Investors shun listed stocks for bond market

A tipping of scales is in the offing at the Nairobi Stock Exchange (NSE) as investors shun listed stocks for bond market securities.

The recent flurry of activity at the bond market amid falling asset prices at the stock market stands to favour debt issuers seeking funds at the NSE.

At a time when the local stock market has careered to lows that have left investors with a foul taste in their mouths, the bond market is emerging as a favoured alternative with investors readying their portfolios for the KenGen public initial bond offer.

The bond market activity reminiscent of the flurry of stock trades witnessed prior to the benchmark KenGen IPO back in May 2006, saw bond turnovers hit Sh4.6 billion last week in a brilliant pace of trade volumes that market players say is likely to continue.

“The conditions in the market are perfect,” said Mr John Wakiumu, the head of fund management and research at Amana Capital. In the last five weeks, Sh12.7 billion worth of bonds have changed hands compared to Sh4 billion worth of shares in a firm indicator of the changing fortunes of the bond market.

This has been driven by the investors’ quest to reap gains from government paper rather than sit on cash at a time when the stock market is still showing little signs of emerging from its year long lull.

Last Friday, the NSE 20 share index stood at 3, 096 points compared to 3, 589 points at the start of the year. Now, financial analysts reckon that the market would continue to remain in a bearish run for the remaining part of the year.

“The market is still waiting for a fresh impetus, the company results that were expected to spark a rally have been mixed and below analysts’ expectations,” said Mr Paul Mwai, the chief executive of African Alliance Asset Management, arguing that the recovery could fall into next year.

As a result, local institutional investors are still taking a wait and see approach towards the stock market, opting instead for fixed income securities and real estates.

For retail investors, the confidence crisis brought by the collapse of Francis Thuo & Partners and placing of Discount Securities under statutory management together with the sky high inflation, which has reduced the fraction of income aimed for investments, has kept them away from the stock market.

Besides the woes of the stock market that are fuelling the bond market’s success, interest rates have remained stable and “low” hence providing certainty for investors in the secondary bond market.

The NSE yield curve is currently on the up, which means that price long dated bonds is coming down, which perhaps explain that some investors are selling to buy into the KenGen bond that has an annual interest return of 12.5 per cent. Still, its indication that some investors are buying low to take advantage of future increases on the bonds interest rates.

The increased activity in the bonds market has not only attracted heavy government borrowing, but also boosted prospects of firms raising cash. CFC Stanbic Bank was the latest to tap into the bond market, raising Sh2.5 billion through a corporate bond at the beginning of the month.

The offer was over subscribed by about 32 per cent and the bank forced to pay a rate of return that was about 1.25 per cent higher than its initial indicative rate for the fixed and floating rate.

Other firms looking to issue bonds by the end of 2009 include Shelter Afrique, Centum and Safaricom. Although the interest rates might fall and favour firms tapping into the fixed income market, investors might bid higher rates for a better return.

More liquid
KenGen opened its ten-year corporate bond last Tuesday and at 12.5 per cent it’s priced 1.1 percentage points above the Treasury bonds yield rate of 11.4 per cent for bonds of a similar tenor. But still all eyes remain on government’s borrowing, a step up of which still kindles fears of crowding out the private sector

“A keen eye is out for governments borrowing from the market,” said Mr Fred Mweni, the managing director of Tsavo Securities, adding that if the Government borrows in quick succession it could put pressure on bond prices.

The Kenya bond market has 65 Treasury bonds with a total market value that is less than half that of the equity market’s. In developed countries however, bond markets are significantly larger and more liquid than equity markets. 

Government securities holdings by pension funds and commercial banks increased from 22.3 percent and 52.4 percent, respectively, in June 2009 to 26.7 percent and 52.5 percent as at September 4, 2009.

On the other hand, holdings of insurance companies, parastatals and other investors decreased from 11.6 percent, 7.1 percent and 6.5 percent, respectively, in June 2009 to 11.3 percent, 6.7 percent and 2.7 percent during the same period.

Bond market players expect the second half to be more liquid and active in both primary auctions and secondary market trades.

“To have a stable yield curve, there is got to be stable and predictable interest rates as well as well managed government borrowing appetite,” said Mr Mweni. There are high chances of doing the second Treasury infrastructure bonds in October or November as well as March 10 to raise the Sh50 billion the government requires.