Report Says High Inflation Will Drag Stock Prices Down

Financial analysts at Financial Derivatives Companies (FDC) Limited have expressed fear that higher inflation will further lead to decline in stock prices considering the fact that the National Bureau of Statistics (NBS) pegged official inflation rate for June 2015 at 9.2 per cent.

In its latest edition of its Economic Bulletin, the Chief Executive Officer, Financial Derivatives Companies (FDC) Limited, Mr. Bismark Rewane, said while the stock market is historically inflation neutral, investors fear that higher inflation will virtually lead to a rise in interest rates and fall in stock prices.

Consequently, he said: “They will therefore begin to go short on stocks. Thus far, the NSE ASI has returned -9.5 per cent year-to-date (YTD), with inflation-adjusted returns on equities falling from -11.0 per cent in May to -17.1 per cent in June. The dollar adjusted inflation after considering the depreciation of the naira is -35.5 per cent. As exchange rate is interest rate driven, the outcome of the MPC meeting will have an effect on the currency.

“We believe that the increasing inflationary trend is likely to extend into third quarter. Besides the fuel scarcity problem that still lingers – albeit lightly, there have been sustained attacks from Boko Haram insurgents in the North-east, where many farm products (especially perishables) are cultivated. Lower food supplies would lead to a rise in the food sub-index of the CPI”, he stated.

He, however, noted that the appointment of new service chiefs was expected to improve the security situation in the North-east, adding that the aftershock of the CBN’s restriction of importers’ access to foreign exchange at the interbank market would be felt in the coming months.

Source : Independent

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