Investors at the Nairobi Securities Exchange are headed for mixed returns in 2016 from equities and fixed income markets, with the bonds segment the better performer.
The bonds market saw a resurgence with turnover rising by 37 per cent to Sh417 billion through mid-December compared to 2015.
Traded yields on bonds have largely held between 10 and 14.5 per cent this year.
At the same time, the equities market has been depressed as it remains in the grip of a bear run, which has persisted since quarter two 2015.
Market turnover has fallen by 31 per cent to Sh145 billion, with the benchmark NSE20 share index down by 24 per cent to a five-year low of 3,074 points.
The net result of the contrasting fortunes of the two segments of the securities market has therefore been a flight of capital from equities to fixed income, especially among local fund managers.
“We have seen depressed turnover in the equities market whilst turnover in the bonds market shot up. This could be attributed to the low returns on stocks compared to the fixed-income instruments. We have witnessed some flight to safety by investors as they look at trimming on their losses in the equities market and moving to the less risky assets like bonds and bills,” said Kingdom Securities senior research analyst Mercyline Gatebi.
The fixed-income segment has attracted the attention of banks and pension funds — the two types of investors with access to large pools of capital to drive the segment.
Banks were in the last quarter of the year jolted by the capping of interest on loans at no more than four percentage points above the prevailing Central Bank Rate.
They increased their lending to the government as a result and with the State’s new offers of treasury bonds and bills insufficient to mop up all their capital, they turned to the secondary market to look for bonds to buy into.
Pension funds also directed more capital to fixed income, which already forms the biggest part of their investments that tend to be long term in nature.
“Most schemes had a preference for fixed income market at an average holding of 71.6 per cent by the end of quarter three of 2016,” said Actuarial Services (EA) in a report on the pensions industry covering quarter three of this year.
On a decline
“The average equity holding has been on a decline since the beginning of the year, based on our survey the average exposure was 24.5 per cent in quarter one, 22.5 per cent in quarter two and down to 19.7 per cent in the third quarter.
‘‘This can be attributed to the bearish nature of the equity market in the course of the year with most schemes opting for the fixed income market.”
Investors in the equities market have had to contend with falling share prices, with just seven out of the 63 actively traded stocks at the NSE making a gain this year.
Forty seven counters registered double-digit percentage falls in share price, including nine of the 11 listed banks and six of the nine listed manufacturers.
Going into the new year, the expectation among analysts is that investors will continue to exercise caution in trading, taking into account the political risk arising from the fact that 2017 is an election year.
The expected rise of the US Federal Reserve base rate could also lead to capital flight back to the US, at the expense of emerging markets.