Rising inflation, cedi’s weakness bad for stock market – Analyst

Ongoing economic conditions emanating from rising inflation and policy rate hike, as well as depreciation of the local currency, are already affecting the stock market’s performance, Senior Analyst with the UMB stockbrokers, Kofi Bussia Kyei, has said.

Headline inflation in February 2022 rose sharply to 15.7 percent, with the local currency as of mid-March depreciating by 17 percent to the dollar on a year-to-date basis.

Consequently, the Monetary Policy Committee of the Bank of Ghana (BoG) increased the policy rate to 17 percent from 14.5 percent – a decision some analysts argue could have an adverse effect on the equities market, perhaps eroding recent gains.

In an interview with B&FT, Senior Analyst at UMB Brokers, Kofi Bussia Kyei, noted that the current economic conditions, especially high inflation, is not favouring trading on the stock exchange – particularly on the equities side – and this is affecting returns.

“The economic indicators do not look that good; there is rising inflation, depreciation of the currency and interest rates are going up, and these factors are not good for the stock market.

“This, to some extent, has translated into the low participation of local investors on the stock market, as foreign investors continue to dominate the market with about 80 percent of trades,” he said.

Commenting on investor participation in the market, Mr. Kyei also blamed the recent economic crisis in addition to the financial sector clean-up as factors responsible for the low participation of local investors.

With the recent data showing that offshore investors’ participation in the equities market as of February-ending remains at 80 percent of trading, the analyst fears it may have a negative impact on the local economy if there is mass exit due to unfavourable market conditions.

“We came out from financial clean-up not too long ago, and a lot of people had their funds locked up. Companies like UT Bank were delisted from the market because they had their licence revoked.

“So, within the period, investors have to take the pill and wait for things to recover. It is a very tough period; the investors were not able to recover their funds as quickly as they wanted. And all these accounted for low participation of local investors.

“For the long-term, the GSE has started some education for the youth in schools and universities. But in the short-term, there is little that can be done because of the situation in which we find ourselves,” he said.

Mr. Kyei added that a stable and trustworthy economy is the remedy to revive and deepen local participation in the stock exchange, given that low trading on the side of local investors is partly responsible for the cedi’s depreciation.

“They need to have trust in the system, financial reports have to be very consistent with good performance. When they see that there is consistency, then they can come back into the market,” he said.

“Another risk is that when you have a lot of foreign investors investing in our market and is time for dividends to be paid, it means a chunk of these funds find themselves in other economies outside the shores of this country – and when that happens, it puts pressure on the local currency.

“From what we have seen throughout the years, once you can study the market well, you are able to make some very good returns in the short-term. That is what investors should be doing now,” he said.