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Pension funds stand to gain from rate cap review

Treasury secretary Henry Rotich. FILE PHOTO | NMG
Treasury secretary Henry Rotich. FILE PHOTO | NMG 

Pension funds returns are likely to enjoy a boost through equities and fixed income with the expected review of the interest rate cap, a fund administrator has said.

Investment managers at Zamara say bank stock prices at the NSE are likely to go up further on the expectation of higher margins should the rate cap be reviewed, while other companies are also likely to enjoy the knock-on benefit of improved credit flow to the private sector.

President Uhuru Kenyatta last week in London said the policy has failed to increase credit to traders. Subsequently, Treasury CS Henry Rotich has disclosed he will submit amendments on the law to Parliament in June through the Finance Bill.

Pension funds returns hit an average of 18 per cent last year on the back of a recovery in the equities market, defying a tough economic climate.

“Anticipation of a repeal has already began to have a positive impact on the market, and while it may not be as strong a year as 2017, definitely it augurs well for the equities,” said Zamara chief operations officer Chris Nyokangi during the launch of the firm’s pensions performance watch 2017 yesterday.

“For fixed income, the cap has also limited the rate which banks can offer for deposits. If they are able to lend at a higher rate, it should also translate to an increase in the returns depositors are able to get from their cash held in banks.”

Last year, returns from equities investments for 374 schemes surveyed by Zamara stood at an average 30.4 per cent compared to -9.6 per cent in 2016, when the market was in the grip of a bear run.

Fixed income returns rose to 14.7 per cent from 14.3 per cent in 2016, while those of offshore investments jumped to 22.2 per cent from 1.2 per cent.

The movement of rates on government securities in the event of a rate cap review would be of importance however, given the inverse relationship between the price (value) of bonds and yields.

Pension funds have invested 70 per cent of assets in fixed income, a significant share being in government securities.