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Monday, March 27, 2023

MPC: Stocks to Sustain Rally with Real Bond Yields Firmly Negative

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Nigerian stocks are expected to continue with their momentum as the Monetary Policy Committee (MPC) held its first meeting of the year on the 25th and 26th of January 2021 and voted to leave all parameters unchanged.

In reaching its decision, the Committee acknowledged the policy dilemma before it but maintained that the need to hasten the recovery process through sustained and targeted spending in collaboration with the fiscal authority was imperative.

After reviewing available policy alternatives, the Committee voted to maintain the benchmark rate at 11.50 percent, while also keeping all parameters (CRR at 27.5%, liquidity ratio at 30.00%, asymmetric corridor at +100bps/-700bps around the MPR) unchanged.

Analysts say the decision means the real rate of return on fixed income instruments will remain negative while equities continue to benefit from the search for attractive investment instruments.

With three (3) trading weeks into 2021, the local bourse has recorded impressive activity levels so far trading just over N11.25 billion worth of shares in about 100,000 deals, with year to date return currently at 3.26 percent (as at 26th January 2021).

Negative real yields on naira bonds (c. negative 7 – 8%) and inflation galloping means investors will seek out opportunities elsewhere to generate alpha.

Returns on Nigerian local-currency bonds are down 6.48 percent year to date, according to the S&P FMDQ, Nigeria Sovereign Bond Index.

Rising inflation expectations which accelerated to a 35-month high of 15.75 percent in December is spooking fixed income investors.

The yield on Nigerian naira bonds due November 2029 fell 3 basis points this week to 8.24 percent as of the market close on Tuesday. The yield is still well below inflation.

Consumer inflation will remain in the double digits unless authorities’ reform policy with the aim of raising aggregate supply, the MPC said.

“Our expectation is that investors’ interest in equities will be sustained largely by the depressed fixed income yield environment and the hunt for better returns. Also, we expect the release of the 2020FY financial results accompanied by dividend announcements to influence the market’s direction in the short term,” analysts at Meristem Securities said in a note to clients.

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