The Week Ahead: MPC outcome to shape stock trading pattern
Going into a new week after massive losses in the Nigerian stock market last week, analysts have said the ahead will be determined by the outcome of the highly anticipated Monetary Policy Committee (MPC) meeting of the Central Bank of Nigeria.
Meanwhile, the Central Bank of Nigeria’s bi-monthly Monetary Policy Committee (MPC) meeting for the month of May 2021 is scheduled to hold on the 24th and 25th of May, 2021, and capital market analysts believed the new inflation numbers will impact the voting pattern of the committee.
Investors’ losses to share sell-offs last week was estimated at N604 billion despite improved market turnover during the week.
“In the week ahead, we believe investors will be focused on the outcome of the highly anticipated MPC meeting to gain further clarity on the movement of yields in the FI market. Consequently, we see more of a “choppy theme” as cautious trading dominates the market,” said analysts at Cordros Capital Limited.
On market outlook, the chief operating officer of InvestData Consulting Limited, Ambrose Omordion said: “we expect the losing momentum on profit taking and selloffs to slow down, in the midst of first quarter (Q1) GDP expectation and outcome of this week’s MPC meeting, despite the rising infection rate of the novel coronavirus across the globe and the high yields in the fixed income market.
“We also expect the ongoing vaccination to support global and domestic economic recovery that will support the market and give direction. The banking sector and others remains attractive on the back of the prevailing low prices, despite the Q1 mixed numbers.”
Omordion also noted that the market just started a new downtrend as it trades below the 14 and 20-Day Moving Average, noting that, the market may discount the political and insecurity challenges headlines, ahead of half-year earnings reports.
He, however, said the pullbacks offer bargain hunters and income investors fresh opportunities to reposition in high dividend yields and undervalued stocks, while looking out for quarterly numbers that would support recovery.
According to him, this is based on the fact that the rising fixed income yields may not be enough to scare all investors away from the equity market.
“Again, the way to go is to target dividend-paying stocks and fundamentally sound companies with growth prospects in 2021, looking the way of mispriced equities.
“This is especially given the rising oil prices that have so far supported the economy and equity market, despite the seeming improvement in the fixed income yield which had remained at negative real rate of return due to the subsisting high inflation,” he said.
He added that the current undervalued state of the market offers investors opportunities to position for the short, medium and long-term, which is why investors should target fundamentally sound, and dividend-paying stocks for possible capital appreciation in the new year.
Memory lane
Going down the memory lane, Business Metrics recalls that a six-week losing streak in the stock market came to a halt after the last MPC meeting in March as investors reacted positively to the outcome of the meeting, alongside dividend news in the market.
In March, the committee had voted to retain the Monetary Policy Rate (MPR) at 11.5 per cent, albeit with 33 per cent of the votes suggesting that the rate be adjusted by the CBN.
Highlights of March Decisions
- MPR retained at 11.50%
- The asymmetric corridor of +100/-700 basis points around the MPR
- CRR was retained at 27.5%
- While Liquidity Ratio was also kept at 30%
Considerations for the Decisions
In its consideration of whether to tighten, hold or loosen in March, the Committee felt that with inflation at a 3-year high and price stability being the Bank’s core mandate, a contractionary policy stance may be required to tame the rising trend.
- It however considered that tightening will hike the cost of capital and hamper investments required to create employment and continue to boost recovery.
- Also, loosening the policy stance would lower rates and improve access to credit which will drive investment, reduce unemployment and stimulate aggregate demand.
- On the flip side, it feels that loosening will create excess liquidity, which will intensify demand pressure on the foreign exchange market, thereby leading to further depreciation in the currency.
- It, therefore, voted to retain the current parameters, which encourages the CBN to continue to use its various intervention mechanisms to deploy liquidity into employment generation and output stimulating sectors of the economy.
