How the rich went into overdrive to protect their wealth after Covid
By Wainaina Wambu and Dominic Omondi | March 30th 2021
For many Kenyans, everything seemed calm in the months preceding March 13 as Western governments rolled out radical measures to contain the spread of Covid-19.
This was until President Uhuru Kenyatta dropped the bombshell that the virus had landed on Kenyan shores.
Barely 24 hours later, the Nairobi Securities Exchange (NSE) had been suspended after investors lost billions in paper wealth.
And within a week, investors watched in horror as their wealth put in local currency melted away, with the shilling losing ground against the US Dollar.
Before long, millions of workers had lost their livelihoods following the implementation of containment measures aimed at curbing the spread of the virus.
Now the rich were looking for where to hide their money against the ensuing shocks even as the poor scrambled for any extra coin they could find.
To protect their wealth from the depreciation of the local currency, the wealthy opted to move most of their cash into dollar accounts.
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Interviews with wealth managers – who have reported huge jumps in their portfolios since March last year when the first case of Covid-19 was reported – detail how affluent Kenyans moved to protect and, where possible, enlarge their wealth.
This liquidity and access to capital have provided them with an array of investment options, ranging from global stocks, venture capitalism, real estate and mutual funds as well as the ability to bag government tenders.
These numbers can be reflected in the growing mountain of fixed account deposits and foreign currency deposits at local banks.
With a volatile business environment in which demand for products had been depressed by the social distancing rules, wealthy investors hurriedly moved their billions from the goods and services market into the financial market.
They invested their billions with fund managers, investment bankers, stockbrokers and investment advisers.
These financial experts have in return converted this money into foreign currencies, particularly dollars, in what is aimed at hedging their clients’ wealth from the sharp depreciation of the local currency that posed a major risk.
Consequently, money in foreign currency deposits dramatically rose by a fifth to Sh756 billion in January from the pre-pandemic levels of Sh626 billion, data from the Central Bank of Kenya (CBK) shows.
A volatile business environment also saw wealthy individuals and businesses shovel their money into fixed deposit accounts.
Between February and December last year, cash in fixed deposits rose by nine per cent to Sh1.53 trillion.
Although these funds later declined marginally to Sh1.52 trillion as the economy began to recover with investors trying to test the water in the goods and financial market, they were still higher than the pre-pandemic levels of Sh1.4 trillion in 2019.
For Collective Investment Schemes (CIS), for example, the fraction of the assets under fixed deposits jumped from 26.3 per cent in December 2019 to 39.8 per cent last year.
This pushed the assets being managed by CIS that had been placed in fixed deposits to Sh39 billion, a 95 per cent increase from Sh20 billion by the end of December 2019.
Another safe haven for rich investors was in government securities.
Treasury bonds - medium to long-term government papers - listed at the Nairobi Securities Exchange (NSE) increased by 73 per cent from Sh50.3 billion in February last year to Sh87 billion in September, according to the CBK data.
Traditionally, gold has been the safest investment in times of an economic crisis for the wealthy.
Thus in the onset of Covid-19 in Kenya in March last year, investors in ABSA’s gold-backed exchange-traded fund (ETF) at the NSE enjoyed increased activity in the value of their holdings.
This was reflected in high turnover levels following a sharp rise in the global price of precious metal.
But this fizzled out in the fourth quarter, with the gold ETF recording an ETF turnover value of Sh10.88 million. This was a decline of 88.9 per cent from Sh98.27 million recorded in the previous quarter, thus exposing rich investors who took this option to safeguard their wealth.
Nonetheless, the wealthy had a wide array of options to protect their wealth against a jittery market that at some point contributed to the suspension of trading at NSE as investors cashed out in droves, leaving behind a bleeding bourse.
Conversely, these options were largely unavailable to the population on the other side of the social divide. Instead, many Kenyans have since the beginning of the pandemic been living from hand to mouth.
During the period between January and June last year, subscribers to Safaricom’s overdraft M-Pesa facility Fuliza more than doubled their borrowings when the government implemented the containment measures aimed at curbing the spread of the deadly virus.
Many people resort to this overdraft facility when they run out of cash when carrying out M-Pesa transactions.
Fuliza loans, popular among the low-income earners, rose to Sh176 billion in the six months to September last year from Sh81 billion in the same period a year earlier, indicating a daily borrowing of Sh967 million, data from the telco showed.
Data from the Kenya National Bureau of Statistics (KNBS) showed that the economy contracted by 5.7 per cent in the second quarter of 2020 following the stringent containment measures that saw schools closed, hotels remain empty, airlines grounded and pubs and nightclubs shut for over seven months.
Consequently, KNBS found that the number of unemployed people increased by 1.7 million between April and June last year. Those who were not retrenched saw their salaries cut as firms’ revenue streams dried up.
This saw Kenyans tragically withdraw their life savings as others ate into their pensions amid job losses.
And finding themselves without a source of income, a majority of Kenyans sold their cows and other household assets to navigate through the pandemic, a World Bank survey showed.
Analysis of KNBS’ data on the consumer products index (CPI) showed that while the cost of living among the poor in Nairobi remained high, that of the rich went down dramatically as the cost of transport, which takes up a huge chunk of their income, went down due to low cost of fuel.
Indeed, the virus has continued to expand the inequality gap, causing murmurs of the introduction of a wealth tax.
“In any time of disruptions, there’s a huge amount of opportunity, and I think people who are wealthy are used to finding those opportunities and with risk comes reward,” Knight Frank Kenya Managing Director Ben Woodhams summed up the situation for Financial Standard.
For Kariuki Ngari, the chief executive of Standard Chartered Bank, nothing warms him up more lately than talking about the lender’s wealth management unit.
As part of a revamped strategy that also included digitisation, which has seen the bank cut branches, StanChart started paying attention to its wealth unit that Ngari touted as a key driver of growth.
The wealth unit, which targets affluent Kenyans, reported a 90 per cent growth last year.
Assets Under Management (AUM) rose from Sh68 billion to Sh129 billion over the period.
“It shows that our clients were waiting for an option on the savings products where they could put their money,” said Ngari last week when the lender announced its 2020 financial performance.
In an interview on the wealth unit in February, Ngari explained to FS the special focus that StanChart had given it.
“We decided that wealth management is a very big part of our focus because that’s what client demand is saying,” he said.
Retail banking contributed 46 per cent of the lender’s revenue, with the wealth business contributing 21 per cent of the total retail performance.
Digitisation has seen 64 per cent of clients invest online and use their phones to transact through the bank’s mobile app.
“They are not filling forms; they want to buy insurance through their phones, invest in government bonds and mutual funds,” said Ngari.
Ngari further pointed out that now younger people are more involved, with 25 per cent of clients being below 35.
But what has pushed the growth of AUM in light of the Covid-19 pandemic?
Ngari noted that the major push has been the Covid-19 reality check that individuals are in need of a rainy day fund. Fund managers ensure that individuals protect their capital as they grow it at the same time.
He added that the lender has lowered ticket items to about Sh10,000 ($100) and more individuals are interested as they can set investment time frames.
The minimum one can place in bonds is Sh100,000 and Sh10,000 for fixed income.
StanChart has also created a lending product around the investments.
“One can actually use what they have invested to borrow against it,” said Ngari.
He reckoned that the young population, especially professionals, start investing at an early age by setting money aside and not waiting until a health crisis strikes or their children start school.
People are also very conscious about the interests offered, and StanChart has built a team of over 100 certified wealth advisers to guide clients.
Investors who sign up get market commentary daily from experts tracking the performance of their investments such as stocks.
Where are they investing? “For us, it depends on the risk profile. If, for example, you are conservative, we lead you to fixed income and if aggressive, to funds that are a lot more volatile,” said Ngari.
“Last year was a good year for people who went for mutual funds,” he added.
SIB Executive Director Global Markets Nahashon Mungai said most investors, especially those holding stocks in the US market, had reaped big.
“This is largely due to the federal reserve stimulus, which boosted liquidity in financial markets,” he said.
SIB has a fund dubbed Mansa X, promising annual returns of up to 24 per cent. It trades in more than 100 currency combinations and precious metals, such as gold and silver platinum and lucrative stocks such as Apple, Tesla and AT & T.
Mungai also observed that there is a rising class of dollar millionaires.
“We are seeing a rising class of dollar millionaires as government spending flows to newer businesses. Generational wealth remains intact and significant, however.”
Mungai further noted that wealthy Kenyans traditionally went for real estate but are now becoming more open-minded, especially on foreign investments.
“A lot of wealthy investors are taking interest in exposure to foreign stock markets. The appeal is also due to the fact that the investment is in foreign currency, therefore, hedging their exposure to local dynamics.”
“However, higher yields in Kenyan debt markets have seen a lot of wealthy Kenyans invest there as well,” said Mungai.
ICEA Lion Asset Management Chief Executive Einstein Kihanda reported that their portfolio had recorded a 15 per cent jump over the last year.
“For our business, initially during the pandemic we saw a bit of withdrawal, but after some time we saw people starting to make investments,” he said.
Kihanda added that in terms of private wealth, the rich have started giving special focus to succession planning and generational wealth transfer. This is in light of the killer Covid-19 pandemic and constant media reports of family wrangles sinking empires.
“In terms of figures, we saw a 15 per cent growth to our portfolio as a result of new money coming for investment. Whether it’s in money market funds or private wealth, there has been a lot of interest,” said Kihanda.
He said many wealthy people put their money in “resilient stocks,” such as telco giant Safaricom, EABL and BAT. He added that fund managers were also eagerly waiting for the financial results of banks, which comprise the biggest sector of the NSE.
For riskier products, he said, they have unit trusts and equity funds, which at times offer returns of up to 25 per cent to investors.
The wealth managers agreed on the rising class of dollar millionaires, the majority of whom are drawn from jobs such as technology and financial services.
Kenya is an entrepreneurial society and not particularly rich in terms of mineral resources. Nairobi is also boosted by its profile of being a “Silicon Savannah” and a key regional hub.
“When we look at who the new office occupants are, there’s a lot of new technology businesses... US tech companies are also coming to Africa and picking Kenya,” said Knight Frank boss Woodhams.
He was referring to findings of the Knight Frank Wealth Report 2020, which tracks how the rich spend and invest their money.
The report cites Covid-19 as the biggest risk to future wealth creation.
Woodhams noted that the super-wealthy had invested in long-term assets able to weather financial storms, and they made riskier bets than the typical investors due to their huge capital.
However, Kenya’s growing class of high-net-worth individuals (HNWIs), whose wealth exceeds Sh109 million ($1 million), dropped by 22 per cent in 2020, said the report owing to Covid-19 shocks that devalued their assets.
The billionaires or ultra-high-net-worth individuals (UHNWIs), whose liquid assets are more than Sh3.3 billion ($30 million), fell by 15 per cent.
The number of HNWIs fell by 912 last year to 3,323, while billionaires reduced from 106 to 90 in the period under review.
Currency shifts against the dollar and softening property prices were some of the key reasons for the wealth depreciation.
But why is the wealthy class getting wealthier as the pandemic continues to bite millions of others?
An analysis by FS showed that they are upper-middle-class, frequent travellers, aspirational and enjoy the good life.
The restrictions on movement meant they could not travel. Being extremely well-heeled, they have been able to purchase second and even holiday homes in areas such as Naivasha and the Coast.
In a market survey by property firm Knight Frank, 18 per cent of respondents said they were likely to buy a second home as a result of the pandemic.
This was attributed to them looking for a retreat or safe haven in case of future outbreaks or disasters, and to improve their lifestyles during periods of uncertainty.
Kenya’s richest households are concentrated in Nairobi and its environs, an analysis of data from the national census shows.
Lang’ata and Westlands in Nairobi host a majority of Kenya’s affluent class, with a good number of them owning houses with access to the Internet and other social amenities.
Residents of these suburbs are also highly educated, most with university degrees.
The rest of the wealthy are concentrated in Kiambu, Uasin Gishu, Nakuru, Kajiado and Laikipia counties.
Although a sizable population in these areas live in rented houses, they lead in the number of households in urban centres that own homes.
Owning a house in such places is costly, with the price of the home driven up by prohibitive land prices.
Very few people, other than the rich, can afford to build or buy a house in these areas.
The data is contained in the fourth volume of the Kenya Population and Housing Census that tackles the distribution of population by socio-economic characteristics.
According to the wealth report, the number of dollar millionaires is expected to rise by 46 per cent in the next five years, while the ultra-rich are expected to increase by 110 per cent.
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