NAIROBI, Kenya, Jul 1 – A financial expert has warned against disregarding equity markets despite their poor performance in the last few months.
Gulf African Bank Chief Executive Officer Najmul Hassan told Capital Business that stocks have suffered largely due to speculation but they still offer higher returns than most of the other vehicles of investments.
“Equities will always hedge you against inflation; it will always give you a decent return in the market but you (investor) must not come in putting on the hat of a speculator,” he advised.
Equities have in the last one year taken a beating as risk- averse investors flee to perceived safety grounds, due to the ongoing financial crisis across the globe.
Mr Hassan however said investors who wish to invest in these markets need to adopt a long term objective which would see them reap maximum benefits.
“Equities is looking at the market and saying the PE (Price Earnings) ratio of this share is good, it’s giving a decent return and there’s a long gain in it,” he explained while pointing to the history of the market where investors who for instance invested 25 years ago have made more money than those who put in their funds in securities such as Treasury Bills and Bonds.
The government however seem to have a different view as indicated by a recent directive in the Finance Bill that seeks to protect investments by schemes such as the National Social Security Fund, that receive statutory contributions from losing money.
In the Bill, Finance Minister Uhuru Kenyatta said that effective January 1 next year; these schemes will have to invest in government securities and infrastructure bonds issued by public institutions.
But while he lauded the government’s intention to bar pension schemes from investing new contributions in the stock market, Mr Hassan said the government should adopt a diversification strategy to maximise returns and minimum risks.
“Yes, it is a strategy where you say you’ll only invest in T-Bills or investments which have a very low risk but you are compromising your returns. I’m not saying that everything should go into equity market but part of your portfolio should go into equities and part of it could be in infrastructure bond to ensure that you don’t have all your eggs in one basket,” the CEO said in defence of his argument.
Nairobi Stock Exchange (NSE) Chief Executive Officer Peter Mwangi concurred and added that this restriction could be detrimental to the scheme members’ interests, fund managers at these schemes and the capital markets.
“If you take the case of NSSF, they have ongoing property projects and presumably they had hoped that their cash flows would be used to complete those projects. What will happen to those projects that are underway, if they are not able to make additional investments?” he posed in reference to the scheme which is one of the biggest contributors to the stock markets.
For instance, in 2008 it is estimated NSSF’s equity holdings were three percent of the market capitalisation of the NSE and it contributed an estimated two to three percent of equity market turnover or Sh1.95 billion to Sh2.93 billion.
NSSF has an asset base of Sh90 billion with about 50 percent of its investment portfolio held in equities and five percent in government securities.
Stanbic Investment Analyst Stephen Gugu reckoned that the Finance Minister should clarify a few issues about the directive one of which is what should happen to the stake that is already in the market.
“Nobody is sure whether they are supposed to dispose of the holdings of the equities that they currently have so the market has to wait for that clarification,” he said.
Should this (selling off of the equities) be the case, Mr Gugu said the market would automatically come down because there would be so much supply of shares which the demand would be unable to take up.
On the positive side, NSSF and the other schemes would serve to create increased interest in the bonds market but only if they actively traded these securities.
“If they come in with the same strategy of ‘buying and holding’, you wouldn’t see much turnover in the bonds market,” the analyst said of these players.
From these arguments, it is clear that if the aim (of the directive) is to protect contributors’ savings, these experts argue that the government should focus on ensuring that laws exist to penalise trustees and management that misappropriate the pension assets of contributors.