A renowned financial expert and former Dean, Faculty of Management Sciences, Rivers State University, Port Harcourt, Prof. Adolphus Joseph Toby, has bemoaned the effect of the recent decision that increased the monetary policy rate (MPR) on the stock market.
While urging government to reconsider its decision on the increase, he argued that there would be a massive sell-off of shares in the equity market as investors are already positioned to move their investment to other sectors outside the capital market.
Speaking with The Tide in Port Harcourt recently on the state of the capital market and monetary policy, Toby said that the hike in the interest rate at this time has deterred the prospects of equity market rebound.
Reacting further on the development, he said: “the impact in the capital market is very simple, meaning that the interest rate is on the increase and will definitely affect fixed deposits or money market.”
According to him, the motivation is that most persons will want to sell-off their shares and put the money in either fixed deposits or on money market instrument where the interest will be better, that will mean profit-taking by the investors in the market which will depress the market.”
The university don urged the apex bank to reconsider their decision on the issue, adding that investors that stake their funds in the equity market need gains for their investment.
“The market will come back gradually because what I know is that the economic team of the federal government is good enough to make the positive change that is needed. But the CBN current MPR pronouncement shows that they are temporarily thinking of the value of the naira, instead of average investment in the capital market. We are in an economy where whatever you do in one side affects the other,” he said.
He noted: “definitely there will be a drawback. I am of the opinion that they (the regulator) should go back and draw a map for the way forward of the Nigerian capital market.”
He further explained that the impact of the interest rate hike on the equities market is negative, as it has the potential to accelerate the sharp correction the market has witnessed since the apex bank began its monetary tightening programme.
Toby, a professor of corporate finance at the university noted that: “the rate hike means two things to quoted companies: credits become more expensive and so future sales and profit decline. “Rate hikes also increase the cost of doing business and this can eat deep in profit margins.”
He added that investors would fly to fixed income not only as a haven but also to earn positive real returns against the backdrop of rising fixed income yields as the continuous hike in the MPR will not give joy to equity investors.
Toby further argued that the apex bank, in a bid to stabilise the foreign exchange market, has raised the benchmark rate of MPR several times this year.
The erudite scholar pointed out that the last increase was monumental and beyond all expectations, noting that it was already causing a decline on the stock market indicators.