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What will a US recession mean for your investment?

What will a US recession mean for your investment?

About four months ago, the big concern for emerging and frontier markets across the world was a possibility of a further rate hike by the United States (U.S) Federal Reserve and its negative implication for their economies.

However, a unanimous decision by the U.S monetary policymakers in March to keep the country’s interest rate range between 2.25 percent and 2.5 percent in 2019, signalling no rate hikes in the year as against their December prediction to raise rate twice, has helped diminish the fears, but that got replaced with fresh worries of an impending U.S recession after the country recorded its first yield curve inversion since 2007.

That implies long-term bonds in the U.S are offering lower returns than short-term bonds.

“History has it that the inversion of the U.S. yield curve always leads to an economic recession in the country,’’ said Gbolahan Ologunro, a research analyst at CSL Stockbrokers.

The 2007 yield curve inversion was followed by a recession in 2008 when there is a negative spread between the long-term yield and the short-term yield, and the U.S economy follows its historical trend, the big question is “how would this affect Nigerian investors?”

Analysts say the severity of the U.S recession would determine its impact on the Nigerian economy, “a mild recession in the U.S would translate to inflows of foreign portfolio investment into Nigeria’s fixed income market as the U.S Fed Reserve might consider a rate cut to spur growth,” Ologunro said.

Emerging markets including Nigeria had come under pressure in 2018 after the U.S embarked on policy rate normalisation which prompted its apex bank to raise rate four times in the year, causing foreign investors to pull out more than N600 billion from Nigeria’s stock market in 2018.

While Nigeria could benefit from a mild recession in the United States, a similar thing cannot be said of the nation if the U.S, which is one of the largest economies of the world, suffers another economic woe after a 12-year break.

A reoccurrence of two consecutive quarters of economic slowdown in the U.S would translate to lower demand for crude in the international market, a development that could impact negatively on the prices of crude oil, Nigeria’s main source of foreign exchange earnings. This is due to the fact that the United States is one of the world’s largest importers of crude oil in the global commodity market.

With that in mind, foreign investors may begin to pull out their investment from Nigeria like every other emerging economy, “it will be a broad sell-off in equities,” Ologunro said. “Investor appetite for risky assets will wane significantly.”

A bad omen for an equity market that has lost 5.77 percent in value since the beginning of the year, and recorded four straight weeks of losses despite a marginal surge of 0.21 percent on Friday to close the week’s trading.

This could trigger central bankers in these economies to consider interest rate hikes to compensate investors, attract dollar inflows and ensure currency stability, or risk pressure in the foreign exchange market.

Meanwhile, there are indications that the United States would adopt several measures to prevent a recession, particularly with the U.S Fed action, and it is also expected that the Central Bank of Nigeria would deploy its monetary tools effectively to mitigate any adverse effect a slowdown in the U.S and global economy may have on the Nigerian economy.

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