The Nigerian equities market declined on Wednesday, shedding N68 billion in value following an increase in interest rate to 26.75%.

The Monetary Policy Committee (MPC) of the CBN raised the Monetary Policy Rate (MPR) from 26.25% to 26.75% on Tuesday.

This move is part of ongoing efforts to curb inflation but has made equities less appealing compared to fixed-income securities.

The Nigerian Exchange Limited (NGX) saw its All-Share Index fall to 100,365.17 points from a previous high of 100,486.12.

Market capitalization also dipped to N56.830 trillion. Investors exchanged 497,842,944 shares valued at N8.605 billion in 8,412 deals.

Banking and consumer goods stocks were hit hardest, with significant sell-offs observed. Conversely, insurance and industrial stocks saw some buying activity, indicating a shift in investor preferences amid the changing economic landscape.

The CBN’s decision to increase rates is part of broader measures to tighten monetary policy and rein in rising inflation.

However, this has placed additional pressure on the equities market, which is now grappling with reduced investor sentiment.

United Capital research analysts highlighted that Nigeria continues to face negative real returns, deterring investments in the financial markets.

They anticipate higher yields in the fixed-income sector, which could further influence investor behavior.

Despite the current market pressures, analysts suggest that the upcoming second quarter (Q2) 2024 earnings season might provide some positive momentum.

Investors are keenly watching for potential gains that could arise from corporate performances.

The market’s year-to-date return has decreased to 34.22%, reflecting the broader economic challenges and investor caution.

While this week’s decline stands at 0.17%, the monthly performance has shown a slight increase of 0.31%.

The Nasdaq 100 Index suffered a $1 trillion loss on Wednesday as investors reevaluated the potential returns on artificial intelligence investments.

The selloff, the worst since October 2022, was led by key AI-related stocks, raising concerns about the technology’s immediate financial benefits.

Shares of semiconductor giants like Nvidia Corp., Broadcom Inc., and Arm Holdings Plc were hit hard, each experiencing significant declines.

Nvidia, a leader in AI chip technology, fell by 6.8%, while Broadcom lost 7.6%.

The downturn was sparked by Alphabet Inc.’s earnings report, which revealed high capital expenditures without the expected returns, causing its stock to drop over 5%.

Tesla Inc. also contributed to the market’s woes, plunging more than 12% as CEO Elon Musk provided limited updates on the company’s self-driving vehicle projects.

Alec Young, chief investment strategist at Mapsignals, highlighted the overarching worry: “The ROI on all the AI infrastructure spending remains unclear. There’s massive investment, but the payoff is proving elusive.”

This sentiment echoed throughout Wall Street, fueling fears of an AI bubble.

The tech sector’s volatility was further underscored by increased options trading. Nvidia saw its highest options volatility since March, with a notable rise in demand for protective puts on Broadcom Inc. This reflected traders’ concerns over future price swings.

This selloff comes just weeks after a shift from tech stocks to smaller companies expected to benefit from potential Federal Reserve rate cuts.

The Russell 2000 outperformed larger indices, gaining 0.5% this week compared to a 2.6% loss in the Nasdaq 100.

Jim Covello of Goldman Sachs Group Inc. voiced skepticism about the commercial viability of AI, questioning whether the immense spending on AI infrastructure would pay off.

This apprehension was echoed in derivatives markets, where demand for bearish options in tech stocks surged.

Tech valuations have reached historically high levels, with Nvidia trading at 36 times projected earnings, compared to the S&P 500 average of 21.

As tech giants brace for slower profit growth, the stakes for upcoming earnings reports are high.

While Alphabet’s results have dimmed immediate expectations for AI contributions, the market is closely watching upcoming reports from Microsoft, Meta Platforms, Apple, and Amazon. Nvidia, the biggest beneficiary of AI spending, will report later in August.

Cayla Seder, a strategist at State Street, remains cautiously optimistic: “Despite current trepidation, large-cap tech stocks continue to offer attractive growth potential.”

Nigeria’s equities gained modestly at the start of the week as investor enthusiasm pushed stock prices slightly higher.

The Nigerian Stock Exchange (NGX) All-Share Index climbed by 0.03% or N16 billion, buoyed by notable gains in shares of key companies including Julius Berger, Livestock Feeds, and Neimeth.

Julius Berger saw the most significant increase, with its share price rising from N87.50 to N92.50, a gain of N5 or 5.71%.

This surge reflects growing investor confidence in the construction sector, despite broader market uncertainties.

Livestock Feeds also performed strongly, with its stock price climbing from N2.20 to N2.38, marking an 8.18% increase.

Neimeth Pharmaceuticals followed suit, with its shares rallying from N1.74 to N1.88, up by 8.05%.

Market analysts attribute the market’s cautious optimism to a combination of factors, including upcoming corporate earnings releases and potential dividend declarations.

Futureview Research noted that while the market showed a positive trajectory, investor sentiment might be tempered by increased regulatory scrutiny on banking stocks and anticipation of the Central Bank of Nigeria’s (CBN) Monetary Policy Committee (MPC) meeting.

“We expect a mixed market close this week,” said Futureview Research in their July 22 note. “Cautious trading in banking stocks is anticipated amid increased regulatory oversight, while investor focus is likely to shift towards the bond Primary Market Auction (PMA). This could dampen overall market sentiment.”

Despite the modest gains, analysts are cautious about the short-term outlook. Meristem analysts highlighted that while some stocks have shown positive movement, the broader market could face challenges.

“We anticipate increased activity in equities this week, driven by buying interest in fundamentally strong stocks. However, uncertainty surrounding the MPC’s decisions and potential impacts from the bond and T-bills auction could influence market dynamics,” they noted.

The NGX All-Share Index rose from the previous day’s 100,539.40 points to 100,568.63 points, while the market capitalization increased from N56.929 trillion to N56.945 trillion.

In a total of 8,760 transactions, investors exchanged 335,704,787 shares valued at N3.717 billion.

Trading activity also highlighted the popularity of stocks such as Ellah Lakes, Universal Insurance, United Capital, Veritas Kapital Assurance, and FCMB Group. These stocks saw active trading as investors navigated the market’s current landscape.

As the week progresses, all eyes will be on the MPC meeting, where key decisions regarding interest rates and monetary policy will be announced.

The outcome is expected to play a significant role in shaping investor sentiment and market direction in the coming weeks.