Inflation, interest rates to hurt bond earnings

Inflation, interest rates to hurt bond earnings

By MORRIS ARON

High inflation trends brought about by the rising cost of fuel, food and other basic items is bound to push up interest rates, and erode the value of bonds in the medium-term, a leading investment banker has warned.

Paul Mwai, the chief executive of African Alliance, said as interest rates rise, investors with longer-term bonds generally tend to drop them in favour of short-term debt instruments such as T-Bills, heralding a drop in earnings of bonds.

"If inflation goes as has been projected —some saying that it may hit 19 per cent before the end of the year — then we are in for a possibly challenging period in as far as the bond market is concerned," said Mwai.

"Generally, high inflation which translates to high interest rates is not good for the Bond market as it reduces earnings."

Despite the impending development in the bonds market, hope now lies in the stock market that has remained relatively vibrant following impressive financial results recorded by most companies in the last three quarters of the 2010-11 financial year.

Going forward, however, there is concern that the NSE may adopt a ‘nervous session’ in the medium-term future if interest rates rise and investors run to short-term debt instruments.

Applauded CMA

But even as debate over the forecast of the future of the securities continues, players in the market have applauded the CMA for its decision to re-classify licenses for some operators, saying the development is bound to herald the creation of stable institutions, and borrows on global best practices that focus on risk based capital requirements.

Last week, CMA reviewed the licences of five investment banks into stockbrokerage firms following the new guidelines on capitalisation requirements.

CMA put Equatorial Investment Bank on conditional licence, and revoked the trading permits of Africa Alliance Kenya Securities, and African Alliance Kenya Management. Trading licences for two investment advisers (Equilibrium Capital and Finconsult), and an authorised Depository institution—Dubai Bank Kenya— were also cancelled.

Others affected were Afrika Investment Bank, Drummond Investment Bank, Kestrel Capital (EA), Apex Africa Investment Bank and Sterling Investment Bank.

"We chose to stick to being stockbrokers and funds managers to better manage our portfolios, and give maximum returns to our customers in light of the recent investment trends across the world," said Kassim Bharadia, the chief executive of Apex Capital.

A similar sentiment was voiced by Mwai who said that the decision to drop the stockbrokerage and fund management licenses was in line with the company’s structural re-arrangement policy that it began a year ago.

Under new laws, investment banks are required to raise their minimum capital to Sh250 million, from Sh30 million, while stockbrokers are required to increase their capital to Sh50 million, up from Sh5 million, by the end of March, in order to acquire an operating license.