What you need to know:
- Pension scheme managers reduced their exposure to the NSE up until the last quarter of 2015, making modest recoveries to their earnings.
- Data from the Retirement Benefits Authority shows that domestic pension funds have put a good portion of their money in Kenya Commercial Bank, Safaricom, East African Breweries Limited and Equity Bank in 2014.
Analysts are predicting that a shift to equities in the second half of this year by local investors moving away from low-yielding fixed income is likely to drive the resurgence of the Nairobi bourse.
According to strategy paper by Standard Bank Group, low yields from the government papers is likely to force fund managers to reallocate their portfolios.
The three-month Treasury bill (T-Bill) fell to 8.807 last week, the lowest since July last year when the rates stood at 8.2 per cent.
Returns on government securities have fallen since mid-January and have been taking a plunge especially after Treasury’s move to cut domestic borrowing by Sh53.3 billion.
Last year government paper gained significantly due to revenue constraints with T-Bill returns gaining up to 22 per cent at a time when the Nairobi Securities Exchange (NSE) values were under erosion due to a bear run.
“Given that short-term rates have come off, we expect domestic asset allocation bias for cash/fixed income in quarter one but expect gradual rotation into equities towards the tail end of the first half of the year,” the report read.
Pension scheme managers reduced their exposure to the NSE up until the last quarter of 2015, making modest recoveries to their earnings.
According to Alexander Forbes Consulting Actuaries Schemes Survey, fund managers shifted focus to fixed income securities increasing their portfolios from 65.5 per cent in September 2015 to 67.9 per cent at the end of the year.
Data from Alexander Forbes’ schemes survey shows that equity weightings for domestic fund managers declined from 35 per cent in the first quarter of last year to 30 per cent in fourth.
“This supports our view that domestic fund managers are likely to increase equity weightings as fixed income yields decline,” SBG said.
Kenya has a Sh811 billion ($8b) assets held by pension firms which remains largely invested in cash/fixed income.
“We believe asset reallocation into equities is a potential upside trigger in the second half of this year given our outlook for a decline in fixed income yields,” the SBG report stated.
“We expect a rebalancing to occur gradually over 2016 as fixed income yields continue to decline, fuelling equity risk appetite.”
This might boost valuations for Kenya’s leading bank stocks and Safaricom where many fund managers have invested.
Data from the Retirement Benefits Authority shows that domestic pension funds have put a good portion of their money in Kenya Commercial Bank, Safaricom, East African Breweries Limited and Equity Bank in 2014.
Standard Bank Group said the four stocks remained core holdings for domestic investors in 2015 and their researchers expect these stocks to remain important in 2016.
The exit of the local fund managers opened up the market to increased foreign ownership of NSE-listed firms even though net inflows reduced last year.
According to portfolio holdings data from the Capital markets Authority (CMA), foreign investor ownership of NSE-listed companies has increased mainly on account of a local investor sell-off or reallocation of weightings.
“As at December 2015, the foreign ownership of NSE-listed companies was at 26 per cent against the five-year average of 21 per cent,” the SBG report read.
Overall, net inflows reduced from a peak of Sh30.4 billion ($300 million) in 2013 to Sh4 billion ($40 million) in 2014 to Sh913 million ($9 million) last year.
Market turnover data suggests that portfolio from foreign investors has greatly improved daily market liquidity.