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Wednesday, March 22, 2023

Stocks Gloomy Outlook Worsens on Rising Yields

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…as Airtel Africa roils market

The acceleration of inflation which has spurred the central bank to lift interest rates to 15.50 percent, and the monetary tightening that is expected to continue into 2023, has widened the gloomy outlook for Nigerian stocks.

It is not unusual for the local investors to dump shares for safe haven assets such as gold, government bonds and the United States treasury yields in an election period, but the difference this time around is the twin shock of rising prices made worse by the war in Europe.

The National Bureau of Statistics (NBS) report on consumer prices showed that headline inflation was higher in September 2022 (20.77% YoY vs. 20.52% in August). Both the food and core indices continue to contribute to the uptrend in headline inflation.

“It means higher returns on the money market and there is no sign that stubborn inflation will simmer down soon,” said Tajudeen Ibrahim, director of research at Chapel Hill Denham Limited.

“Valuations are gradually getting weak because prices are falling and earnings remain resilient,” said Ibrahim.

While the NGX ASI increased by 0.15 percent to 44,396.73 points (pts), driving year to date (YTD) returns to +3.93 percent as of 2:00pm on Friday in Lagos, it is lower than the 18.18 percent YTD recorded on August 4.

The major drivers of equity market performance so far this year have been local investors and impressive corporate performance that underpinned expectation of bumper dividend payment by bellwether firms.

Analysts attribute the stock market rout in the last three weeks to the precipitous drop in share price of Airtel Africa Plc, the second most capitalised firm in Nigeria.

Before the telecoms firms share price fell 30 percent, the shares had been appreciating because investors who wanted to avert being hit by the foreign exchange scarcity and repatriate their funds out of the country sold other stocks to buy Airtel and convert it abroad.

This saw the price of the company jump from N950 at the start of the year to N2,000 on July 7, 2022. However, the stock has lost 30 percent to close at N1,312 as of October 21, 2022 as the arbitrate game is over and people are not willing to sell.

“Initially, when Airtel stock was up by 100 percent the NGX ASI YTD stood at 16 percent even as the banks were not doing well,” said Paul Uzum, a Stock broker at Golden Securities Limited.

“Now that we are seeing distortion in the company’s stocks, the overall market is also feeling the pinch as it has a weight of 16.15 percent,’’ said Uzum.

There has been rotation from stocks to bonds as investors fret that rising interest rate and inflation will balloon the cost of debt that means firms will be paying a higher interest on money borrowed from the bank. Of course, rising finance costs erodes profitability.

The Nigeria 10-year government bond has a 14.353 percent yield, according to data from World Government Bond. That compares with 1o year bond yield of 4.17 percent as of October 27, 2020, during the coronavirus pandemic that forced the government to impose a lockdown policy that paralyzed business activities.

Brent crude oil gained 0.27 percent to touch down at $92.65 per barrel while West Texas Intermediate (WTI) was up 0.13 percent to sell at $84.75.

It is important to note that rising inflation and currency devaluation have ballooned the cost of production for firms as the Russian Ukraine war bloated the price of grains that are primary raw materials for manufacturers across the globe.

There are indications the tough and unpredictable macroeconomic environment is taking its toll on corporates as Unilever Nigeria posted a loss after tax of N2.25 billion in the third quarter of 2022.

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