The United States Federal Reserve (US FED) is expected to maintain a dovish outlook on rate hikes, following the volatility that overcame global financial markets due to the recent vote by Britain to leave the European Union.
This may propel investors seeking higher returns to go in search of yield outside the US; and emerging markets are the most likely destinations, BusinessDay findings show.
Referring to the US Fed, Ted Weisberg, a trader with Seaport Securities in New York, says the “800 pound gorilla” has been pushed back in its cage on Brexit’s fallout; fuelling optimism from analysts who see an interest hike delay stabilising the financial market of Africa’s largest economy.
“We should begin to see more capital inflow if the US Fed drags on hiking interest rates because it will help Nigeria’s bond yields stay competitive and attractive to investors,” said Ayodeji Ebo, an investment banker at Afrinvest, an investment bank, in response to questions.
Investors who had exited Nigeria on the naira uncertainty, have begun to flock back gradually, after the Central Bank of Nigeria (CBN) abandoned a 16-month naira to the dollar peg.
“If the US Fed doesn’t hike interest rates, there is no incentive to retain capital in the US, and the appetite for emerging markets’ bonds will spiral” said Tiffany Odugwe, a macro-research analyst at Cardinal Stone partners, by phone.
“Especially at a time when investors are increasingly beginning to figure out that they can now take advantage of the market to make as high as 50 percent yields.”
Just a month ago, Nigeria, and to some extent Egypt – the two largest equity markets in Africa, were tough or impossible for equity investors to put money in.
Policy makers in both countries were sceptical of allowing their currencies, the naira and Egyptian pound, find their market value in the wake of commodity prices slump and macroeconomic shocks which rocked emerging and frontier markets.
Now Nigeria has followed on from electricity price hikes (Feb-16) and the fuel subsidy removal (May-16), to a float of the currency (Jun-16).
“We wonder if it is exposure to financial markets that is leading Nigeria and Egypt to adopt policies that make the most economic sense,” said Charles Robertson, chief economist at Renaissance Capital, an investment bank, in a July 04 note to investors.
“At around NGN280/$, the naira is far more sensibly priced than it was when it was pegged at NGN197-199/$,” Robertson noted.
The task of deciding on the Fed’s interest rates falls to a group of up to 12 men and women, called the Federal Open Market Committee (FOMC).
The FOMC meets eight times year – about every six weeks – to decide on the US monetary policy, and it is led by Janet Yellen, the central bank’s chairperson.
Seven are members of the Fed’s board of governors – when those seats are filled – and one is the president of the New York Fed.
Four other spots are rotated around the other Federal Reserve Bank presidents, of which there are eleven, for one-year terms.
Each meeting lasts two days, and on the second, a vote is taken. Each meeting is accompanied by a statement.
Four times a year, the Fed updates its economic projections, and Yellen gives a press conference. It’s on these occasions that analysts think changes in Fed rates are most likely.
Fed officials had said that they would be watching the US labour market data for signs of improvement, which central bank watchers believed could encourage a rate rise in the coming months.
However, the UK’s referendum result has suppressed hopes for higher rates.
Janet Yellen said previously that a Brexit would bring a “period of uncertainty” and the possibility of “a period of financial market volatility that would negatively affect financial conditions and the US economic outlook”.
Neil Mellor, a BNY Mellon strategist, said that the vote had “compounded doubts that the Fed will be able to hike rates this year at all, let alone implement the two hikes [it had] notionally pencilled in.”
Emerging markets could be particularly vulnerable, as many have amassed greater debts, while interest rates have been at historic lows. As these begin to rise, payments on those loans could become unmanageable.
Brazil, Chile and South Africa are among the most exposed, with their currencies likely to slump if the Fed tightens more rapidly than anticipated, according to analysis by Oxford Economics.
LOLADE AKINMURELE
