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Bond yields are on the rise and, among other factors, they are threatening equity returns. A sharp rise in bond yields so far has widened their gap with earnings yields, making stock investment unattractive.
The relation between the two is defined by the BEER ratio, or bond-earnings yield ratio, which is calculated by dividing the benchmark 10-year bond yield by the earnings yield of the stock market or the benchmark index.
On Friday, NGX all share index (ASI) price to earnings P/E ratio stood at 10.91 times resulting in an earnings yield value of 1.16 (1/forward PE multiple or EPS/price). And that gives a BEER ratio of 1.36. A value above 1 suggests equities are overvalued.
A consistent dividend payment with attractive yields combined with corporate profit growth have underpinned a bullish run since the start of the year as gradual economic recovery is buoyed by the rise in crude oil price.
The NGX All Share index has a year to date return of 24.55 percent.
The Q1-2022 GDP figures showed that the Nigerian economy expanded by 3.1 percent y/y in real terms, according to recent data from the National Bureau of Statistics (NBS).
Interestingly, the bond yields have been surreptitiously and gradually rising since last year and fund managers’ favorite asset class has always been the bonds, which is regarded as safe haven assets against macroeconomic headwinds.
The Nigeria 10 year government bond has a 11.148 percent yield, according to data from World Government Bonds.
That compares with a yield of 4.48 percent as at November 2020 and 5.10 percent in July.
There are indications that the concerns around the impact of inflationary pressures and rising raw material cost that elicited the central bank to hike the monetary policy rate will cause a more rotation from stocks to bonds since yields are going to be moving upwards.
If the policy maker continues to raise the key rate, portfolio managers will continue to allocate to fixed income,” said Johnson Chukwu, managing director and CEO of Cowry Asset Managers.
However, capital does not flow out of the country and fund managers are limited to the bonds available to them. Interest in Nigeria does not align with the monetary policy rate.
The Russian and Ukraine war that exposed the latter to sanctions from the United States and European Union has ballooned the price of grains as both countries are major exporters of the commodities.
The MPC, for the first time in two and a half years, raised the Monetary Policy Rate (MPR), hiking the benchmark rate by 150bps to 13.0 percent. The MPC also maintained the Cash Reserve Ratio (CRR) at 27.5 percent.
The MPR retained the asymmetric corridor at +100/-700 basis point around the MPR, while the Liquidity ratio was kept at 30.0 percent.
The headline inflation climbed further by 90bps to settle at 16.8 percent y/y in Apr-22, from the previous print of 15.9 percent y/y in Mar-22, which is 12bps higher than our forecast of 16.7 percent.
But Nigeria stocks are still somewhat attractive and relatively cheap compared to some frontier and emerging market peers.
The NGXASI index has a price to earnings ratio of 10.9 times, and that compares to South Africa, 10.20 times; Frontier Market, 11.20 times; Emerging Market, 11.50 times, and Developed World, 13.90 times.
It is noteworthy that the stock market is overvalued compared with Ghana’s equity market price to earnings ratio of 6.40 times; Egypt, 6.80 times, and Kenyan, 7.10 times.