Earlier this year, I advised folks via facebook to stock up food stuffs because of the likely inflationary effects of the 2009 federal government budget. So far, food inflation has been on the rise. Figures as of May 2009 showed that food prices had gone up by about 40 basis points (0.40%) from 15.3% in April to 15.7% in May. Although core inflation appears to be down by 10 points from 13.3% to 13.2%, there are fears that if food inflation continues to go up, it might eventually begin to reflect on the core inflation because of its weight in the consumer price index (CPI). Fears of a continous rise in food inflation are coming from speculation by meteriologists that rain is likely to stop earlier this year (www.stockmarketnigeria.com). This will constrain on supply an consequently push up prices. What this means is that consumers can cash-in the real value of their income by buying food stuff in stock in anticipation of a longer dry season but there are inflationary consequencies that come with panic buying.
On the monetary front, the common-year end fever is catching on quite soon. Communique 64 of the Central Bank of Nigeria (CBN) RELEASED ON 7th July 2009 revealed that inter-bank lending rates for April and May were 12.5% and 13.2% respectively. In June, the month when the new CBN Governor, Sanusi Lamido took office, inter-bank rates rose to as high as 18.6% and in the few days of July it ranged between 21-22 percent. Though the CBN is providing guarantee on all inter-bank placements from July 2009 to March 2010, the hostility among banks (reflected in the high inter-bank rates) is expected to continue for a while as banks approach the common year-end on one hand and battle with the bad margin loans littering their balance sheet on the other.
Monetary Policy Rate (MPR) was lowered by 200 basis points from 8% to 6%. There are serious implications for this with regards to the flow of investments in the capital market. Borrowing and lending rates theoretically move in positive correlation with the MPR. Equity investors are interested in these figures because the lower the MPR, the lower borrowing and lending rates but the higher the disposable income available for equity investment. Lower lending and borrowing rates make investments in fixed deposit products less attractive to investors.
On the face of it, investors are expected to look to the equity market but this depend on their perception of risk in the equity market. Investors are increasingly having guided optimism about the stock market. Recently, institutional investors like pension fund managers have taken a 'flight for safety' from equities to government treasuries. There has been some decline in the yields of medium and long-term government bonds. FGN bonds with maturity of 20 years posted a yield of 13.3% in January which is 100 points higher than yields posted by FGN bonds of the same maturity as of the last auction date in June. This means that investors still prefer to take bets on bonds than on equities.
Reduced MPR is expected to affect earnings in the next reporting season. Profits are expected to see a lift as cost of capital is expected to drop. A number of market fundamentals are expected to drive the stock market in the short-term. One is the expectations of positive corporate performance in the next reporting seasons. Another is the change of leadership at the Securities and Exchange Commission (SEC). Market confidence is set to return to the market as analyst believe a new era of professionalism and transparency is set to begin in the market with the appointment of Aruma Oteh as DG of SEC.
After much say about the pros of the drop in MPR, I still think it has been 'recklessly' done as the CBN has given away too much too soon. The CBN appears to be playing too much cards it has in its possession as it is expected to remain very conservative so as not to fuel inflation. Though interest rates may not drop to as low as they are in Europe and the US, it is wise to be careful with lending so that prices in the equity market can be explained by fundamentals and not mere speculation.
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