Sunny days may be back at the Nigerian Stock Exchange, in the wake of the benchmark interest rate cut by the Central Bank of Nigeria on Tuesday.
The impact of the rate cut quickly resonated at the Stock market, which had witnessed weeks of bearish trends. A N1.99 gain by Dangote Cement, 99kobo gain by Guaranty Bank and 98kobo gain by Nigerian Breweries pushed up the index. Nine other stocks also recorded gains.
(Read the gainers and losers list here: GAINERSDAILY 25 November )
And Read the full Price list for today:PRICES LIst for 25 November
While the Naira got a knockdown in the exchange market to N245.25 and bond yields fell, the upward swing in 12 stocks erased seven days of losses to climb to 27,662 points. The index has fallen 20.4 percent so far this year.
“On the back of the reduction in policy rates … investors are reconsidering investment in the equities market to earn higher return,” said Ayodeji Ebo, head of research at Afrinvest. “We anticipate further moderation in bond yields.”
Nigeria’s central bank cut benchmark interest rate to 11 percent from 13 percent on Tuesday, its first reduction in the cost of borrowing in more than six years. The continent’s top oil producer has been hard hit by a plunge in crude prices over the last year.
Ayodeji Ebo said he expected stocks in the industrial sector such as Dangote Cement and Lafarge Africa to gain from the liquidity surge as infrastructure projects boom. Ebo said the rate cut may hurt bank earnings as consumer firms reel from dollar shortages.
Yield on the most liquid 5-year bond fell 264 basis points to a five-year low of 7 percent while the benchmark 20-year bond closed 150 basis points down at 10.8 percent on Wednesday, traders said.
Bond yields had traded above 11 percent across maturities prior to Tuesday’s rate decision, with the 2034 bond trading at 12.30 percent.
The central bank has been injecting cash into the banking system since October in a bid to help the economy. Banking system credit stood at 290 billion naira ($1.5 bln) as of Wednesday, keeping overnight rates as low as 0.5 percent.
Samir Gadio, head of Africa strategy at Standard Chartered Bank said bond holders could be exposed to future losses if the interest rate easing cycle suddenly ends with inflation currently trading 9.3 percent below the yields..
The rate cut also weakened the naira on the unofficial market, which fell 0.8 percent to 242 to the dollar. The currency is pegged at 197 naira on the official market.
Non-deliverable currency forwards, a derivative product used to hedge against future exchange rate moves, indicated markets expected the naira’s exchange rate at 235.56 to the dollar in 12 months’ time – the strongest level in five months – and compared to 245.25 at Tuesday’s close.
“Our economists still believe a devaluation will happen in a couple of quarters but I think they have had opportunities,” said Luis Costa, head of CEEMEA debt and FX strategy at Citi.