Published on 2022 | 06 | 16

What Is Happening in The Markets?     
Global financial markets have had a rocky start in 2022. Major global stock market indices such as the MSCI World Index, MSCI Emerging Markets Index and MSCI ACWI have dropped on a year-to-date basis by 24.17%, 19.3% and 12.26% respectively. In the US alone, the S&P 500 and the Dow Jones Industrial Average valuations have dropped rapidly, signifying a general decline in stock markets as shown in chart 1. The local market has not been any different. The Nairobi All Share Index (NASI) has dropped by 22.8% year-to-date.
Bonds yields have increased over the same period across global markets including Kenya. Rising bond yields may look attractive; however, that negatively affects the prices of existing bonds due to the negative relationship between yields and bond prices.
The declining market performance can be attributed to: 
  • Unwinding of monetary policy stimulus used during the Covid-19 pandemic through raising interest rates. The Central Bank of Kenya in its sitting on 30th May 2022 also raised the Central Bank Rate (CBR) to 7.50% from 7.00%
  • Inflation has been persistently on the rise globally due to soaring commodity prices because of the Russia-Ukraine crisis and disruptions in global supply chains
  • The raising of interest rates by Central Banks to combat inflation has also set in recession fears especially across the major developed economies
To keep inflation in control, central banks have had to raise interest rates. This has led to an increase in bond yields across the globe. Yields on Kenyan government bonds have also recorded a similar increase to what is being observed globally.
Because of higher yields on government bonds, investors have shifted their capital away from stock markets. Higher interest rates/yields affect the stock market negatively since future expectations of growth are lowered which affect future cash flows of a company. In addition to increased bond yields, the Kenyan investor has been faced with a deterioration in the value of the shilling against the dollar. Kenya’s stock market is highly dominated by foreign investors, therefore, when you factor the losses they face due to a deteriorating exchange rate, it accelerates the selloff pushing stock prices further down.
Chart 1: The SPX (S & P 500 index) and Dow Jones Industrial Average decline in 2022
Chart 2: The NASI and NSE 25 decline in 2022
What do we expect?
Given that certain parts of the world are still grappling with Covid 19, such as China, we still foresee a continuation of supply chain constraints, though on a lower scale than previously experienced.
Therefore, we expect inflation to remain significant in 2022 as most central banks continue to raise rates to contain the high inflation.
We expect bond yields to continue to increase.
What options are available for investors in an inflationary environment?
Staying invested is the best way to navigate through an inflationary world. Remember, holding on to cash leads to a decay in value and buying power. What investors want, at the end of the day, is to be able to generate a return, over and above the rate of inflation which currently stands at 7.1% in Kenya, according to the latest data from Kenya National Bureau of Statistics (KNBS).
At that inflation rate, any amount of KES 100,000 held in cash for one year is equivalent to KES 92,900.
Investing in Bonds
We perceive this as a good time for investors in bonds who are after earning interest income. 
With the high rates and low prices, bond investors stand to reap from both well-paying coupons through the life of the bond, and capital appreciation when the prices recover back upwards.
With low prices, most bonds are priced at discount to initial par prices, especially the existing bonds.
An investor can create a stable consistent income stream, just by consistently investing in bonds with different maturities. 
Chart 3: YTD changes in bond yields
It is clear from Chart 3 that yields have risen significantly across all bonds, especially with the 7-year to the 14-year bonds.
Minimum investment in bonds in Kenya is KES 50,000.
Apart from regular bonds, the government also issues out Infrastructure bonds. Infrastructure bonds are bonds whose main purpose is to raise capital to fund government infrastructure projects.
Infrastructure bonds (IFB’s) issued by the government are not taxed and because of this reason, these are the most preferred bonds we advise clients to invest in.
The table below illustrates the interest income an investor would expect to get if they had invested KES 100,000 in each infrastructure bond issued by the Central Bank since August 2020:
IFB Ticker
Date issued
Fixed Coupon rate %
Minimum Investment
Annual Coupon Payment (KES)
Aug 2020
Jan 2021
Mar 2021
Sep 2021
Feb 2022
Average Fixed coupon rate %
Table 1: Return on Investment in IFB’s from Aug 2020 to Aug 2022 for minimum regular investment of KES 100,000
Table 1 shows that a regular investment of KES 100,000 in every IFB for the last two years would earn the investor an average of 12.308%p.a in interest income.
By regularly investing in the IFBs, investors have benefitted from the rising yields as shown in Table 1.
This regular stream of income generated by bonds, qualifies as ‘passive income’. Passive income is money generated from investments without the daily commitment of a full-time job. 
Warren Buffet once said, ‘If you don’t find a way to make money while you sleep, you will work until you die.’
Investing in Stocks
The decline in stock prices also presents opportunities for investors to buy stocks at low prices.
Investors who have already bought various stocks should not be caught up in panic-selling. Instead, dividends can be reinvested back into the strong counters that will recover after the declining period. 
Investment in sectors such as financials is encouraged. This is because financial companies benefit from increased rates as orchestrated by the government.
Additionally, in such economic times with high prices of commodities, revenue for most companies is poised to take a hit. Therefore, companies that can take the lowest hits, or rather, pass down the extra cost of inflationary effects are best investment opportunities 
The World of Investing can be a jungle, bulls, bears, danger at every turn. If you want to navigate through investments in these turbulent times, we at Amana Capital can help you create the well-balanced portfolio.
FA Jesse Ludenyo| Research Analyst
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