Market operators have opined that the decision of the Central Bank of Nigeria (CBN) to further increase the interest rate to 16.5% could further hurt the equities market which has just started to recover.
They argued that the increase could prompt investors to navigate towards fixed-income space.
This is despite the fact that the equities market has seen a bullish trend in the last couple of days which saw the market close with a gain of N710 billion as of Wednesday, November 23, 2022.
Reversal to bear run: Some of the operators who spoke with Nairametrics said that the investors will migrate their financial assets away from equities to money market instruments, causing a reversal to a bearish market.
The analysts explained that when the interest rate is low, speculators move their funds from money market instruments to the stock market for higher yields. And when the reverse is the case, they move from stocks to other asset classes, especially money market instruments.
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Fixed-income takeover: The Managing Director of Crane Securities Limited, Mr Mike Eze, further explained to Nairametrics why he thinks investors will move their money to fixed-income.
“The purpose is for high return and stability of capital. There is no sentiment attached to it. Investors will further navigate towards fixed income space because it is not favourable. Considering the current CBN MPC announcement on further hiking the rate to 16.5%, there will be negative effects on the market. The current bullish trend that we notice in the last couple of days will revert to a bearish trend. It is only the conservative investors in the market that will retain their investment in the stocks while watching the trends.
“There will be a run till the end of the year. But because the market has a self-adjusting mechanism, after a while when it has gotten to an all-time low, it will automatically reverse on its own even without any information or any other variables and become bullish, why because the prices have gotten so low that it has now become very attractive. That may be towards the end of the year.”
Executive Vice Chairman of Hicap Securities Limited, Mr David Adonri, also agreed that when interest rate rise, investors tend to migrate to fixed-income securities.
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He noted that the recent hike will negatively impact the market, especially on the equity side.
“The recent hike is expected to further depress the equities market that just started recovering. The hike is likely to reverse the recovery of equities. The market will react negatively to this current month as investors will find solace in the fixed income segment, but if there are any other sensitive activities after this month, it can change the direction of the market,” he said.
Disruptions of rate hikes: Chief Executive Officer at Wyoming Capital & Partners, Mr Tajudeen Olayinka, said:
“The last three interest rate hikes by CBN have caused so much disruption to the market, as it is responsible for the prolonged repricing of securities across markets and instruments, including loans and advances by banks. This is the real problem.”