Fact from History: Is the party begins for Nigeria’s Equity Investors?

LAGOS, Nigeria, Capital Markets in Africa — The Nigeria’s Central Bank reduced its Monetary Policy Rates (MPR) by 200 basis points to 11.00 percent against market expectations and the country  macroeconomic fundamental outlook. The question is how will Nigerian equity markets reacts to this development?

Many investors believe that when rates fall, the party begins for stock prices and rate hike is the party is over for stock prices. Is the party begins for Nigerian equity investors?  The Nigerian All Share Index has lost about 20.4% in 2015 as the end of 24 November 2015.

 So, what does history tell us?
Let consider the past five rate ease cycles going back to 2007. Using time periods of 21 trading days (roughly equivalent to one month), we found there is no clear distinct whether equity markets benefits or suffers after interest rate is reduced. In three cases, equities performed well prior to central bank rate decrease. For instance, during the 2008 credit crisis, equity declined slightly after the onset of rate reduction (on 18^th September 2008), only to recover in the one years following the first rate increase.

The central bank had cut benchmark interest by 200 basis points on two occasions (before yesterday reduction) and 175 basis points reduction on 4 April, 2009. Nigerian equities have generally performed greatly after the rate eases, however, there are instances of increased volatility in short-term. 

The table shows the average daily returns of the periods discussed above. The numbers are different for each of the periods, but on average, equities have experienced a peak-to-trough after rate cuts. Therefore, one could conclude that Nigerian equity investors will observe some sign of relief and 2016 is a good year for them, provided the central bank doesn’t unexpectedly and suddenly hike the benchmark rates and vigorously defending the naira.