Billionaires, forex market speculators, and anyone holding a significant pile of dollars are set to benefit from the global market turmoil which has precipitated a massive decline in asset classes globally.
The cryptocurrency market is down by almost 50% from its year high why stocks plummeted to their worst week in over a year as investors scampered to get their money out.
The market sell-offs were triggered by confirmation that the US Feds will raise interest rates at least three times this year in response to the galloping inflation in the US. While rising interest rates are bad for most portfolio investors, especially those with leverage, it appears to be positive for local Nigerian forex holders.
The US Treasury yield closed 1.77% on Friday, hitting an all time high. Back in the early eighties when US inflation was high, treasury yields topped 15% forcing a change in government.
Forex Holders
Nairametrics analysts expect a rise in interest rate to be net positive for Nigerians who hold dollar positions locally and especially abroad.
- A respected billionaire (name withheld) who chatted with Nairametrics opined that increase in interest rates meant the millions of dollars fixed in US banks and portfolios will now start to earn significantly higher returns than what they currently earn.
- “I have earned next to zero returns for years from my investments abroad due to a protracted period of low-interest rates. So, any increase in interest rates favours me immensely,” the billionaire explained.
- Dollar mutual funds in Nigeria currently offer 5% returns annually if the money is fixed for a year and 3% per annum of fixed for 6 months or less. However, interest rates could rise in tandem as the US Feds commence a ramp-up of rates to combat inflation.
- Nairametrics believes Holders of US Dollars lying in banks locally and abroad should expect a rise in dollar deposit interest rates as the era of cheap credit dissipates.
- They also stand to gain significantly from cheap asset prices emanating from the fall of cryptocurrencies. Most stocks and cryptos will fall skew bargains to holders of cash especially forex who can now get their investments to work competitively.
Could it affect Naira
We believe it is likely this could impact on any incentive to hold naira. If dollar interest rates rise as we suggest, very few holders of forex will be incentivized to sell.
- Even in the event of a stronger Naira, the returns investors get from holding the dollar could erode any gain in a strong naira.
- We also consider the fact that on a long term, the naira always depreciates against the US dollar.
- For those with dollar debts, the situation could be dire as interest rate is expected to rise if the interest rate on their loans are floating rather than fixed.
Bottom Line
- If you hold cash dollar position, then an increase in US treasury yields should be net positive for you.
- High net-worth individuals, dollar speculators and other significant holders of cash dollars should anticipate higher interest rates.
- Finally, cash is king.
