Bear market sees shift to property, offshore investments

The bear run that has seen most stocks at Nairobi Securities Exchange (NSE) dip into red zones has made investors move their money from equities into property and offshore investments.

The latest investment survey by Alexander Forbes shows in the period to June 2016, returns on equity dropped by an average of 1.7 per cent to 5.2 per cent, causing investors to reduce their investments in shares.

This was compensated by 1.4 per cent rise in offshore investments to 7.2 per cent which, according to Alexander Forbes CEO Sundeep Raichura, was seen as a safe place for putting money.

The equity market, particularly NSE, has been down since last year with investors losing Sh55 billion paper wealth in six months to end of June. In June, the NSE 20, which tracks the best 20 stocks, even slid to its four-year low just after Britain voted to leave European Union.

"Brexit happened in June but by May, there was flight to safety. There was a lot of money going out of frontier markets. For the last couple of months the offshore markets have been doing quite well. There is therefore little incentive to participate in frontier markets like NSE," said Raichura.

In the survey that covered 388 fund management schemes that manage Sh581.3 billion, medium schemes had the high return, nine per cent, on offshore investments while large ones offered 8.5 per cent.

Returns on fixed income investments dropped marginally by less than 100 points on overage to 10.8 per cent with that from smaller schemes recording a 1.1 per cent drop.

"One reason I feel this is happening is that we have been very reliant on foreign participation on the stock market and this year, the participation has been a bit down. This has had an impact on price and activity at NSE," explained Raichura.

However, he added that equities are also becoming less desirable due to elections fever added to banks' reduced profitability as non-performing loans surge. This has seen majority of bank stocks perform poorly.

Central Bank of Kenya's latest report shows by close of last year, bad debts had hit Sh147.3 billion. Banks have been forced to raise their provisions for NPLs, slowing down their profits.

Despite the good performance on offshore investments, the survey shows that asset class allocation for overseas investment remained the least at 1.3 per cent. According to Alexander Forbes survey, this is because not so many fund management schemes have access to offshore market.

"Even for those who have exposure, it is just up to seven or eight per cent since there is a restriction to how much you can invest outside. With all the [global] volatility we saw in 2007 and 2008, most schemes pulled out of offshore," said Raichura.

However, for pension funds, who have a longer-term outlook, Raichura sees this period as a good time to pick up stocks cheaply.

The latest performance analysis also shows fixed-income investment remained popular, with investors locking in about Sh418.5 billion.

Equities investment came second in popularity with 22.4 per cent of the total assets managed by the schemes being put there. However, that was a drop from previous survey, when average allocation was 24.7 per cent.

Investments in property have however attracted new investors. Its share of total investments through fund managers rose by about 1.5 per cent to 4.5 per cent on average. This means, close to Sh26.2 billion has been invested there.

"It is typically the larger funds who have exposure to property of between 15 per cent and 20 per cent. For many funds, property has provided a good cushion against the volatility we have seen in the equity and fixed income markets," explained Raichura.

Going forward, several schemes are considering investing in private equity funds although many are treading with caution citing the lack of a track record of such investment in the country.

The asset base of pension funds in Kenya is expected to cross the Sh1trillion mark this year and Alexander Forbes CEO sees this as an appropriate time for fund managers to diversify their investment offering beyond the traditional asset classes.