The high returns that investors in Kenya enjoyed last year from bonds to equities and bank savings look unlikely in 2025 as the government aggressively cuts the cost of its borrowing and the equities market faces turmoil in the wake of US President Trump’s tariffs.
In 2024, several asset classes including the stock market, bonds, money market funds and fixed bank deposits, offered investors double-digit returns, billions in capital gains and interest earnings.
With these gains coming amid tough economic conditions, many opted to invest in government securities and equities to chase the higher returns, while banks also preferred to lend to the government on reduced demand for consumer loans.
Aggressive cuts on government borrowing costs have, however, cut returns from Treasury bonds and bills—which have dipped to single digits.
US tariffs, which sow fears of global trade war and recession, have meanwhile battered stocks across the world, with the Nairobi Securities Exchange (NSE) losing Sh74.3 billion in a week.
Since the start of the year, the Nairobi bourse has recorded a return of 2.7 percent or Sh53 billion rise in investor wealth.
In contrast, the market added Sh328 billion or 22 percent in the first quarter of 2024, on the way to an annual growth of 34.8 percent or Sh500.8 billion by December, which made it the top performing investment class of the year.
Analysts have pointed to the low base effect last year when the market was coming off a two-year bear run as one of the reasons for the high growth, meaning that there is limited room for growth this year even if company performances were to improve.
The emergence of new global shocks such as the wide-reaching tariffs announced by Mr Trump earlier this month has clouded the prospects of the equities market further, with the blue chip stocks which dominate the market being vulnerable to foreign investor flight if the uncertainty persists.
“The gains last year represented a recovery of the market from a lean period in 2022 and 2023, and was largely driven by banks and other large blue chip stocks. With this high base therefore, it is likely we will see limited upside this year, even though company fundamentals are stronger compared to 2024,” said Wesley Manambo, a senior research associate at Standard Investment Bank.
“Foreign investors may also linger in their home markets for longer due to the current elevated risk sentiment in the global economy, in order to avoid capital loss in case markets are hit further by the emerging trade war.”
Normally, investors flee to the bonds market whenever volatility hits equities, looking for the guaranteed returns and safety offered by risk-free government paper.
In 2024, holdings of government debt by retail investors, who include individuals, private companies, savings and credit co-operative societies (saccos), and self-help and religious groups, grew by Sh201.6 billion to Sh772.3 billion, reflecting the rise in popularity of these securities as an investment option.
This year, they have added another Sh30.4 billion into the securities, taking the current holdings to Sh802.7 billion by April 4.
Returns in the fixed income market have, however, fallen after five successive rate cuts by the Central Bank of Kenya (CBK) that slashed the benchmark rate from 13 percent in August last year to 10 percent.
This signalled a lower interest rate regime from bonds to bills and savings.
The rates on Treasury bills have come down to between 8.5 percent for the 91-day paper, 8.89 percent for the 182-day and 10.23 percent for the 364-day T-bill, from highs of between 16.73 and 16.99 percent in March 2024.
In the bonds market, the yields on long-term paper floated this year have dropped to a range of 13.5 and 15.7 percent, from between 14.7 and 18.9 percent last year.
The decline in the government’s borrowing rates will have a knock-on effect on the amount that banks are willing to pay depositors, especially high-net-worth investors, for their cash.
Banks were forced to increase returns on savings last year to prevent a flight of deposits to government securities, where returns went up in the year and the Dhow CSD platform of the CBK made it easier for depositors to shift funds from accounts to bonds and Treasury bills. Fixed deposit rates hit a peak of 11.48 percent in June 2024, representing a 25-year high for this rate.
Banks have also come under pressure from the CBK to cut their lending rates, prompting the lenders to scramble and cut their cost of funding in order to accommodate lower loan charges.
As a result, the deposit rate fell to 9.76 percent by February this year, and is forecast to decline further in coming months in tandem with falling lending rates after CBK policy moves and the lenders’ quest to protect their margins.
A significant portion of investment capital has also flowed into unit trusts in recent years, mainly money market funds whose primary investments are short-term government debt and fixed cash deposits.
Last year, Kenyans pumped in an additional Sh174.1 billion into these collective investment schemes, increasing the volume of assets under management of the unit trusts by 81 percent to Sh389.15 billion.
The rush into the money market funds was informed by increased demand for professional investment services by Kenyans, as improved access to information through the internet continues to boost awareness of the formal financial products in the economy.
The funds also offered attractive net returns of up to 18.3 percent on an annualised basis last year, riding on high T-bill and cash deposit interest rates.
The top returns have, however, fallen to about 13.6 percent for the majority of schemes in tandem with the declining rates on Treasury bills and fixed deposits, significantly cutting the monthly interest banked by investors in the unit trusts.
