- •CBK Innovation: The DhowCSD online platform facilitates accessible bond trading, benefiting Kenyans abroad.
- •AI-Driven Rally: Nvidia’s soaring performance and Nasdaq’s surge drive the AI-driven US equities rally.
- •Big Corp Interest: Major US banks pursue Bitcoin ETFs, indicating growing institutional interest.
- •Government Bonds Shine: Amid a struggling stock market, Kenyan government bonds offer bumper yields above 17.95%.
In the ever-shifting economic landscape of Kenya, the challenge of preserving one’s savings against the eroding effects of high inflation (7.28% as of July 2023) looms large.
Despite recent inflation deceleration, the impact on consumer budgets and investments remains significant, compelling Kenyans to explore a diverse array of investment options, ranging from NSE stocks, money market funds, SACCO shares, government bonds, real estate, to offshore investments and cryptocurrencies.
Notably, the Central Bank of Kenya’s unveiling of the DhowCSD online platform has streamlined bond trading and accessibility, particularly benefiting Kenyans in the diaspora. Amid this backdrop, the realm of government bonds has emerged as a standout performer, offering yields surpassing 17.95%, while the stock market has been generally losing, epitomized by Safaricom shares which are down 35.34% year-to-date.
Local Investments: Navigating the Kenyan Terrain
As the Kenyan economy contends with rising interest rates and persistent inflation, the technology sector’s potential has been stifled, causing concerns about an ongoing bear market.
This sentiment is exacerbated by limited consumer credit access and a high unemployment rate. Industries such as paints have faced upward pricing pressures due to increased excise duties and escalating fuel costs.
The Central Bank’s gradual interest rate hikes from 7% to 10.5% have bolstered lending business for banks, while liquidity challenges plague other sectors. Commercial banks are lending at a range of 14%-17% according to a recent report by the central bank of Kenya.
A notable development with ripple effects is the inclusion of Egypt and Ethiopia in the BRICS economic bloc, a move likely to foster intensified competition and attract investors to the region. Meanwhile, the Kenyan banking sector anticipates gains if consumer strength improves and lending activity accelerates.
Global Macroeconomics: A Glimpse Beyond Kenyan Borders
On the global stage, the United States Federal Reserve’s change in tone has infused equity markets with optimism. In its recent meeting, the Fed adopted a data driven approach following a divide where some Fed members were worried about overtightening policy while the other divide was concerned about reemergence of inflationary pressure.
The AI-driven rally in US equity markets continues to captivate investors, exemplified by Nvidia’s remarkable performance, propelling it to a trillion-dollar valuation. Nvidia is up 229% year to date. The Nasdaq’s tech-driven rally, up 39.45% year-to-date, underscores the AI boom.
Conversely, the Eurozone confronts a persistent battle with inflation as the European Central Bank raises rates in a bid to quell the upward trajectory. Eurozone inflation has slowed in the last nine months with the most recent report showing 5.3% inflation in July 2023.
Geopolitical tensions and energy costs cloud the European outlook, with Germany’s manufacturing sector enduring a recession.
China’s economy grapples with a faltering recovery, leading to deflation territory as manufacturers resort to price cuts to offload inventories.
Stock Sectors: Riding the Equities Rollercoaster
In the United States, equities unexpectedly surge amidst impending elections, with the technology +36.27% and communications +36.22% sectors leading the charge year to date. While energy +2.33% and real estate -1.48% sectors languish under the weight of elevated energy prices and rising interest rates, the financial sector +4.71% displays resilience in the wake of regional bank failures.
The SP500 index’s impressive 16% year-to-date performance, driven by the AI boom, challenges traditional indicators, while potential signs of a recession persist. The market’s resiliency, strong job market, and surging retail sales contrast with indicators like an inverted yield curve, weakening consumer confidence, and sluggish bank credit.
As profit-taking and short-term treasuries gain favor, a Q4 correction could be on the horizon.
Currencies: A Global Currency Melody
Global currency markets witness significant shifts, as the Euro, Pound, and Swiss franc stage recoveries in response to central bank actions addressing inflation. In contrast, the Chinese economic struggle exacts a toll on the Australian and New Zealand dollar.
Japan’s economy has strengthened but the Yen has lost 9.85% to the dollar following ultra-easy monetary policy that have maintained key overnight lending rates at -0.1% since 2016, and the yield curve control program that has capped Japanese 10-year bond yields at plus or minus 1%.
The Kenya shilling has continued losing to the US dollar having started the year at 123.41 and slid to 144.71 in August. Despite the central bank’s tightening policy that hiked interest rates to 10.5%, Kenyans and Kenyan corporations continue stacking dollars to hedge against currency risk.
The US dollar continues to strengthen against other currencies as the Fed continues tightening policy. With US interest rates at 5.25%-5.50% and inflation at 3.20%, US bond yields have become very attractive due to their low risk. The US 6-month treasuries are yielding 5.48% while the 10-year is yielding 4.38%.
Commodities: A Diverse Landscape
Commodity markets portray diverse trends, with agricultural products such as orange juice, sugar, and cocoa enjoying remarkable growth, driven by soaring food prices.
Gold’s retreat, in the wake of the AI boom, reflects a broader shift toward risk-on sentiments, while oil prices hold steady amidst OPEC output cuts.
In stark contrast, natural gas, palladium, wheat, corn, and platinum face downward pressure due to weak demand and burgeoning supply.
Cryptocurrencies: A Resurgence Amidst Regulation
Cryptocurrencies rebound with vigor following a bearish 2022. Bitcoin and Ethereum lead the resurgence, up 60% and 39.5% respectively year-to-date. Noteworthy stability returns to the digital asset realm, although recent regulatory efforts by major economies hint at a future defined by transparency and reduced risk.
In the United States, a varied stance on crypto regulation persists, juxtaposing industry support with regulatory crackdowns. Furthermore, major banks’ pursuit of Bitcoin ETFs underscores institutional interest.
Europe saw its first spot bitcoin ETF listed on the Euronext Amsterdam exchange earlier this month. The Jacobi FT Wilshire Bitcoin ETF allows European investors direct exposure to bitcoin in a regulated environment without leverage.
As Q4 approaches, the Kenyan investment landscape remains marked by cautious optimism, while global markets grapple with a mix of economic indicators that herald opportunities and challenges alike.
Rufas Kamau, Lead Market Analyst, FXPesa
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