Government securities and fixed deposits in banks offered Kenyan investors the highest returns in the first half of the year as listed shares took a beating in the wake of foreigners’ flight from emerging markets.
Investors in Kenya’s real estate also received measly returns from sale of homes, rent and disposal of land on a slow recovery of the property sector from Covid-19 economic fallout.
The Business Daily analysis of the different asset classes in the six months to June shows that the highest available returns locally came from offering loans to the government, which stepped up borrowing to plug shortfalls from revenues and increased spending.
Returns from bonds auctioned this year averaged 13.06 percent where Treasury Bills offered rates of between 7.2 percent and 10 percent, helping them beat real estate, land and the equities market.
The equities market, which emerged the second best performer last year with returns of 11.91 percent, witnessed share depreciations on reduced appetite for emerging markets after a jump in interest rates in the developed markets such as the US. Investors’ wealth at the Nairobi Securities Exchange (NSE) shrank 26 percent in the first half, wiping out Sh653.7 billion of shareholders’ fortune.
While home and land prices are rising on the back of economic recovery, their returns remained relatively lower.
Rent returns in Nairobi rose one percent in the quarter while returns from home and land sales rose 0.11 percent and 2.17 percent respectively, data by realtor HassConsult shows.
Real estate was among the worst-hit sectors by the economic fallout of the pandemic as orders by new house buyers dried up, largely due to income and job losses, cautious lending by banks, and investors choosing to keep their cash in hand as they rode out the economic uncertainty.
Fixed deposits in banks offered the second-best returns in the six months, averaging 6.58 percent in the first four months of the year, according to Central Bank of Kenya (CBK)
The government’s increased borrowing from the domestic market has pushed up the benchmark Treasury bill yields, forcing bankers to match it in an attempt to encourage larger depositors to leave their money with banks instead of lending to the State.
Cash-rich companies and high-net-worth investors have recently pocketed huge interest incomes from commercial banks’ wholesale deposits.
Small savers, however, are not likely to make significant gains in the current market environment as their rate of return has remained at about 2.5 per cent since banks have increased their reliance on wholesale deposits to support their lending.
“Investors have largely shifted to holding near-cash assets, for example, Treasury bills, and also bonds which they are holding to maturity. While a few investors have been going offshore, the majority are staying local in the fixed income segment,” said Davis Gathinji, an analyst at Sterling Capital.
Fixed deposits in banks rose Sh33.6 billion or 2.1 percent to Sh1.6 trillion between January and April, a faster pace of growth compared to the corresponding period last year when they were up 1.9 percent.
Those holding dollar deposits in local banks have also enjoyed a further exchange gain of 4.1 percent, with the US currency having gained by that margin on the shilling since January.
Equities have been the worst-performing financial asset this year, seeing significant price erosion on the largest four blue chip stocks of Safaricom, Equity Holdings, KCB and East Africa Breweries Limited (EABL), which together account for 70 percent of investor wealth at the bourse.
These stocks dominate the foreign trading desk and are now trading at record lows despite their key business indicators remaining strong, particularly profitability.
The rate hikes in the West has sent stocks tumbling across the globe as investors pulled out of equities on the expectations that inflation would surge.
Smaller markets like the NSE have taken deeper hits because investors, particularly foreigners, get attracted to the western bonds and equities that are viewed as safe havens in times of global uncertainty.
The current high inflation in the advanced markets is a result of high energy and food prices following Russia’s invasion of Ukraine in February, which cut off wheat and fuel exports from the Black Sea region.
“Foreigners will largely continue exiting the NSE, and while local investors will at some point re-enter the equities market, this will likely only be in the post-election period,” said Mr Gathinji.
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The property market has lost its shine, which once made it the best performing asset class and magnet for high-net-worth investors like pension schemes.
The sector had been one of Kenya’s fastest-growing in the decade to 2015, with returns outpacing equities and government securities. This triggered a property craze that saw coffee plantations in the Nairobi suburbs uprooted to pave the way for gated housing estates and shopping centres.
The recovery of the economy has aided the marginal rise in house prices as more people who lost jobs in 2020 return to gainful employment and businesses regain their footing.
This slight rebound has given house buyers the confidence to invest in real estate, while developers are also able to move ahead with projects that they had put on ice due to the prospects of a revival of the rental market.