Retail investors weigh options as NSE picks up

By JACKSON OKOTH

Local investors are busy scribbling on their notebooks as returns in the bonds market begin to fall.

This is happening as the riskier, but more rewarding equities market become more attractive, especially to retail investors who fled the Nairobi Stock Exchange (NSE) more than two years ago.

Latest market statistics show a significant slowdown in the fixed-income market, with returns on bonds with a maturity of less than a year at 6.04 per cent.

This rate is expected to edge lower in the coming months. Similarly, investors who bought the 15-year bond have a return of 10 per cent, from 13 per cent last year. Meanwhile, shareholders at the NSE have seen the size of their wealth increase significantly during the last 18 months.

For instance, between January 2, 2010 and March 11 2010, the NSE 20-share index registered returns in excess of 22 per cent.

"It will take a while before investors shift from the bond to equities market. But we are definitely moving towards that direction as soon as the stock market hits a bull run," said Peter Mwirigi, a fixed-income dealer at Sterling Investment Bank (SIB).

Dominated by banks

Activity in the bond market is still dominated by commercial banks, controlling more than 50 per cent of turnover, pension funds, fund managers and insurance firms. Retail investors control a paltry two per cent of this market.

"The oversubscriptions in the treasury bill and bond market shows that there is still high liquidity that is desperately seeking for a place," said Mwirigi.

Fund managers are still holding their cash in anticipation of treasury floating a 25-year bond and re-opening other offers.

In the forthcoming Treasury bonds issues for the month of April, Central Bank of Kenya (CBK) will be seeking for Sh12 billion, out of which Sh4.9 billion will be in new borrowings and the rest for redemptions. Details of this offer, including the coupon rates, will be advertised before the issue date of April 26, 2010.

In March, Treasury borrowed Sh16.5 billion from the domestic money market through the issuance of 2-year and 15-year Treasury Bonds. The offer received bids amounting to Sh30.3 billion, a 183.79 per cent subscription.

The rate on the 2-year bond was 6.936 per cent down from 8.127 per cent, whereas the 15-year bond reported a weighted average rate of 9.980 per cent down from 13.709 per cent in the last auction.

"While banks are still active in the bond market, there is a lot of profit-taking, especially among retailers seeking for capital gains," said Mwirigi. Analysts expect the yield curve to continue the downward shift in the second quarter of this year, lowering returns for players in the bond market.

Speculative activity

"It is still unclear whether a shift has taken place between the equities and fixed-income market. The equities market is still largely driven by speculative activity on the Safaricom counter, as the firm prepares to release its full year results in the second week of May," said Vimal Parmar, an analyst at African Alliance.

Other top counters include National Bank of Kenya (NBK) where shareholders could lose in a privatisation plan that will see the Government increase its holding in the firm. If conversion of NBK’s preference shares occurs, the Government’s stake will increase to 71 per cent from 22.5 per cent, meaning that NSSF will only hold 25 per cent down from the current 48 per cent and the stake held by the public will slide to four per cent from 29 per cent.

It is mostly the speculative and low-income retail investors who fled the NSE when activity declined. This was soon after the Safaricom Initial Public Offer (IPO) ended and the share begun trading. But fortunes are slowly changing as prices improve on most counters at the bourse.

"Most small investors are yet to return in large numbers due to experience of the last 18 months where the market experienced high volatility in prices, with share prices dropping by almost 40 per cent during the period," said Dominic Kiarie, MD British-American Asset Managers Limited.

The experience of the Safaricom IPO, where this stock traded below the IPO price for a considerable long period, may also have played a part in putting investors away from investing in the stock market.

The low confidence in the market has also been partly as a result of the problems experienced by some stockbrokers. In response, the Capital Markets Authority (CMA) has put in place mechanisms to ensure investors are protected and that the stock market operates in an orderly manner.

Regular inspections are also made by CMA to licensed market intermediaries to ensure they are complying with provisions of the capital markets regulations and sanctions made where these provisions are not met.

Local investors were also attracted by better returns in other instruments, including corporate, treasury and infrastructure bonds.

Best investment decision

While prices on most counters have been low, investment bankers point out that it is only those who took this opportunity to enter the market on the cheap that are making excellent gains as the market recovers.

In a market comprising a large segment of those lacking investor education, fund managers recommend that for with a long horizon, say over three years, investing in the NSE offers the best option.

For those with a short-term investment horizon (less than six months), the ideal vehicle would be the money market. [email protected]