An investment analyst has claimed that it will be difficult for investors to make money from the Nairobi Securities Exchage this year. Mr. George Bodo, an investment analyst who is also an investment columnist for Kenya’s Business Daily made the observations in his weekly column following the second worst monthly market performance since January. Below, we adapted his column for you. What are your thoughts? Do you agree with him?
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“The stock market has just posted its second worst monthly performance this year in May. Market valuations (or otherwise referred to as market capitalisation) declined by two per cent while the benchmark NSE 20 Share Index lost nearly five per cent.
It’s still not going to be easy making money in the stock market this year.
At the heart of market performance will be sentiments, which will be driven by the net amount of investors’ optimism or pessimism. There are different schools of thought on this.
First, the economic rationale. I think it’s generally agreeable that the economy isn’t in a very good shape.
Second, global cross-currents, including the fact that US Federal Reserve has remotely hinted to another mild rate hike in the coming months; as well as continued low commodity prices that has greatly impacted on the US dollar liquidity in the region.
Also not to forget that the general elections aren’t too far away and we can all see the rhetoric flare-ups. These three factors will continue to breed pessimism.
On the optimism front, there is only one driver: monetary policymakers at the Central Bank have just signalled a policy victory.
They seem to have well anchored inflation expectations since the beginning of the year and have even shrugged off all the possible downside risks to their expectations such as the looming fiscal dominance and the domestic economy imbibing external shocks.
The main battle will now gravitate around who’s outdoing who between optimists and pessimists. It’s a tough call to make for now and while the range-bound oscillations in the stock market will still persist, it’s time to look at bonds.
The bond market is really looking good. Over the past 12 months, primary yields have really descended since the October 2015 peak. Suddenly, everyone who has been submerged under water for some time can now float.
The money market seems to be super-liquid. I trace back current high market liquidity to CBK’s actions especially its deliberate actions to keep acceptance levels very low during primary auctions despite demand, as shown via bid-to-covers ratios, being very high.
Basically, bid-to-cover ratio compares the number of bids received in an auction to the amount offered for sale. It’s a vital demand gauge and usually ratios above one shows strong demand.
In the treasury bills auctions, between last September and May 2016, demand was strong with bid-to-cover ratio averaging at 2.2.
The strong demand perhaps reflecting the search for higher short-term yields. However, the CBK has been cherry-picking, with a penchant for non-aggressive bidders, perhaps reflecting its desire to drive pricings down. CBK’s acceptance rates between last November and May 2016 averaged at just 65 per cent, compared to 90 per cent levels in the first nine months of last year.
In the bond market, it’s a similar story. Bid-to-cover ratios averaged at 1.5 between last December and May 2016 while CBK’s absolute acceptance rates stood at just 57 per cent.
For instance, the CBK sought Sh30 billion in a treasury bond auction some two weeks ago and received bids worth Sh80 billion but only picked Sh33 billion.
And as a net result of the cherry-pickings, primary yields have dropped noticeably; in the bond market, we are now talking about 13 per cent levels compared to 23 per cent last October.
The short-term yields have also plummeted to 7.7 per cent from 11 per cent at the beginning of the year. This is good news for bond prices due to the inverse relationship between prices and yields.
On the back of rising liquidity levels and continuing low acceptance levels from the auctioneer, I expect bids in the secondary market to soften a bit to sub-13 per cent levels, which makes the bond market a good place to be.”