Surge in inflation likely to affect Ghana stock market – Analyst

The Ghana Stock Market was briefly roiled following the surge in November Consumer Price Index, and a market expert and a financial analyst, Gifty Annor-Sika Asantewah, has indicated that the current high inflation rate in the country has the tendency to disrupt the stock market performance.

According to the analyst, though some level of inflation is needed for the stock market to gel, a high one is a bad news to profit taking investors.

“Inflation, of course, isn’t necessarily a negative for equities. Stocks are viewed as real assets, which means they tend to appreciate in an inflationary environment, making them a useful hedge against inflation pressures. However, inflation well above the low single digits, as in the case of Ghana in November, has tended to coincide with lower stock-market valuations due to the negative effects of rising prices on economic growth” she said.

Annor-Sika Asantewah further averred that, depending on the type of the stock, inflation can be positive or negative.

“But in our part of the market, most of our stocks are growth stocks. So, they perform better during low inflation…, therefore, surges in inflation will definitely have negative impact on the stock market”.

According to the analyst, when inflation is on the up-swing, income oriented or high dividend paying stock prices generally decline, making short term inflation dynamics less favourable.

“Higher inflation is usually looked on as a negative for stocks in general as it increases borrowing cost, increase cost of material, labour, etc”

Historically, the Ghanaian stock market’s performance tend to dip amid very high inflation i.e. more than 8-9%. This, the analyst explained that in most cases, is an indication that the economy is not doing well.

“Stocks overall, do seem to be more volatile during highly inflationary periods. The reason behind that has been the fact that most of the time, during inflation phases, the economy was in a bad shape.”

Market Likely to be Choppy Ahead

Annor-Sika suggested that investors must brace for wild swings on the stock market as the pressures of inflation and a surge in cases of the Omicron variant of Covid-19 have given bears the upper hand.

“The overall chart pattern indicates a negative outlook ahead and one may expect further fall in the benchmark and broader indices ahead.”

Concerns around the Omicron variant and its negative impact on growth and inflation have accelerated in the past few days.

The analyst intimated that some investors may be having the feeling that the Bank of Ghana has already lost control of inflation and inflation expectations. As result, she noted that policy makers may need to tighten monetary policy much more aggressively than anticipated, potentially leading to a sharp economic downturn.

Nonetheless, some stock-market investors may expect stocks to remain supported until policy makers show signs they’re prepared to take more aggressive action.

Rising inflation has been a widely discussed subject over the years; in the near term the topic has gained prominence as a spike in commodity prices has caused inflation to creep up both globally as well as in Ghana.

According to the data released by the Ghana Statistical Service, the average consumer prices have risen to almost a 3-year high last month November, as the national year-on-year inflation rate rose for the sixth consecutive month to 12.2 percent in November 2021.

Notwithstanding the high inflation rate, Gifty Annor-Sika Asantewah concluded that “one should be a bit sceptical about some of the segments where valuations are really high, as the rest of the market may keep performing in the absence of any external disruption.”