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CBN’s rate cut triggers rush for equities

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By Taofik Salako, Deputy Group Business Editor

Stunned by the decision of the Central Bank of Nigeria (CBN) to cut the benchmark interest rate,bewildered investors dumped fixed-income instruments and rushed to the equities market, pushing equities to their best performance in four months.

After five trading sessions of successive gains, Nigerian equities closed weekend with net capital gain of N390 billion, with average gain for the week at 2.92 per cent. The momentum of activities at the Nigerian Stock Exchange (NSE) also increased considerably with turnover volume and value rising by 46 per cent and 69 per cent.

The performance of Nigerian stocks was a silver lining in the slowdown in global equities markets with most advanced and emerging markets in America and Europe closing negative. United States’ benchmarks- Dow Jones Industrial Average (DJIA) and S & P declined by 3.0 per cent and 2.2 per cent. United Kingdom’s FTSE 100 Index also posted negative return of -2.7 per cent. Japan’s Nikkei 225 depreciated by 0.7 per cent. The broad MSCI EM Index-which tracks emerging markets, closed with average negative return of -4.6 per cent.

The CBN cut its Monetary Policy Rate (MPR) by 100 basis points to 11.5 per cent on Tuesday, in a surprise move that further heightened uncertainties in disconcerted fixed-income market. The apex bank stated that the rate cut was necessary to increase credit to the production sector of the economy in furtherance of its role in lessening the impact of the COVID-19 pandemic and global fluctuations.

With dividend yields of several quoted equities above fixed-income returns, attractive valuations of Nigerian stocks and steady operational performance by headlining companies, the shift to equities was sharp and swift.

Cordros Securities attributed the rally at the equities market to portfolio adjustments in favour of equities amid sharp drop in fixed-income yields following further monetary easing by the Monetary Policy Committee (MPC) of the CBN.

“We expect the market might continue to benefit as domestic investors seek alpha-yielding opportunities in the face of increasingly negative real returns in the fixed income market. However, we advise investors to trade in only fundamentally justified stocks as the weak macro environment remains a significant headwind for listed companies,” Cordros Securities stated in a weekend advisory review.

Aggregate market value of all quoted equities at the Nigerian Stock Exchange (NSE) rose from the week’s opening value of N13.365 trillion to close weekend at N13.755 trillion, indicating net gain of N390 billion or 2.9 per cent.

The All Share Index (ASI)- the value-based common index that tracks all share prices at the NSE, rose successively to close weekend at 26,319.34 points, its best performance since March 2020. It had opened the week at 25,572.57 points, indicating average gain of 2.92 per cent for the week.

Senior Research Analyst, FXTM, Lukman Otunuga, said the rate slash caught investors off-guard as they were expecting to remain unchanged for the rest of the year and early 2021.

Trading data at the weekend showed a market-wide rally as open market orders saw most deals closing at premium. The NSE 30 Index-which tracks the 30 largest stocks at NSE, posted a five-day average return of 3.50 per cent. The NSE Banking Index closed with a gain of 3.59 per cent. The NSE Insurance Index appreciated by 1.08 per cent. The NSE Oil and Gas Index rose by 1.16 per cent. The NSE Industrial Goods Index posted average gain of 2.44 per cent while the NSE Consumer Goods Index led the rally with average return of 5.99 per cent.

Total turnover at NSE stood at 1.57 billion shares worth N20.56 billion in 18,396 deals as against a total of 1.14 billion shares valued at N12.69 billion traded in 17,109 deals two weeks ago. The financial services sector remained atop activity chart with 1.18 billion shares valued at N9.18 billion in 9,900 deals, representing 75.14 per cent and 44.65 per cent of the total equity turnover volume and value respectively. The consumer goods sector followed with 90.0 million shares worth N1.69 billion in 2,715 deals while the information and communication technology sector placed third with a turnover of 84.67 million shares worth N5.79 billion in 771 deals.

Banking stocks continued to drive activities at the Exchange. The three most active stocks were Sterling Bank, FBN Holdings Plc and Zenith Bank Plc, which altogether accounted for 612.81 million shares worth N4.31 billion in 3,739 deals, 39.10 per cent and 20.97 per cent of the total equity turnover volume and value respectively.

Also, a total of 119,603 units of Exchange Traded Products valued at N1.228 million were traded in 16 deals compared with a total of 143,690 units valued at N1.246 billion traded in 19 deals penultimate week.

At the bond segment, a total of 467 units valued at N564,073 were traded in five deals compared with a total of 18,803 units valued at N19.581 million traded in eight deals two weeks ago.

A further review of the pricing trend showed that Nigerian Breweries recorded the most dramatic gain of 25.12 per cent during the week to close weekend at N52.55. However, AIICO Insurance suffered the biggest depreciation, dropping by 20 per cent to 72 kobo.

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