Market shifts signal shake-ups in portfolio mix

A turn in interest rate trends and a rally in the equities market is set to herald a shake-up in most portfolios as fund managers and investors reposition their investments.

The fixed income market is expected to be a key loser in the emerging search for higher returns.

“Yield hunters who have been driving the secondary bond market are holding back as the rise in interest rates erodes their margins,” said Peter Mwirigi of Sterling Investment Bank.

The latest market report indicates that the secondary bond market which at times had more turnover than equities is cooling.

“Bonds turnover declined by 33.28 per cent to Sh63.52 billion from Sh95.2 billion recorded in June as most investors stayed out of the market due to uncertainty of the direction of interest rates,” said Sterling Investment Bank in its latest report on the fixed Income Securities.

The June turnover was the highest recorded in the bond market.

The report attributes the low performance on the secondary bond market to the spike in interest rate on short-term Treasury Bills, a situation that is forcing investors to hold back.

In the latest auction of the 91-day Treasury Bills the Central bank of Kenya (CBK) was forced to raise the yield by 21 basis points to 1.9 per cent from 1.69 per cent posted in the previous auction at the beginning of the month.

With the local bourse, the fixed income and equities are the main segments to play with, a decline in one is reflected by an increase in the other segment.

Infrastructure bond

An inverse relationship exists between bonds and interest rates in the secondary market, which is driven by margin traders.

Rising interest rates portend lower returns and vice versa.

“The outlook for the equities market is strong as the good weather has resulted in lower costs especially in energy, lower cost of funds due to falling interest rates and regional integration which provides for increased income,” said Einstein Kihanda of Sanlam Investment Management.

Mr Kihanda also sees the upcoming infrastructure bond preying on investors decisions as they look to enjoy the various incentives offered by the bond.