a staggering N1.7 trillion. It also posted its biggest weekly and yearly loss in October, as the All Share Index declined 6.7 percent to close at 44,396.73 points, the lowest level since January.
Furthermore, with a market capitalization of N27.163 trillion in August to close at N23.88 trillion on 31 October 2022, it lost around 12.09%. This 12.09 percent is equivalent to N3.28 trillion lost in the three months.
In a desperate attempt to control inflation, the Central Bank of Nigeria raised the policy rate to 15.5 percent, from 14 percent at the last meeting of the Monetary Policy Committee.
This move, the capital market stakeholders believed, had an adverse influence on the market activities as the market is currently witnessing.
Meanwhile, the sell-off has continued to hit Nigerian stock investors harder. Investors are asking questions. Many of them wonder what changed between when the market was bullish and now that it’s losing almost every week. The cause of the downward trend in activities in the stock remains largely inflationary pressure, according to market watchers.
Last week, according to 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 month-on-month drop of 0.21%. Core inflation similarly spiked to 17.76 percent in October.
Records show that the Central Bank of Nigeria, through the Monetary Policy Committee, is ready to raise the Monetary Policy Rate in a bid to curb inflation.
This vicious economic circle weighs heavily on equity investors as it inadvertently leaves an adverse effect on their purchasing power, making it necessary to sell their assets to get more money and hedge against the inflationary trend.
Some of these assets may be related to the actions of investors.
Interestingly, yields on fixed assets like bonds and commercial paper remain the best bet for most investors, an area of investment where inflation has only had a positive impact. This is because the interest rate is higher during an inflationary period, which favors fixed income securities.
To get a proper perspective on this undue impact of the inflation rate on the stock market, a capital market analyst, Olatunji Aje, said: “When you have excess, that is when you think about investing. When there is inflation, the level of sponsorship and the market will always go down.
Speaking further, he said: “When there is inflation, the purchasing power of investors and people falls. Sometimes you may be forced to sell some of your assets and some of your shares to pay for certain things during inflation.
“And when you are selling more when the value of the money you have has eroded, you will sell at any price. You will sell at a gift price.”
Afrinvest Consulting’s Managing Director, Abiodun Keripe, speaking to the punchHe said the impact of inflation on the stock market was dimensional.
He explained that the weight would fall on real returns, particularly dividends and the cost of operating companies listed on the NGX.
He said: “You can dimension this in two perspectives. In terms of profitability, inflation will affect real profitability.
“In this sense, investors are starting to get distracted by fixed income instruments that easily react to continued inflationary pressure with the promise of higher yields.
“They will start to switch from the equity market to fixed income instruments where there is the promise of higher returns reflecting the pressure of inflation.
“The second part of this is that publicly traded companies are also going to see a bit of cost pressure to operate.
“Operating expenses will see a bit of cost pressure. Raw material costs will rise. So basically the cost of sales and the cost of production will go up.
“This will have an impact on the final result. What this means is lower profitability and, by extension, a lower dividend payout, which will also distract and discourage investors.
“This is the kind of impact it will have on the market, like distracting investors, causing investors to look away from the stock market towards the fixed income market which can easily react to inflation pressure, given the fact that interest rates will move. up.
“It is likely that the cost of operations will increase, which will cause a reduction in the final profitability. If investors are taking dividends when earnings are lower, this, by extension, means lower dividends.”
However, he maintained that the companies could overcome the pressure once their prices adjusted. “Once the company can adjust the bottom line so that its sales increase substantially, this will offset the high inflationary pressure on the bottom line.
“But if companies are committed, they can now adjust the dividend payout so that the dividend payout ratio can be increased so that investors can receive higher dividends.”
Also, the head of the retail department of Agusto and Co, Ayokunle Olubunmi, said that more activities were carried out in a fixed income market compared to the equity market because it was more attractive to investors.
“Normally, when you have high inflation, you notice that to respond to that and encourage investors, interest rates go up easily. You will notice during inflation that the interest on bonds, commercial paper, among others, rises easily. This is because they are fixed income instruments.
“They are more attractive compared to stocks. In this case, you will find that during the period of rising yields, you will see people leaving the stock market for bonds, and they also invest in commercial paper,” Olubunmi said.
Explaining further, he noted that “in the MPC meeting, CBN has increased the rate steadily. As a result of this, he will notice that the yield on asset-backed instruments, interest rates on bonds, and commercial paper have increased.
“Of all these bond and money market instruments, you know that your yield is already set. There is no risk. So why would you want to go and leave your money in the capital market where you are not sure of your returns?
“During the period of inflation, you will notice that the rate goes up. You will see people leaving the stock market for the fixed income market ”, he concluded.
One stockbroker, David Adonri of HIGHCAP, believed that the question of whether rising inflation had contributed to some of the stock market losses was a straightforward one.
According to him, “at the beginning of the year, when the market began to gain rapidly, it appreciated as much as 22 percent in May. Since that May, the market started taking a hit when the Central Bank of Nigeria started raising the interest rate to the point that what the market earned from that 22 percent is only about 2.5 percent.
“So now we can say that since the beginning of the year, the stock market has only gained about 2.5 percent,” Adonri said.
He added that “whenever inflation goes up, it depresses the stock market. The reason is that every time the monetary authority raises monetary policy, there will be increases in interest rates that will make financial assets move away from actions.
“That’s what we’ve 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 the shares.
He explained that if listed companies could not pay dividends as a result of the high cost of production, added to the low returns on sales, these shares would lose their attractiveness to investors.
“If there is high inflation, the prices of goods and services go up. This means that consumers will spend more to get what they used to buy at a relatively cheaper price.
“And if you pay more for what you once bought at a relatively lower price, you’re spending more money, which means you’re taking it out of your investment.
“The investment could be bank deposits, or you are selling your shares so you can buy the same amount of food you used to buy last year.
“To that extent, you will see a withdrawal of more funds from the banking system. You might even see a sell-off of some shares.
“And when people are selling and not buying, it means less money is going into the industry to invest.
“And because the price has gone up, people will buy less. If sales go down, it affects profitability, which consequently affects the attractiveness of your stock.
“It has a spiral effect on the cost of production and sales because if your cost is too high, more people can’t afford it. As a result, they fall off.
“And some companies will be in trouble because it is general inflation.
“To this extent, the prospects of listed companies become questionable.”
“Can they make a profit so they can generate dividends?” she asked, rhetorically.