It is becoming clearer more than ever before that the United States Federal Reserve would most likely cut it monetary policy rate soon as concerns mount over a negative impact of the ongoing trade war on its economy.
Being the world’s largest economy, it is evident that this development would impact both equity and fixed income investments in emerging markets across the globe including Nigeria.
Although the apex bank chairman, Jerome Powell, did not explicitly say the bank will cut interest rate, but as a result of worsening trade tensions between U.S and China, the two world’s largest economies, Powell said the bank is “closely monitoring the implications of these developments for the U.S. economic outlook and, as always, we will act as appropriate to sustain the expansion.”
No doubt, an interest rate cut in the U.S would help salvage its economy and could trigger some investors, who had left markets in emerging and frontier economies for the developed nation’s markets make, a U-turn in search for higher returns on their investments.
Furthermore, the U.S interest rate cut would make carry trade more attractive for foreign investors. The implication of this is that investors can borrow at lower rates in the developed nation and invest in the emerging markets owing to high yields in their fixed income instruments.
Consequently, there may be increased capital inflows into the Nigerian economy by offshore investors to take advantage of investments opportunity therein, a move that could put further moderation in the country’s yields and bolster the Nigerian Stock Exchange (NSE) which slumped 3.18 percent below its level at the beginning of this year.
However, certain concerns might likely militate against these prospects if not curtailed going forward. Among these concerns are crude oil prices which entered a bear market last week having shed 3.4 percent to close at $51.68 a barrel.
A bear market refers to a situation where prices are constantly falling, reaching more than 20 percent lower from their recent highs, creating risky investments climate and undermining investor confidence.
Since Nigerian government still depends largely on crude oil earnings for its revenue, investors would likely price in the gloomy crude oil outlook in the short term, thereby waning their sentiment for Nigeria’s securities.
Similarly, the recently downgraded 2019 global growth forecast from 2.9 percent to 2.6 percent on the back of elevated risks caused by trade tensions may not fully support reversal of capital flows back to the emerging markets until an improvement appears in the offing.
In this case, the much-anticipated inflows of investments into equities, which are perceived as risky securities, as well as fixed-income assets, may not be impacted as expected.
While a possibility of US Fed over rate cut may create some impetus for existing but depressed investments in Nigeria, the feasibility of that still hinges strongly on the downside risks on the global economy.
