The successive increases in interest rates by the Central Bank of Nigeria (CBN) have significantly reshaped and will continue to reshape Nigeria’s investment landscape and the stock market.
On Tuesday, February 27, 2024, the Central Bank of Nigeria’s Monetary Policy Committee implemented yet another interest rate hike, elevating the rate by 400 basis points to 22.75% from 18.75%.
The decision, spearheaded by CBN Governor Yemi Cardoso, aimed to counter persistent inflationary pressures and address exchange rate volatility.
Despite these successive hikes, the inflationary trend has persisted, with Nigeria’s inflation rate surging to 29.90% in January 2024, according to the inflation report released by the National Bureau of Statistics.
Additionally, Nigeria’s currency weakened by 2.1% to N1,615.94/$ in the NAFEM window on Tuesday, February 27, 2024, according to data published by FMFQ.
In response to these macroeconomic headwinds, investors have increasingly turned to the stock market.
In 2023, the NGX All-Share Index (NGXASI) soared by 45.90%, with about 95 stocks outperforming the inflation rate, providing investors with real returns.
Stocks such as Transcorp Hotels, MRS Oil, Transcorp, FBNH, UBA, and Access Holding, among others, provided investors with returns that surpassed the rate of inflation, enhancing their purchasing power.
On the other hand, stocks like Airtel Africa, Dangote Cement, MTNN, Unilever, etc., underperformed the inflation rate.
However, individual stock performance has waned in 2024, with only about 24 stocks recording capital gains surpassing the January inflation rate.
This indicates that investors might be showing a preference for specific stocks or sectors believed to be more resilient or promising, particularly considering the prevailing macroeconomic headwinds.
The recent increases in interest rates undoubtedly carry inherent impacts. Ordinarily, a rise in the Monetary Policy Rate (MPR) signifies elevated borrowing costs. This can result in reduced business investment and consumer spending, potentially slowing down economic growth. Consequently, company earnings may decline, subsequently influencing lower stock prices.
However, the degree of the impact varies across sectors. In the banking sector, for instance, an increase in interest rates may enhance the yield on investment and interest income, potentially bolstering profitability.
However, this comes alongside an increase in impairment losses, which could constrain the banks’ net interest income after the impairment charge.
For instance, in the first nine months of 2023, First Bank, UBA, GTCO, Access, and Zenith (FUGAZ) collectively experienced an average growth of interest income by 71% year-on-year, amounting to N3.39 trillion.
However, due to a higher growth rate in interest expenses and loan impairments, reaching about 87% and 302% growth respectively, driven by higher interest rates, the average net interest income impairment charge moderated to 18%.
The banks’ impressive pre-tax and post-tax profits were primarily fueled by foreign exchange gains, which bolstered investor confidence in the stock, as evidenced by an average year-to-date share price gain of 119%, surpassing the inflation rate in 2023.
However, this scenario differs in other sectors. For example, in the Fast-Moving Consumer Goods (FMCG) industry, an analysis of their 2023 results indicates escalated finance costs attributed to higher interest expenses on borrowing and foreign exchange losses. This has resulted in losses after tax in some instances.
Nigerian Breweries, Cadbury, BUA Foods, International Breweries, and others witnessed triple-digit growth in interest expenses on loans and borrowings.
Besides the consumer goods sector, companies like Dangote Cement and MTN Nigeria, with significant book loan balances, may face additional increases in interest expenses due to the hike.
With increased finance costs, companies may find it challenging to maintain dividend payments at previous levels. They may opt to conserve cash to address the heightened interest expenses.
For instance, Nigerian Breweries, Cadbury, Unilever, and Guinness have consistently distributed dividends over the past three years. Still, they are unlikely to do so for the 2023 fiscal year due to poor earnings.
Investor sentiment may sour in response to diminished profitability and reduced dividend distributions, potentially precipitating downward pressure on the share prices.
Overall, while the interest rate hike may pose challenges for companies, especially those outside the banking sector, it may also present an opportunity for investors to secure returns that outstrip inflation from other asset classes apart from stocks.
However, companies across sectors need to navigate these challenges adeptly, adjusting their financial strategies, and communicating effectively with shareholders to maintain resilience.
