Pan Africa Asset Management Senior Portfolio Manager Kevin Kangogo says equities and bonds are getting a beating from sell-off rates as most foreign investment companies that have been placing their money in emerging market economies in Africa opt to invest back to their markets.
Speaking to Capital FM Business, Kangogo says the US Federal Reserve has plans on increasing the interest rates in September triggering a capital flight from emerging markets back to the US.
“Over the past two years, the US Federal Reserve has been stimulating their economy by pumping money leading to weak dollar, so most investment companies (hedge funds and investment banks) placed their money in emerging market economies in Africa.”
“Late last year they decided to reverse the process through tapering, hence triggering a capital flight from emerging markets back to the US. When the dollar strengthens, their actual returns will be lower when converted to US dollars from Kenya shillings, hence most foreigners prefer holding dollar assets. Also, weak company performance leads to the sell-off. Same scenario is happening to China, India, Brazil and Europe,” he explained and expects this trend to continue in the remainder of the year.
He says stronger US dollar has affected some listed companies, who have made losses, issued profit warnings or lowered their earnings, with most companies who rely on dollar imports for inputs, and sales are in shillings hit hardest, this includes sectors such as manufacturing and aviation.
“The weakening shilling has led the Treasury to raise rates which is affecting the other sector of the market, Banks. The banks make money out of spreads, hence when the rates rise, the cost of deposit rises faster than the rate of lending rates, hence they end up with expensive deposits and same interest income,” he added.
However, even as the equities and bonds are getting a beating from sell-off and high interest rates Kangogo says cash is performing quite well.
Currently assets that are held in Money Market Funds (MMF) are outperforming both equity and bond funds on the unit trust segments.
He pointed out the other advantage of MMF over fixed deposits in banks is that they adjust quite fast to the environment.
“Two months ago fixed deposits locked at 8 percent are still earning the same rate while a MMF that was earning 8 percent is placing money on more than 10 percent,” he added.
Listed companies on the loss making trend in the period under review include Real estate firm Home Afrika that has made a loss of Sh111 million compared to a net profit of Sh42 million same period last year.
The management attributed the loss to a 60 percent drop in revenue.
British American Investments (Britam) posted a 77 percent decline in its first half net profit to Sh624 million compared to Sh2.7 billion recorded over the same period last year, attributable to a bearish performance of the securities market.
The firm says the performance of the market negatively impacted on the fair value of financial assets. The insurer recorded fair value losses of Sh842.9 million compared to a gain of Sh2.9 billion in the first half of 2014.
Logistics firm Express Kenya is anticipating to make a loss in its 2015 first half period ended June 30, 2015.
The management attributes the loss to the economic downturn that has negatively affected the transport sector.
Standard Group has also issued a profit warning anticipating 2015 full year earnings to be at least 25 percent lower than 2014 earnings.