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US Fed’s Hint on Rate Cut Seen Spur Foreign Portfolio Inflows into Nigeria’s Equity Market in 3H 2019…

In line with our expectation, May headline inflation rate rose to 11.40% year-on-year (from 11.37% in April 2019) on sustained monthly cost pressures – both core inflation and food inflation increased month-on-month to 0.75% and 1.41% in the month of May from 0.70% and 1.14% respectively in the month of April.

In the same vein, annual food inflation increased y-o-y to 13.79% in the month of May as market prices of major staples such as tubers, bread & cereals, fish, meat, poultry & dairy, and oil & fats registered the highest increases amid gradual drawdown in food stockpiles into the planting season.

The biggest y-o-y food price increases were recorded in Kebbi (+18.86%), Kaduna (+17.07%), Gombe (16.95%), Niger (+16.53%) and Ondo (+16.48%) states. Imported food inflation rate also increased further to 15.71% y-o-y in May from 15.68% in April 2019 and to 1.25% m-o-m amid monthly depreciation of the Naira against the US greenback across the market segments.

However, annual core inflation slowed to 9.03% in May from 9.28% in April on the back of slower increases in costs of transportation and clothing & foot wear.

In terms of regional price change, inflation rate in the urban areas rose faster y-o-y to 11.80% (from 11.70%); however, inflation in rural areas were flatish at 11.08%.

Meanwhile, recently released report by the Nigerian Stock Exchange on domestic and foreign portfolio participation in equities trading for April 2019, showed that equities market transactions increased due to the renewed interest of the foreign and domestic institutional investors amid investors expectation that the President would hit the ground running immediately after inauguration day – May 29, 2019.

Further analysis showed that total transactions on the nation’s bourse increased to N148.91 billion in April 2019 (from N110.11 billion in March 2019); of which Foreign Portfolio Investors’ (FPIs) transactions grew to N76.92 billion (from N56.09 billion) while domestic transactions also rose to N42.73 billion (from N26.58 billion).

On foreign transactions, foreign portflio inflows increased month-on-month (m-o-m) by 61.38% to N41.78 billion in April 2019, outstripping the m-o-m 16.36% increase in foreign portfolio outflows to N35.14 billion.

Similarly, domestic institutional transactions increased m-o-m by 60.76% to N42.73 billion in April 2019 while the retail transactions increased m-o-m by 6.63% to N29.26 billion in the month under review. Despite the laudable increase in inflows from the foreign investors, the local bourse still plunged by 6.06% to 29,159.74 index points in April 2019 (from 31,041.42 index points in March 2019).

On the international scene, the US Fed held rates range unchanged at 2.25% – 2.50%, left its forecast for 2019 economic growth rate at 2.1%, but adjusted its forecast for 2020 growth rate higher to 2% from 1.9%, at the end of its monetary policy meeting on Wednesday June 19, 2019.

The policymakers forecasted that the headline inflation would drop to 1.5% in 2019, down from 1.8% it projected in March while signaling possible rate cuts of as much as 0.5% before the year.

Annual inflation rate in US moderated to 1.8% in May 2019 from 2.0% in April 2019. We expect Nigeria’s inflation rate to increase further – as indicated by recent build up in monthly price increases – especially against the backdrop of ongoing planting season as well as anticipated increase in spending activity following the implementation of the new minimum wage bill.

As Nigerians’ disposable income increases amid implementation of minimum wage, we expect corporates to benefit more as their production outputs increase in tandem.

Also, with the possibility of rate cut by 0.50% in US, we expect foreign portfolio inflows into the country to further increase, especially into the equity market in the third quarter of 2019. In the same vein, with the current lower yield environment – as stop rate for 91-day treasury bills moderated to 9.60% – we feel that the lengthened bearish-streak of the local stock market might be nearing its end

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