Listed shares at the Nairobi Securities Exchange (NSE) are tipped for a better year in 2024 after taking a battering in 2023 on the back of foreign investor flight, placing them alongside fixed income securities as the asset classes to watch in the next 12 months.
Equities were the worst performing major asset class in 2023 where the NSE shed Sh554 billion or 28 percent of its investor wealth, most of it (Sh418.7 billion) on the Safaricom stock — the largest on the market.
In contrast, returns from bonds in terms of interest rates went as high as 17.9 percent while offshore returns hit 43.9 percent in the year to September driven by higher interest rates and rising stock markets in western economies.
Investment advisers say that expected rate cuts in the US and an improved availability of forex in Kenya should make the stock market more attractive to foreign investors whose inflow are crucial to the performance of blue chips that hold the bulk of the NSE’s market wealth.
Such price erosion, according to analysts, has created an opportunity for investors to find value, especially the local pension and asset managers who have reduced their equity holdings to a 10-year low.
“There are a few catalysts that we see, one is interest rates in the US starting to come down, and secondly, as inflation moderates in Kenya and the CBK also reduces interest rates then equity investments will start to look more attractive,” said Muathi Kilonzo, managing director and head of equities at EFG Hermes Kenya.
“Third, all indications are that forex shortages for portfolio investors are no longer an issue – this hopefully lines Kenya up for a review by MSCI allowing passive EFTs to start to re-invest. It will also be an important signal to foreign investors, who historically made up 60 percent of trading.”
Some of the concerns that ailed the economy last year— the weak shilling, unfavourable outlook on emerging markets and expensive credit — remain in the air, however, meaning that potential gains in the market are likely to be seen on select, stable companies.
It also means that bonds are set to remain attractive to risk-averse investors, especially if rates remain elevated as expected.
The Central Bank of Kenya (CBK) action to raise its base rate to 12.5 percent from 10.5 percent in December is set to keep the rates on government securities high going into the new year.
The rate on the one-year Treasury bill rose to touch the 16 percent mark in the last auction of 2023 last week. Banks have also adjusted their lending rates upwards in response to the base rate review and are also expected to raise deposit rates to compete favourably for customer deposits against competitors such as government paper and unit trusts.
“Banking stocks may be the only group benefiting (due to high rates), and preference for high-yielding treasuries will likely stay going into the second half of the year,” said Rufus Mwanyasi, the managing director of advisory firm Canaan Capital.
“Nonetheless, for three to four year bets, 2024 is best to reposition back into an equity-heavy portfolio. High-yielding blue-chips would be the easiest picks.”
For unit trust investors, the returns from money market funds that are primarily linked to Treasury bills and bank fixed deposits will continue to rise in tandem with the rates on these options. By the end of last year, the funds were paying between 11.8 and 15.8 percent in annualised returns, net of all costs except withholding tax.
The higher interest rates do not bode well for real estate investments, however, given the capital-intensive sector’s sensitivity to cost of credit.
In 2023, the growth in house and land prices slowed down partly due to rising cost of loans that made it harder for would-be buyers to access funds to fund their investments.
In the 12 months to September 2023, according to HassConsult analysis, average house prices in Nairobi and its environs fell by 3.7 percent, while asking rental prices fell by 1.5 percent. A year earlier, the sales and rental prices had gone up by 4.8 percent and 0.3 percent respectively.
Land sale prices meanwhile rose by 0.83 percent in the period, coming in below the previous year’s growth of 1.23 percent.
Recovery of returns — if any — is likely to be moderated by the high loan costs and tighter credit standards imposed by banks due to rising volumes of non-performing loans.
Difficult economic conditions are also expected to weigh against the real estate sector, with the reduced consumer spending power making it hard to grow rental yields and house sales.
