The Nigerian stock market has had a dreadful first half of the year, with losses owing to a slow recovery and rising yield. Although recent auctions have witnessed a decrease in rate, the decrease may be too little to spark stock market activity.
Given current business values, the macroeconomic environment, and fixed income market rates, it is predicted that investors would favour certain counters throughout the market as the economy continues to recover from the COVID-induced recession.
So far in 2021, we have seen a return to the Fixed Income market as a result of rate rises, as previously indicated. This has coincided with a drop in the local equities market, which has lost 5.89% YTD at the time of writing this report as investors seek safe haven options. However, local market rates remain considerably below current inflation rates, a situation made worse by the depreciation of the Naira.
Nigeria stock market performance to remain weakened by FI rates
The market’s decline has been fueled largely by rising fixed income rates, which have resulted in a liquidity exodus from the equities market. Rates are expected to continue increasing, impacting on equities activity, according to Vetiva Capital Management Limited’s Nigeria H2’21 Outlook ‘No country for old policies’.
As a result of the increased rates given across the fixed income market, the banking industry will also have a robust second half, largely driven by interest income.
Finally, with foreign investors becoming net sellers for the second year in a row, the present economic scenario may put more strain on market liquidity, putting downward pressure on market values across the board.
Commercial paper activity is expected to continue in the face of favourable yield conditions
According to Vetiva, firms have raised N204.98 billion and $80 million through commercial paper issuance in 2021, with rates ranging from 1.25% to 10.0%. This activity is expected to outperform the $604 billion raised in 2020, despite the fact that the dollar amount has already been surpassed ($76.52 million in FY20).
Despite our expectations for higher returns in the FI market in general, the sluggish pace of recovery, along with low equity values, makes it more probable that firms seeking financing will continue to choose the FI market. As a result, vetiva projected that local corporations will raise a total of $700 billion in the market by the end of the year.
Final yield position will hinge on FGN borrowing
The yield rate has lately dropped, with the most recent offer having a lower interest rate than the previous month’s offer. Despite the fact that the rate was reduced in June, subscriptions increased as a result of the ongoing liquidity crisis and investors’ preference for risk-free assets.
Udegbunam Dumebi, a fixed income trader at UBA, told Nairametrics that the trend of rate cuts is the outcome of the government’s (DMO) attempt to lower borrowing costs.
“Nigeria is currently experiencing a serious problem as the cost of borrowing rises, with one of the worst debt servicing ratios and debt to revenue ratios among her emerging market peers. As a result, the government is attempting to lower borrowing costs by lowering interest rates as the draw closer to their domestics debt target,” Dumebi said.