Financial market analysts are anticipating a reduction in the benchmark Monetary Policy Rate (MPR) by the Central Bank of Nigeria’s (CBN) Monetary Policy Committee (MPC) whose two-day meeting commences today in Abuja.
Analysts based their prediction on the fact that the CBN had in the past few days announced expansionary measures in the quest to cushion the impact of COVID-19 on the economy, saying leaving the MPR at a high level might be counterproductive.
The COVID-19 pandemic has also resulted in the massive plunge in the prices of stocks following weak demand, thus opening a new entry opportunity for long-term investors in the Nigerian equities market.
At the last MPC meeting held in January, the central bank had raised the Cash Reserve Ratio (CRR) by 500 basis points to 27.5 per cent, from 22.5 per cent.
The bank, however, had kept other monetary policy instruments unchanged by retaining the MPR at 13.5 per cent as well as the liquidity ratio at 30 per cent. It had explained that the decision to increase the CRR was a response to the growing threat of inflation.
Nigeria’s Consumer Price Index, which is used to measure inflation, increased to 12.20 per cent in February 2020.
Also, CBN Governor, Mr. Godwin Emefiele, while announcing a raft of measures to cushion the effects of COVID-19 on the economy last week had signalled a decision on interest rate would be taken at the MPC meeting.
He had said: “The CBN would not decree on interest rates but what happens is that as a result of activities in the market, the size of liquidity in the market, interest rate will either go up or come down also depending on the decisions of the monetary policy committee.”
But speaking with THISDAY yesterday on his expectation from today’s meeting, the Managing Director, Financial Derivatives Company Limited, Mr. Bismarck Rewane, anticipated a cut in interest rate, considering the developments in the global economy.
“I think they would go the same way with other central banks considering what is going on in the world,” Rewane said.
Also, the Managing Director, Afrinvest Securities Limited, Mr. Ayodeji Ebo, also predicted a slash in interest.
“It won’t be a surprise to see the CBN cut the benchmark interest rate. The CBN may want to signal that it is in the mode for accommodative monetary policy by reducing interest rate,” he added.
However, a Senior Research Analyst at FXTM, Mr. Lukman Otunuga, stated that with the inflationary pressure, there would be little room for the central bank to cut interest rates.
Instead, he anticipated that the CBN may implement more unconventional tools to stimulate the economy.
“Oil prices have depreciated over 50 per cent since the start of 2020 amid the COVID-19 outbreak and the raging price war between Saudi Arabia and Russia. Foreign exchange reserves in Nigeria decreased to $36.38 billion in February and may drop further if oil prices fail to recover,” Otunuga added.
Opportunity Opens for Investors as Stock Prices Decline 40%
Meanwhile, many stocks are trading over 40 per cent cheaper than their year’s opening values as a result of the unprecedented decline suffered by the market in the last two weeks.
Operators said since most stocks have strong fundamentals, investors with long-term objective should take advantage of the low prices to increase their portfolios.
The market has declined about 17.3 per cent year-to-date (YTD), while some stocks have declined by almost 50 per cent in the same period.
However, instead of panicking and dumping shares, market analysts have said they see opportunities and advised investors to take advantage of the bearish situation and increase their investments.
For instance, analysts at Afrinvest (West Africa), an investment banking firm, said they see opportunities in the local bourse for medium to long-term investors.
“With a loss of 17.3 per cent YTD, market valuation is currently weak at 6.7x P/E ratio (vs. 8.9x average in January 2020), which is at its lowest since 2015. Given the effectiveness of social distancing measures to fighting the spread of COVID-19 and its wide adoption in countries most vulnerable to the virus, we could see a resumption of economic activities in the second half of 2020, which would support crude oil prices and market performance. Thus, we advise a gradual entry approach (buying in tranches) into the Nigerian equities market given the uncertainties both on the global and domestic fronts,” they said.
Bellwether stocks such as Zenith Bank Plc, Guaranty Trust Bank Plc, Access Bank Plc, Nestle Nigeria Plc, Nigerian Breweries Plc, United Bank for Africa Plc, Stanbic IBTC Holdings Plc, FBN Holdings Plc, and Ecobank Transnational Incorporated (ETI) are selling significantly cheaper at the market despite having strong fundamentals and bright prospects to deliver returns to investors.
Nigerian Breweries Plc is trading 49 per cent below its year’s opening value; Nestle Nigeria Plc is 42 per cent cheaper. For the first time in many years, Nestle shares are trading below N1,000 per share. It closed N850 per share last Friday. Access Bank Plc, which recently declared improved 2019 results and recommended a significant final dividend for shareholders, is also trading 42 per cent lower than its opening price.
Unilever Nigeria Plc has shed 43.7 per cent, while Cadbury Nigeria Plc and FBN Holdings Plc have declined by 40.7 per cent and 38.4 per cent respectively.
UBA Plc is 30.5 per cent cheaper, while ETI 25 per cent cheaper compared to its year’s opening price.
Commenting on the state of the market, Chairman of Association of Securities Dealing Houses of Nigeria (ASHON), Chief Oyinyechukwu Ezeagu, said investors should take advantage of the current bear market to beef up their portfolios.
According to him, although ASHON acknowledged the high level of downswing on the market, fundamentals of the quoted companies remained strong.
Ezeagu explained that Nigeria’s stock market remained part of the global exchanges and as such any development in the global market would impact on its operations.
“The effect of COVID-19 is gradually affecting trading all over the world and whatever happens elsewhere reflects in our market. The centre of it all is China and being a major world power both in production and consumption capacities, any ill wind affecting China would naturally cause big sneezing to the rest of the world. Investors should not panic. The share prices will bounce back. The companies’ fundamentals remain strong. Many investors are taking advantage of the bearish run to beef up their portfolios,” said Ezeagu.