Expect further sell down of equities as CBN hikes interest rate-Operators

Market operators have said that the decision of the Central Bank of Nigeria (CBN) to increase the interest rate by 15.5% would further depress investors’ appetite for equities to embrace money market instruments. 

The operators who said the investors will migrate their financial assets away from equities to money market instruments. 

The MPC voted to increase interest rates to a 15.5% as the apex bank fights rising inflation. 

The Central Bank, during its last MPC meeting had increased the interest rate from 11.5% to 14%. In the last two meetings, however, with the inflation rate still spiking above 20%, the CBN has raised the rate further to 15.5% in a bid to combat the rising cost of goods and services. 

According to them, when the interest rate is low, speculators move their funds from money market instruments to the stock market for higher yield, just as they move from stocks to other asset classes, especially money market instruments when the interest rate is high. 

The All Share Index (ASI) decreased by 27.87 basis points, representing a dip of 0.05% to close at 49,161.45 index points from 49.189.32 points reported the previous day. Similarly, the market capitalisation lost N15 billion or 0.05 to close at N26.517 trillion from N26.532 trillion. 

Mr. David Adonri, Executive Vice Chairman, Hicap Securities Limited in a chat with Nairametrics said when interest rates rise, investors tend to migrate to fixed income securities.  

“The hike is capable of migrating financial assets away from equities to fixed income; expect investors to sell down their shares in near term. Both equities and fixed income operate on yield, with the increase in interest rate the yield in fixed income will be higher and investors will move there until the price of equities fall to be competitive to debt market. If microeconomic improves and inflation starts dropping it will then favour the equity market and we will start seeing stabilization”. 

Speaking in the same vein, Mr. Eugene Ezenwa, Consultant on Capital market Activities said the increase in interest rate is expected following the country’s economic situation. 

“The increase is a reflection of the economy; with the inflation ravaging the country, there is no way CBN will not increase interest rate in order to fight the threat. However, it will have a negative effect on the capital market.  

“Capital market and money market work in inverse proportion. With the increase money market instruments like treasury bills, bonds and others will go up. Investors will sell down equities to move to those instruments. We will see investors drifting from stock market to money market. Stock market will get a hard hit from the development”.