Lower interest rates return equities on radar

A reduction in interest rates is expected to change the composition of investment portfolios this year as listed stocks re-emerge as favoured investments over fixed income securities.

Considered riskier investments but yielding higher returns than bonds and government paper, equities at the Nairobi Stock Exchange (NSE) are gradually emerging from a three-year lull driven by a resurgent Kenyan economy.

While fixed income securities are still primed to yield steady returns in 2010 with more corporate bonds and treasury bonds expected, higher risk appetites among investors favour the stock market.

“As interest rates fall, we expect to see fund managers reducing their exposure to bonds as they seek higher returns with riskier asset classes; with equities being the immediate beneficiaries,” say research analysts at Renaissance Capital in their latest research note.

The telecommunications, oil, cement, utilities and agricultural stocks are cited among the cherry picks that will drive growth at the bourse.

From record lows of 2,360 points in March last year, the NSE 20 share index has moved up by 49 per cent to stand at 3,520.92 points at the close of trading on Wednesday.

The dominant participation of foreign investors seeking frontier market exposure has been a crucial factor in the revival of the stock market.

RenCap analysts say despite expensive valuations, fund managers, particularly local, may be reluctant to lighten certain portfolio positions given limited fixed income opportunities and general underweight equities allocations.

At AIG Investments, analysts say that low and stable interests likely to prevail in the first half of the year due to the high liquidity and slow credit expansion.

“If the economic growth gathers momentum and a stable interest rate environment is maintained in 2010, we are likely to see robust activity in the primary corporate bond market,” say analysts at AIG Investments.

Last year, in the wake of global financial crisis, debt has become a preferred option for raising cash.

In 2009, bond activity in the Kenyan capital market more than tripled setting the local bond market on a remarkable performance streak.

Private equity

KenGen raised Sh25 billion to fund its capital projects.

Safaricom issued Sh5 billion, in the first tranche of its Sh12 billion programme.