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Stocks rise from nine-month low after rate cut

By on November 27, 2015

Stocks recovered from a nine-month low on Wednesday to gain 0.24 per cent after the Central Bank of Nigeria’s announcement on Tuesday of a surprise interest rate cut aimed at stimulating lending in the nation’s economy.

The stock market, which has the second-biggest weighting after Kuwait on the MSCI frontier market index, erased seven days of losses to climb to 27,662 points, according to a report by Reuters.

The index, which had fallen by 20.4 per cent so far this year, shed 3.3 per cent in the seven days before the CBN’s decision on rates on Tuesday.

The central bank had reduced the interest rate from 13 per cent to 11 per cent, which is the first reduction in the cost of borrowing in more than six years. The continent’s top oil producer has been hard hit by a plunge in crude prices over the last year.

Top gainers were given as Transcorp, which rose by 4.02 per cent; Fidelity Bank, 2.21 per cent; and Dangote Cement, 1.27 per cent.

The Head of Research at Afrinvest, Ayodeji Ebo, said, “On the back of the reduction in policy rates… investors are reconsidering investment in the equities market to earn higher returns. We anticipate further moderation in bond yields.”

He expected stocks in the industrial sector such as Dangote Cement and Lafarge Africa to gain from the liquidity surge as infrastructure projects boom.

Ebo said the rate cut might hurt bank earnings as consumer firms reeled from dollar shortages.

Yield on the most liquid five-year bond fell by 264 basis points to a five-year low of seven per cent while the benchmark 20-year bond closed 150 basis points down at 10.8 per cent on Wednesday, traders said.

Bond yields had traded above 11 per cent across maturities prior to Tuesday’s rate decision, with the 2034 bond trading at 12.3 per cent.

The central bank has been injecting cash into the banking system since October in a bid to help the economy. Banking system credit stood at N290bn as of Wednesday, keeping overnight rates as low as 0.5 per cent.

The Head of Africa Strategy, Standard Chartered Bank, Samir Gadio, said bond holders could be exposed to future losses should the interest rate easing cycle suddenly end with inflation currently trading at 9.3 per cent below the yields.

The rate cut also weakened the naira on the unofficial market, which fell by 0.8 per cent to 242 to the dollar. The currency is pegged at N197 on the official market.

Non-deliverable currency forwards, a derivative product used to hedge against future exchange rate moves, indicated that markets expected the naira’s exchange rate at 235.56 to the dollar in 12 months’ time – the strongest level in five months – and compared to 245.25 at Tuesday’s close.

“Our economists still believe a devaluation will happen in a couple of quarters but I think they have had opportunities,” said the Head of CEEMEA debt and FX strategy at Citi, Luis Costa.
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