Companies On Stock Exchange Will Suffer Pressure Amid Rising Inflation

Financial experts have expressed worries over the rising inflation in the Nigeria equity market.

The recent development, according to analysts, is making the equity market unattractive to investors, and considering that companies listed on the stock exchange will suffer some pressure from the cost of their operations.

Omadaily understands that Nigeria’s equity market started well at the beginning of the year, but eventually, things went south reportedly in the fifth month of the year.

Reports stated that the market, in the beginning of the year until May 2022, appreciated by 22 per cent. But the situation has now completely changed.

In a recent interview with The PUNCH, the Managing Director of Afrinvest Consulting, Abiodun Keripe, observed that the impact of inflation in the equities market was dimensional.

According to him, the burden would fall on the real returns, particularly the dividends and the cost of operations of companies listed on the NGX.

He said, “You can dimension this in two perspectives. In terms of returns, inflation will affect real returns.

“In this sense, the investors begin to get distracted by fixed-income instruments that are easily reactive to the continued inflationary pressure with a promise of higher yields.

“They will begin to switch from the equities market to fixed income instruments where there is a promise of higher yields that mirror the pressure from inflation.

“The second part of this is for the companies that are listed on the stock exchange also will see a bit of pressure from their cost of operations.”

Keripe stressed that the operating expenses for the companies will see a bit of cost pressure as raw material costs could surge.

“So, basically, the cost of sales and cost of production will increase. This will impact the bottom-line. What this means is lower profitability, and by extension, lower dividends payout, which also will distract and discourage investors.

“This is the sort of impact this will have on the market such as distracting investors, making investors look away from the equities market to the fixed income market that is able to easily react to pressure from inflation, given the fact that interest rates will move up,” Keripe added.

He furthered his argument saying that the cost of operations will likely increase, causing a reduction in bottom-line profitability.

According to him, if the investors are taking dividends when the profits are lower, this, by extension, means lower dividends.

Keripe, however, maintained that the companies might surmount the pressure once their prices were adjusted. “Once the company can adjust bottom lines such that their sales substantially increase, this will compensate for the elevated inflationary pressure on the bottom-line.

“But if the companies are committed, they can now adjust dividends payout such that the dividend payout ratio can increase so that investors can receive higher dividends,” the financial expert said.

Meanwhile, the Head of the retail department of Agusto and Co, Ayokunle Olubunmi, had said that more activities took place in a fixed-income market compared to the equities market because it was more attractive to investors.

He said: “Typically, when you have high inflation, you notice that to respond to that to encourage investors, interest rates easily go up. You will notice during inflation that the interest on bonds, and commercial papers, amongst others, easily go up. This is because these are fixed-income instruments.

“They are more attractive compared to stocks. In this case, you will discover that during the period of rising yields, you see people leaving the equities market for bonds, and they also invest in commercial papers.”

He explained further that the Central Bank of Nigeria (CBN) has increased the rate consistently and as a result, one will notice that the yield on assets-backed instruments, and the interest rates on bonds and commercial papers have gone up, Omadaily reports.

“From all these bond and money market instruments, you know that your return is already fixed. There is no risk. So, why do you want to go and leave your money in the capital market where you are not sure of your returns?

“During the inflation period, you will notice that the rate goes up. You will see people leaving the equities market for the fixed income market,” he concluded.

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