Thursday, 11 August 2016

CBN’s New Policy Pushes Up Investments In Fixed Income

Money and equity markets have recorded divergent policy outcome arising from upward review of Monetary Policy Rate, MPR, by Central Bank of Nigeria, CBN, as huge cash inflow is recorded in fixed income market, while bonds and equity markets suffer adverse outflows.

In the last week of July 2016, CBN’s Monetary Policy Committee, MPC, raised its benchmark rate to 14 per cent from 12, in a bid to attract foreign investors and narrow the widening gap between MPR and inflation rate.

Investigations revealed that net inflows to fixed income market in the first week of the new policy rose to N134 billion from N32 billion recorded throughout June and had continued to rise since then, with money market dealers indicating that August net inflow may exceed N500 billion. This came as yield rose dramatically on the heels of the policy change.

However, the dealers explained that the inflows represented outflows from other segments of the financial instruments, including equities market, indicating an adverse policy impact on them.

Consequently, while yields in fixed income market have trended up steadily, returns at the equity market have trended downwards with year-to-date, at negative of -4.4 per cent, as market capitalization plummeted to N9.2 trillion yesterday, down from N9.4 trillion as at date of new policy.

Financial institutions are expecting this trend to continue through the life span of the current MPR which may last till October or beyond.

Analysts at FSDH Merchant Bank said they expected that interest rate and yield would rise further in the month of August, compared with July 2016 because of the desire of the CBN to achieve positive real yield on fixed income securities.

Though they noted that CBN’s intention was to attract foreign exchange inflows into the Nigerian economy to shore up external reserves for the defence of the value of the Naira, they, however, stated: “We do not expect a significant attraction of the intended foreign exchange inflows because of the weakness of the Nigerian economy, particularly the current account in the balance of payment and balance from foreign trade.”

On the outlook down the month of August, they stated: “The rising yields on fixed income securities may continue to have negative impact on the equity market.”
They, therefore, recommended that investors should maintain a medium-to-long term position in the market while reiterating that long-term investors should take long positions in stocks that had strong fundamentals.

For analysts at FBN Merchant Bank, an arm of First Bank of Nigeria Plc, describing the policy as bold explained that bolder steps would be required in the form of further rate hikes, if the foreign exchange market was to attract sizeable autonomous flows and the exchange rate was to settle.
They also added that monetary tightening, rising inflation and, more importantly, FGN’s unprecedented issuance programme for its treasury bills, pointed to a widening of bond yields, which they said would breach the 16 per cent threshold in the weeks ahead.

Speaking on this development, Senior Analyst at CardinalStone Partners, a Lagos- based investment house, Tiffany Odugwe, said “given the currently high interest rate environment following the MPC’s decision to hike the MPR to attract foreign investments, yields may rise throughout August.

“However, at currently attractive levels, healthy demand for these securities may drive yields down but not to significantly lower levels. Also, given the need to manage foreign exchange rate, we do not see the CBN relaxing its tight grip on system liquidity soon, which implies that fixed income yields will likely remain high.

“If yields continue to inch upward or even remain at current levels, there will be a crowd out effect on the equities market. Investors will gravitate towards the relatively safer returns that fixed income securities offer and that will mean a continued dismal performance for the equities market”.

Analysts at WSTC Financial Services Limited, another Lagos based investment house, stated: “we expect the tightening effect of the increase in benchmark rate to drive yields upwards to a level that will deliver positive real return to investors in the fixed income market. We expect attractive yields in the fixed income market to shift investors’ focus from equities”.

In their reactions analysts at Greenwich Trust Limited, another Lagos based financial institution, said “we expect an uptick in lending rates to the real sector from deposit money banks as the MPC has completely reversed course after monetary easing in November 2015, when the MPR was cut from 13.0% to 11.0% failed to generate the credit growth the CBN anticipated”.

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