Investors are now placing big bets on the Nairobi Securities Exchange (NSE) in the hunt for the best-yielding investments as returns from other asset classes shrink.
The bourse has held on to its position of the best investment channel, with a year-to-date return of 12 per cent. The returns had fallen 8 percentage points from 20.9 per cent of end of May.
If the trend is maintained, as analysts forecast, pension funds, insurers and other capital investors should report good gains at year end.
Other assets have seen their returns dip in the last few months, with Treasury bonds and bills yields dropping to as low as five per cent from the average of 12 per cent at the beginning of the year.
Bank deposits have also become less attractive with fixed-account interest rates now nearly three percentage points lower at between six and seven per cent for the highest paying lenders, down from 11 per cent a few months ago.
Research and risk analysts Stratlink Africa said in their July review of the fixed income and equities markets that fixed income returns in the current market climate cannot match those being offered by the equities markets.
“We still maintain that equities will emerge the top performing asset class for 2013, despite recent weakness. Equity indices have yielded high returns since mid 2012, with some counters almost doubling in value,” said the research.
“We are unlikely to see fixed income yields rival these returns,” said Stratlink Africa in the report.
The firm downgraded its political risk perception, especially around the ICC trials, which it had said would inhibit foreign interest in the bourse going forward.
Instead, the firm says that with a stabilising macro environment, the Nairobi bourse would increasingly attract foreigners and institutional investors.
Following the June slide, Stratlink altered their index opinion from ‘bullish’ to ‘neutral’. However, based on their position taken in June a slip below 4800 points would indicate that there was profit taking in the market.
Market interest rates have remained low partly stemming from the government’s decision to hold the base lending rate at 8.5 per cent, a move that has led to lower returns on the government securities.
At the same time the lower rates have made accessing credit easier, helping boost the prospects of the bourse since investors can now access funds to put into equities.
The NSE 20 share index has so far in July been on a recovery path after the June drop to remain at over 4700 points.
NIC securities analyst Faith Atiti told Reuters that the bourse would continue its recovery on solid support largely by financial result- driven speculation with banks expected to start announcing their half-year results.
Last week, the NSE 20 share index gained three per cent to stand at 4720.53 points, recouping losses made in the previous three weeks.
The market closed June on 4598 points and a market capitalisation of Sh1.61 trillion. But driven by increased inflows by both local and foreign investors the value has risen to Sh1.69 trillion, edging up towards the all-time high of Sh1.72 trillion.
Interest-rate bearing instruments are partly paying the price of the Treasury in 2013/14 setting a lower domestic borrowing target of Sh106 billion compared to the Sh157 billion borrowed in the financial year 2012/13.
Cumulative interest payments on government securities hit a record high in 2012/13, standing at Sh109.7 billion at the end of June 2013, and were 36 per cent higher than 2011/12 payments.
The reduced borrowing projection by the government comes at a time when it is planning its first $1 billion Eurobond and projecting higher tax revenues through automation and widening of the tax base.
Lower government borrowing keeps the interest rates down since there is less competition for funds with the private sector, meaning banks have to price their loans at friendlier levels.
“The NSE has had an advantage over the other investment classes in that it has been rampant in value gain over the last 18 months. At the same time, with the interest rates of the fixed income investments falling they have not been able to keep up with the bourse,” said Kestrel Capital financial analyst Kuria Kamau.
The Treasury bills and bonds have recorded under subscription in July though, perhaps indicating that the low interest rates had lessened the appetite for lending to government.
In the week ending July 5, the government offered for sale Treasury bills worth Sh7 billion, receiving bids of Sh2.3 billion, all of which were accepted.
In the week ending July 12,Treasury bills worth Sh7 billion were offered for sale, with a total of Sh1.8 billion accepted out of Sh2.3 billion received.
Fund managers Stanlib say that in the second quarter of the year, less domestic fiscal borrowing needs and a lower inflation outlook presented could further cut the rates.
“Monetary policy will be a key force in 2013. Tightening of monetary policy in the developed world might make emerging and frontier market assets less attractive and thus lower foreign participation in the local market. Lower fixed income yields and stronger economic growth support equities,” said Stanlib in their second quarter economic review.
The projections for 2013 look set to keep the trend of 2012 which saw asset managers reap bigger dividend from their equity funds compared to the other fund classes, driven by a good year for equities.
ICEA Lion Asset Management Limited’s Equity Fund, which caters to investors seeking NSE exposure, turned around from a loss of Sh51.9million in 2011 to a profit of Sh96.7 million in 2012, a rise of 286 per cent.
In its growth fund, where investments are made in a mix of listed equities for capital growth and interest bearing assets such as fixed deposits, Treasury bills and Treasury bonds for income, the fund manager returned a profit of Sh26.8 million as opposed to a loss of Sh22.1 million in 2011.
However, the profit in the money market fund reduced fromSh81.9 million in 2011 to Sh62.7 million in 2012, hit by a Sh16.4 million unrealised loss in shares and bonds for the year.
In the bond fund, unit holders’ funds reduced by Sh10 million from 49.1 million in 2011 to Sh38.9 million in 2012.