With the exceptional high discount rates on treasury bills of 15 per cent, 16 per cent and 16.22 per cent for 91, 182 day and 364-day respectively and deposit rate following the same uptrend, there is little incentive for the institutional investors to invest in the equities segment of the Nigerian financial market in the short term, experts have said.

In a report made available to THISDAY, analysts at FSDH Securities Limited stressed that the reallocation of funds to the fixed income securities and money market from equities, would cause the equities market to drop further in the days ahead.
The experts however advised that, “In the medium to long term, the market has attractive valuation across sectors. Investors should take strategic positions, maintaining long term view with the mind that the current situation in the market will not last for too long.”

FSDH Research noted that the recent hike in the Monetary Policy Rate (MPR) to 12 per cent  from 9.25 per cent, would further drive investible funds into the fixed income market, thereby compounding the woes in the equities market.

“Achievement of stable foreign exchange rate in Nigeria, under the current circumstance, should involve the adoption of unconventional approach that will eliminate dollar demand for unscrupulous uses. Looking at the current weak productive base of the economy, the import dependent nature of the economy and fiscal dominance, monetary policy dose may not bring about achievement of single digit inflation rate, “the experts said.

Speaking in the same vein, experts at BGL Securities Limited warned that more aggressive monetary tightening measures and liquidity contraction as a second option would result in increased financial costs to the banking system, higher lending rates and potential capital losses on fixed income assets.

“Slowdown in credit and economic growth might result eventually. However, by tightening liquidity and raising interest rates, the anticipated expansion in fiscal expenditure in the short to medium term might be contained. Higher interest rates would improve the real return from holding the naira as a store of value thereby supporting increased inflow into naira denominated assets.

“In addition, the likely rise in deposit rates which should follow would help the financial intermediation process and douse capital flight. It would also make it more expensive to settle dollar obligations with Naira liabilities (i.e. borrowing in naira). The appeal of the interest rate increase and liquidity contraction, as suggested by the decision of the Committee becomes obvious from the foregoing. The Committee may have however underestimated the negative impacts of this option on the economy,” BGL said.

BGL also stated that the increase in real interest rate might result in increased investments in naira-dominated assets.

“Theoretically, increased benchmark rate implies that naira-denominated assets now have more attractive yields than United States dollar denominated assets. Therefore, funds are expected to flow into Naira assets while speculative holding of the naira becomes less attractive and households with dollar denominated positions might move them to naira.

“In addition, the huge reduction in the banks’ net open position in foreign currencies should significantly reduce the room for speculative holding of foreign currencies by banks. If the decisions produce the desired effect, demand for foreign exchange at all segments of the market should immediately fall in the coming weeks and the Naira exchange rate should appreciate toward the target level of N150/$ (+/-3% band),”said BGL.

Source: ThisDay/Eromosele Abiodun