Buy these stocks to hedge against Nigeria’s galloping inflation

The decision of the Central Bank of Nigeria (CBN) to increase the interest rate by 15.5% has further depressed investors’ appetite for equities as investors continue to move their financial assets away from equities to money market instruments. 

The MPC voted to increase interest rates to 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 20.52% in August, the CBN has raised the rate further to 15.5% in a bid to combat the rising cost of goods and services. Inflation is now 20.77% for the month of September.

Despite these rate hikes and the associated impact it has had on capital markets, especially equities, investment experts who have made money for rich people over the years recommend now is probably the time to start accumulating stocks.

Why you should consider stocks

According to market analysts, 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. 

• If microeconomics improves and inflation starts dropping it will then favour the equity market which will start seeing stabilization.
• There is certainly an impact on the equities as a result of higher interest rates, but investors should not make the mistake of thinking these moves means you should abandon the stock market entirely.
• Rather than avoid the market following the sell-offs, there’s still money to be made if investors are in the right sectors.
• That means looking at some of the sectors that have been the best-performing despite that the economy is struggling. 

According to Nairametrics’ chat with some investment analysts, dividend-paying and low-price stocks with strong fundamentals are expected to do well given their half-year performance which has been decent. 

• They noted that given that the share prices of the companies quoted in this sector are dropping makes it is more attractive to invest in.  
• In typical Nairametrics style, we spoke to some financial experts to get a view of what equities they can invest

What the financial analysts are saying 

Mr. David Adonri, Executive Vice Chairman, Hicap Securities Limited said:

• “As interest rates rise, the financial assets will then migrate from equities to the debt market or fixed income securities, which means the prices of equities will fall. It is an opportunity to buy stocks. 
• Areas that are elastic in demand like consumer goods stocks and banking stocks are likely to be stocked to pick up during interest rate hikes.  
• “Investors should take a position in Food and pharmaceutical companies such as Okomu Oil Plc, Presco Plc, BUA Foods Plc, GSK Plc, Neimeth Pharmaceuticals Plc, and May & Baker Plc.
• “ Banking sector is always the veritable area, particularly during this period of an interest rate hike and inflation. Banks such as Zenith Bank Plc, UBA Plc, GTCO Plc, Access Bank Plc Fidelity Bank Plc, and Stanbic IBTC are good investment destinations. Oil and gas stocks are also likely to benefit from inflation.
• Most of these companies with good records which have declined so low as investors migrate to fixed income offer investment opportunities to investors because they are likely to recover as the economy is being adjusted. Like the banking stocks that have fallen so low are likely to recover when very quick when the economy has adjusted”. 

According to Managing Director Cowry Asset Management Limited,Mr. Johnson Chukwu

•  “Dividend-paying companies offer better opportunities, especially the companies that are paying an interim dividend.
• Financial stocks like GTCO, Zenith Bank, Access Holdings, Fidelity Bank, and consumer goods stocks like Guinness Nigeria, and Nigerian Breweries that paid interim dividends are good picks.
• The reason is that cash is king when the cash is coming regularly you can invest either in fixed-income securities or reinvest in equities”. 

Kasimu Garba Kurfi, Chief Executive Officer and Managing Director, APT Securities and Funds Limited said:

• “The stocks when the interest rate is high such as this time. Invest in stocks that give double-digit dividend yields such as GTCO, Zenith, and UCAP, and also the stocks that have double-digit earnings yields such as WAPCO, Fidelity Bank, and Transcorp. Dangote Cement, Dangote Sugar, Vitafoam, Fidson, BUA Foods, Nigeria Flour Mills, Presco, and also stocks that their prices are below 52 weeks low such as UBA, Access Holdings, GTCO, Transcorp, AIICO, and AXA-Mansard”.   

Mr. Mike Eze, Managing Director of Crane Securities Limited said:  Taking an active stock-picking approach can throw up some interesting investment opportunities on the back of rising interest rates.

Take banks, as an example. Banks earn more when interest rates rise, based on the simple fact that they can charge more on the money they lend – interest income and operating profit margins benefit.  

• Also, on that basis, take a look at companies with a decent sum of cash in the bank. Cash-rich companies benefit from rising interest rates too, because they earn more on their cash reserves.
• So all those companies that have been cutting costs and accruing cash during and post-pandemic will now be reaping even greater rewards, simply for having cash piles that are now paying their own way.
• The banking sector is always the veritable area, particularly this last quarter of the year. Banks such as Zenith Bank Plc, UBA Plc, GTCO Plc, Access Bank Plc Fidelity Bank Plc, and Stanbic IBTC are good investment destinations for this period.  
• “When they were marked down for interim dividend, their prices started going down and that is to the advantage of investors. This is a good area to invest in now as against the end of the year when they will pay their dividend. Investors should gravitate towards those high-flying banks. 

But, but, Nairametrics analysts however recommend a cautionary approach to invest in equities despite the opportunities that abound.

• It is likely that stocks will fall further before they start to pick up again as has been the case in recent years. 
• Therefore a staggered approach to buying stocks should be explored, where you buy in tranches and take advantage of falling prices.

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