The impact of monetary policy rate hikes on the stock market

Once again, beyond expectations, on September 24, 2024, the CBN’s Monetary Policy Committee (MPC) raised the MPR by 50 basis points, pushing it to 27.25%.

The decision, according to the CBN, is aimed to address persistent core inflation pressures, maintain positive real investment rates to attract investments, manage liquidity, curb foreign exchange demand, etc.

Whether the continuous hikes have been effective is debatable, but one thing is certain: they have reshaped, and will continue to reshape, Nigeria’s investment landscape and the stock market.

The rise in the MPR typically translates to higher interest rates in the broader economy. As borrowing costs increase, companies may find it more expensive to finance expansion projects or service existing debts.

For listed firms, particularly in capital-intensive sectors like industrial goods, manufacturing, and oil & gas, this has reduced profitability as interest expenses eat into earnings.

Another notable impact is the shift in investor sentiment. Fixed-income instruments such as government bonds and treasury bills become more attractive to investors, offering higher yields with lower risk compared to equities.

This shift leads to a reallocation of capital from the stock market to the fixed-income market, reducing demand for equities.

Investors seeking stability amid elevated inflation and rising rates may increasingly favor safer, income-generating assets, potentially leading to a stock market sell-off or, at best, sideways trading.

The stock market has been resilient. As of the close of trading in August 2024, about 39 listed stocks outperformed the increased August inflation rate of 32.15%.

Juli Plc, Oando, RTBRISCOE, VERITASKAP, Julius Berger, Geregu, IMG, Presco, MEYER, Eterna, BUA Foods, and Conoil provided investors with triple-digit returns.

However, it is evident that the overall stock market has not been immune to rising inflation and interest rates.

In 2023, the NGX All-Share Index (NGXASI) performed impressively, climbing 45.9% by year-end, with about 95 stocks outperforming the inflation rate of 28.92%.

This positive momentum continued into early 2024, with the NGXASI up 40% year-to-date (YtD) by the end of March.

However, by the end of August, the NGXASI had slowed to 29.16% YtD, with over 100 stocks underperforming the softened inflation rate of 32.15%.

Major companies, including Nigerian Breweries, Zenith Bank, UBA, Stanbic IBTC, Dangote Sugar, NASCON, and MTN Nigeria, recorded year-to-date (YtD) losses in share price value

Sector-Specific Impacts:

Banking Sector

The banking sector has benefited from the hikes in the MPR. Higher interest rates have led to an increase in yields on loans and advances, thus boosting interest income for banks.

For instance, in the first half of 2024, Access Holdings, First Bank, FCMB, GTCO, Stanbic IBTC, Sterling Bank, Wema, and Zenith combined interest income reached N4.97 trillion representing 145% year-on-year

However, the flipside has been a sharp rise in interest expenses, which increased by 208% YoY, reaching N2.33 trillion; 53% of the total interest income.

This ratio is higher than the 40% and 44% recorded in the full years of 2022 and 2023, respectively.

The growing proportion of interest expenses relative to interest income could eventually pressure profitability despite higher revenue from interest-earning assets.

Additionally, cumulative loan impairments reached N615.4 billion. This suggests a potential increase in loan defaults, possibly driven by the higher cost of borrowing that affects both businesses and consumers.

Non-Financial Sectors:

Looking at a few major companies, the rise in interest rates has had a significant effect on sectors outside of banking as well. In the first half of 2024, several companies across key sectors recorded a sharp increase in interest expenses

For instance, Dangote Cement reported a 166% increase in interest expenses to N130 billion, nearing 90% of its total 2023 figure. This, alongside foreign exchange losses, led to a 34% decline in profit margins.

In the ICT sector, MTN Nigeria recorded an 82% jump in interest expenses in the first half of 2024, reaching N179.6 billion; 84% higher than the total interest expenses for the full year of 2023.

This significant increase in borrowing costs, combined with a substantial net foreign exchange loss of N888 billion, led to a loss before tax of N751.29 billion.

Shareholders have experienced declining returns this year, as evidenced by a 28% year-to-date decline in the company’s stock price.

Nigerian Breweries experienced a 282% increase in interest expenses, reaching N42.54 billion, which, along with a foreign exchange loss, resulted in a pre-tax loss of N115.5 billion.

Seplat Energy’s interest expenses rose by 176% to N46.74 billion, but it still recorded a solid pre-tax profit of N244.048 billion, bolstered by strong revenue. Share price performance has been notable this year, with a 67% year-to-date gain and a consistent record of dividend payments.

Outlook for H2 2024

With the MPR now at 27.25%, the outlook for listed companies remains challenging. Anticipated further increases in interest expenses could limit profitability and growth potential in the second half of 2024.

While banks may see higher interest income, the surge in interest expenses and impairments may pressure core line profitability.

Non-financial sectors face eroding earnings and reduced dividends. It is therefore important for companies to optimize their operations, explore cost-cutting measures, and strategically manage their debt portfolios to mitigate the impact of rising borrowing costs.

Additionally, focusing on cash flow management and exploring alternative financing options could enhance resilience in this high-interest environment.

Considering these challenges, the Central Bank of Nigeria (CBN) should consider a cautious approach regarding future MPR hikes.

Maintaining a balance between controlling inflation and fostering economic growth is crucial. The CBN might also explore measures to provide liquidity support for key sectors to help cushion the impact of high-interest rates.

The trajectory of inflation and future CBN decisions will be critical in shaping the stock market landscape for the remainder of 2024.