Investment experts at Bancorp Securities Limited, a leading investment research and consulting firm, have projected that return on investment in the Nigerian Exchange this week may not be impressive in view of the recent fiscal and monetary policy measures adopted by the government in furtherance of its economic reform initiatives.
The analysts gave this forecast in the firm’s ‘Weekly Stock Recommendation for Jul 29 to Aug 02, 2024’ circulated to our correspondent on Monday.
Specifically, the researchers projected: “This week, a flat return is expected for the broad market index, with slight positive returns for Insurance and Industrial Goods stocks, while Banking stocks may remain flat due to conflicting sentiments around corporate actions and tax increases.”
They recalled that recently, there had been major macroeconomic policy adjustments which are geared to reshape sector specific investor outlook on the bourse, including but not limited to the Monetary Policy Committee (MPC) decision, which raised the interest rate by 50bps to 26.75%, representing the fourth hike this year aimed at curbing aggregate demand and inflation, now at 34.2%.
According to the experts, the asymmetric corridor was adjusted, while Cash Reserve and Liquidity Ratios remained unchanged, contrasting with rate decisions in Kenya, South Africa, and Egypt.
On the impact of the measures on banks and businesses, they pointed out that the 50bps rate hike to 26.75% would increase funding costs for banks and elevates borrowing costs for businesses, potentially reducing investments and slowing economic growth.
In addition, they maintained higher interest rates make fixed income instruments more attractive, leading to subdued equities sentiment and moderately higher yields in the bonds market just as increased interest expenses may lower business profitability, highlighting the need for fiscal policy reforms to address structural issues and support economic productivity.
On the fiscal policy regime, the analysts further noted that the 70% tax on banks’ Forex gains as approved by the National Assembly until end-2025 would boost revenue for infrastructure and wages, with a deferred payment option.
According to the experts, Moody’s sees this as credit-negative, potentially reducing bank profits and capital adequacy, leading to a 4% drop in the NGX Banking Index.
On the impact of the fiscal measure on banks and businesses, while noting that the 70% tax on banks’ FX gains will boost government revenue for infrastructure and wage increases, targeting windfall profits from Naira devaluation, the tax has the potential of reducing banks’ profits and impacting capital adequacy, with a 4% decline in the NGX Banking Index reflecting investor concerns.
The analysts pointed out the implementation of the tax “may lead to legal and operational issues, though the deferred payment option offers banks some flexibility in managing the liability. The changing policy landscape is creating uncertainty for businesses and dampening stock market optimism, with minimal impact on fixed income securities.”
