Foreign Investors may seek Flight on US Fed rate hike

As the U.S. Fed’s first rate increase approaches, foreign investors in Nigeria, Africa’s largest economy, may be set to dump stocks and bonds, a risk that most investors have yet to come to price in.

 

“Foreign ownership can be a risk – more on the bond side than the equity side. If equity investors all try to flee a market, the price of the equities falls dramatically and therefore the dollar value of money that may leave the market gets smaller (as the share price gets smaller),” said Charles Robertson, Renaissance Capital’s global chief economist, in a response to questions.

“Bond prices usually do not fall as much. But bond investors had already turned cautious on Nigeria in late 2014 with the oil price,” he added.

In a recent report, David Spegel, head of EM debt at BNP Paribas, looked at foreign ownership of bonds and equities

in 80 emerging markets as a percentage of each country’s outstanding stock.

The results show that Nigeria was among the 31 riskiest countries by this measure which included several Eastern European countries, as well as, Mexico, South Africa and Indonesia.

Foreigners held about 34 percent of Nigerian equities and 35 percent of bonds at the end of the fourth quarter of 2014, according to data from PNB Paribas.

Total foreign outflows from Nigerian stocks in the first three months of 2015 were equivalent to N185.09 billion, according to data from the bourse.

Janet Yellen, U.S. Fed chair said in March she expected the Federal Reserve to raise interest rates this year.

“I expect that conditions may warrant an increase in the federal funds rate target sometime this year,” Yellen said. She and fellow policy makers “generally anticipate that a rather gradual rise in the federal funds rate will be appropriate over the next few years.”

Analysts say the experience of the past several decades shows that when the U.S Federal Reserve has embarked on significant rate hiking campaigns, there are global repercussions.

During the early stages of the taper tantrum two years ago, there was a 7.6 percent reduction in assets under management at EM fixed income funds, according to data from the IMF.

Whenever the rollback of stimulus (via rate hikes) begins, the fallout will impact Nigeria in two broad areas. The level of oil prices as dollar strength weakens commodity prices and the expected pullback in offshore portfolio flows.

The pullback in portfolio flows and oil prices will affect the ability of the Central Bank of Nigeria (CBN) to maintain benign inflation expectations and naira stability via interventions to prop up the naira.

The government’s funding of deficit spending will also be more expensive as bond yields rise.

The CBN’s gross dollar reserves are already down some 17 percent this year to $29.5 billion by April 23, according to data from the central bank’s website.

The naira has lost some 18 percent of its value versus the dollar in the past 6 months while Nigerian inflation rose for the third consecutive month in March to 8.5 percent, the bureau of statistics said last week.