After the market uncertainties of 2011, fund managers are split over where to put their money this year considering that the political climate is widely expected to influence the economic environment.
An unprecedented increase in interest rate in the second half of last year has made debt instruments the highest-yielding asset class compared to stocks and even property, at least for now. However, policy measures are likely to change the investment environment as the year progresses.
Analysts expect that both inflation and high interest rates will ease in the first half of 2012, lowering production expenses for companies, giving way to higher profits. This analysis makes a case for investment in the stock market.
However, a lower interest rate environment will also raise bond valuations, allowing bondholders to make capital gains on debt instruments, reminiscent of the 2010 windfall on bond portfolios when borrowing costs slumped to historic levels.
Joshua Njiru, the general manager at Madison Asset Managers says he would be keen to increase his bond portfolios to gain from the prevailing high interest rates though he expects the yields will decline but not in the immediate future.
“I would still consider allocating more funds to both corporate and government bonds because they are offering superior yields,” he says.
After a more than 30 per cent decline of the values of stocks at the Nairobi Securities exchange in 2011, Mr Njiru expects some recovery in the equities market but says the performance is likely to be weighed down by politics since this is an election year.
“Stocks are very cheap now after a difficult year and we expect some recovery. I might consider increasing my equities portfolio later in the year,” he says.
Pressed to deal with inflation that just fell shy of touching 20 per cent in November, the Central Bank has put in place measures to discourage borrowing by raising interest rates — and this has gifted investors in bonds.
As an illustration, an investor with Sh1 million to invest can now make a Sh100,000 in profits by lending to the government for six months after buying the 182-day Treasury Bills whose yield in the last auction exceeded 20 per cent.
But since inflation has already shown signs of easing, at least according to the month of December figures, there are indications that the Central Bank could ease the monetary policy again after the objective of containing the erosion of purchasing power achieved.
“With inflation already starting to ease on cheaper food and energy prices, we expect CBK to lower the cost of funds within the first half of 2012,” said David Achungo, an asset manager at PineBridge Investments.
“Lower interest rates will follow, and this tends to make equities attractive, allowing a rally in the stock market,” says Mr Njiru.
Erastus Muturi, a manager at Suntra Investment Bank says that the high cost of capital is likely to lower the level of new investments in real estate and the stock market is likely to be a natural beneficiary.
“I expect a reversal on the capital outflows that benefitted the property market would this year be invested back in the stock market,” says Mr Muturi.