Inflationary pressures pose fresh threat to stocks//Not Good

 

Inflationary pressures pose fresh threat to stocks

Despite the positive sentiment in the stock market that has seen a rebound in both year-to-date (YtD) and month-to-date (MtD) returns, investment experts have said that uptick in inflationary pressure and weakness in the macroeconomic environment may constitute a threat to the continued recovery of the stock market. They project that the year-end may not be rosy due to the impending stagflation, a situation where growth is regarding amidst rising inflation. Headline inflation rose to 13.71 percent, according to September inflation report by the National Bureau of Statistics, NBS, and is projected to rise further through December.

In the meantime, performance of the stock market last week show a sustained uptrend on the back of negative real returns in fixed income and significant buy pressure in some highly capitalised stocks. Consequently, the benchmark All Share Index, ASI, rose by 0.9 percent to settle at 28,659.45 points, while the MtD and YtD return for the index grew to 6.8 percent. The market had closed the week flat on four of the five trading sessions, but was driven to another positive close after 1.11 percent gains recorded on Friday session. Commenting, David Adonri, Managing Director/CEO, Highcap Securities and Investment, said: “Performance of equities beats every imagination. The market moved in opposite direction of the economy. Perhaps the expansionary monetary policy and NESP N2.3 trillion rescue package have positively impacted equities. “Deliberate measures to force down interest rate may also have facilitated migration of financial assets to equities.

 

 “The rally may not be sustainable due to expectation of ravaging inflation. More so, the fundamentals of the economy does not support rally. Year end may not be rosy because of reaction to impending stagflation.” In their own projections, analysts at Cordros Capital, a Lagos-based investment banking firm, said: “We expect the market might continue to benefit as domestic investors seek alpha-yielding opportunities in the face of increasingly negative real returns in the fixed income market. “However, we advise investors to trade in only fundamentally justified stocks as the weak macro environment remains a significant headwind for listed companies.”

Team Ebirien Ephraim