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.

Typically, investors tend to realign their investment portfolio with shifts from one counter to the other, largely dictated by the anticipated rate of returns.

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.

“The infrastructure bond offers incentives such as tax exemptions and the fact that the proceeds will be used for infrastructural development and not typical state expenditure augurs well for investors,” said Mr Kihanda.

The CBK is issuing a Sh31.6 billion infrastructure bond this month with the proceeds to be used for road construction, power generation and improving water supply.

In its note, Sterling Investment Bank indicates that the new issue may lead to increased activity though there is a good chance of it sucking liquidity in the market, considering the size of the issue.

“We have observed subdued activity levels since the announcement of this issue as most investors are consolidating funds to participate in the issue”.

However, with coupon rates of six per cent, some market players indicate that the low yields may deter investors from locking in their funds for the duration.

The bond has a nine-year maturity period.

Financial analysts indicate that the rate of return on the bond may dampen the demand despite the recent overwhelming interest on such long term debt instrument.

Coupon rate

“The coupon rate could prove a challenge as investors may not want to tie their funds for such a long duration as they wait for returns,” said Job Kihumba of Standard Investment Bank.

Given that the funds take time to be released to the general economy, Mr Kihumba indicates this will put pressure on the interest rates, causing a further upward movement.

“The funds absorbed from the bond takes time to be released as they are meant for development expenditure and this may destabilise the market with the potential of further upward swing in interest rates,” said Mr Kihumba.

Mr Kihumba reckons that the bond is likely to suck substantial funds from the money market which may put pressure on interest rates in the short to medium term.