Profitable investments in Kenya
Seek unique investment opportunities that exhibit attractive risk-adjusted return potential while maintaining a focus on capital appreciation. [ Photo / Bloomberg ]

An investment is an asset or item acquired with the goal of generating income or appreciation. Investments involve the purchase of goods that are not consumed immediately but are used in the future to create wealth. It also involves purchasing an asset with the intention that in the near future, it will generate income or be sold for a higher price.

Given the uncertainty around the tenor of COVID-19, people have had to adjust financially to the new environment, thereby affecting their long-term and short-term investment goals. Despite the havoc brought about by the pandemic on investments, people should continue investing to continue generating wealth or at least preserving the value of the wealth they already have.

As shown in our Financial Planning Amidst COVID-19, when making an investment decision, look at the return on the investment, your risk tolerance level, the liquidity of the investment asset you have chosen to invest in, how much capital you have and your time horizon, which will determine the type of investment you will venture into.

Real Estate sectors such as residential, retail and hospitality have been hit by the lockdown measures and the diminishing disposable income for majority of the Kenyans. Given these disruptions and the slowdown in construction activities, revenues from real estate have been significantly reduced, thus making it difficult for the sector to meet the liquidity needs of investors.

Despite the high returns from alternative investments, their illiquidity continues to be a concern during this time and, as such, traditional Investment avenues remain the best option for investors looking for liquidity amid the pandemic.

We look at the traditional investment avenues one can invest in during the Covid-19 pandemic:

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1. Equities Market

In March 2020 when Kenya confirmed its first COVID-19 case, NSE 20 recorded losses of 20%, breaching the threshold of a bear market where the prices of securities fall by 20 or more. In a bear market, stocks are normally traded at cheap valuations and, as such, investors should take advantage of these cheap valuations in the market.

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Buying stocks at cheap valuations is normally an indication to the investor that when the price recovers, they will make profits when they sell the stock at a high price. Considering the substantial uncertainty around COVID-19 containment timelines, and its implication on various sectors, the impact on most firm’s performance as well as their share price remains uncertain, with a bias towards loss of revenue and continued decline in share prices.

However, after a bear market, a strong bull market follows. A bull market refers to a market in which there is a sustained increase in stock price.

For investors with a long-term horizon, selective entry into the equities given the current cheap valuations would be recommendable as it presents an opportunity for potential upsides for companies with strong financial fundamentals. In addition to the potential upsides, it is also important to look at the company’s dividend payout and the dividend yield it presents based on the current market prices.

Derivatives Market provides an opportunity for investors to protect their portfolios against volatile stock prices.

With the slowdown in business activities and the need to preserve capital in these challenging market conditions, most firms have re-evaluated their dividend payments for 2019 financial year. Consequently, this has affected the returns for investors who use the dividends payments to reinvest into other stocks or who rely on the dividends as extra sources of income.

But firms such as NCBA Group that have suspended cash dividends have recommended bonus issuance to their shareholders in place of the dividends.

Investors keen on the capital markets can also consider investing in the Nairobi Securities Exchange Derivatives Markets (NEXT), which began trading on 4th July 2019. A derivative is a financial contract whose value is derived/reliant on the value of an underlying asset. The Derivatives Market provides an opportunity for investors to protect their portfolios against volatile stock prices. For more information on this read our Understanding the Derivatives Market article.

2. Fixed Income

These are securities that offer fixed returns to investors and are moderately liquid, have low volatility and are considered less risky compared to the Equities Market. It includes Bonds, fixed deposits and Commercial Papers.

Bond Investors have 2 main motives, (i) investing for trading purposes and (ii) investing with the aim of holding them to maturity. Investors with the aim of holding the bonds to maturity earn their returns from the semi-annual interest and get the face value of the bond upon maturity. Investors with a trading motive, on the other hand, earn their returns from the fair value gains made from the yield curve movements.

A general concept in bonds is the inverse relationship between the yield to maturity and price. A rise in bond yields leads to a decline in prices and vice versa. As such, bond traders exploit this by investing in bonds at higher yields with the expectations of a downward readjustment on the yield curve which would effectively lead to an increase in prices and thus benefit from the fair value gains.

Investors nearing retirement or within the 35-45 year age bracket prefer to invest in bonds given the steady income they provide. For more information on government securities and how to invest in them, click here.

3. Collective Investment Schemes

Collective Investment schemes (CIS) are pools of funds managed on behalf of investors by fund managers. The amounts invested in the CIS are pooled and utilized by fund managers to buy stocks, bonds or other securities in accordance with the fund’s objective, with the aim of generating returns for their investors.

CIS can also be defined as a vehicle in which profits or income is shared through collective investment. Collective Investments Schemes allow investors to re-align their investments with their risk appetite by pooling money and investing in safe havens. CIS offers investors with (i) diversification as investors have access to a broad range of securities they can invest in, (ii) liquidity, and (iii) good returns.

Investors in these funds buy units through fund managers at the current market price calculated daily. The main types of unit trusts include Equity Fund, Balanced Fund, and Money Market Fund.

Conclusion

While maintaining caution in the volatile market environment, it is advisable to seek unique investment opportunities that exhibit attractive risk-adjusted return potential while maintaining a focus on capital appreciation. When investing in this environment, ensure you have a diversification strategy across the various investments’ asset classes to cushion your portfolio against market shocks.

It is important to ask yourself whether the effects of Coronavirus in your industry, business, or profession put your income at risk. It is important then to identify markets within which you can potentially pivot to lower the risk to your income and your financial goals.

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About the Author

Cytonn Investments Management PLC is an independent investments management company with offices in Nairobi, Kenya and Metropolitan Washington, DC, United States of America.

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