Current Times are Hard, What About the Future?

(James Emp in Nairobi, Kenya)

Then the stock markets crushed and investments lost value. It now starts to sound like Murphy’s Law – that all things that can go wrong will eventually go wrong, and at the same time!

The current economic downturn has affected business and most have resorted to cost saving measures, including production costs. The net result is shelving of expansion plans and laying off of staff. In essence, the individual has been hit hard, and from all angles. That is why this piece is dedicated to addressing the issues of the individual financial and family financial security in the long term.

In every recession situation, new millionaires emerge. In this entirely desperate situation, there are also many great opportunities. These depend on individual organization skills, ability to identify the opportunities and to turn them into profits.

In the first quarter of 2009, only three listed firms in the Kenyan stock market, the Nairobi Stock Exchange, registered positive growth. These were Total Kenya, British American Tobacco and Kapchorua.

This month, the stock market has been heading North with more stocks steadily regaining some lost ground. Many people are now heard wondering whether the market has finally bottomed out and is on the path to recovery. The important question for you and I is whether we took advantage and bought shares at the low prices during the recession and trough, or have we been waiting to buy in the bullish market and sell in the bear market?

Let us address individual investment strategies from the personal goals. Personal financial advisers have generally agreed that there are three levels of financial goals: immediate financial needs, medium term goals and long-term goals. Immediate financial needs are basically our living expenses, which are routinely financed from our regular income. The basic needs fall within this category.

Having addressed the recurrent bills (food, shelter, clothing and utilities), there should be a surplus, the disposable income, which one can then channel to meet medium and
long-term financial goals. Medium term goals run between one year and five, beyond that we find the long-term financial goals.

Planning for, and achieving long-term financial goals leads to personal financial security. It is in the long term that we address the job security and future income guarantee, retirement income, mortgage planning and redemption, children’s education, personal higher educational needs, capital accumulation and generally becoming wealthy.

It is those who have taken deliberate steps towards financial security who are able to see the opportunities in the current economic slump.

One of the reasons put forward by investment advisers for the slump in the Kenyan stock market is the declining income from Kenyans in the Diaspora. It is an established fact that Kenyans in living and working abroad have tended to send money back home to support siblings’ education and daily needs, but most importantly for investments.

The most preferred investment avenue has been land and real estate development. The real estate industry has continued to thrive in spite of the depression. More and more of mortgage lenders, such as Housing Finance have been reported to be considering financing construction projects to ensure adequate houses are available to meet the ever increasing demand for housing.

What with the population contuining to grow and the tendency to migrate to urban areas, particularly Nairobi to seek jobs?

One of the few positive things Kenya’s Grand Coalition Government has achieved is keeping interest rates low. Paradoxically, inflation rate has fluctuated between 20 to 30 percent for quite a few months in the recent past. Interest rates on the contrary have not followed suit, with the benchmark Treasury Bills rates (91 day bills) remaining below 10 percent all through (It is noted that there has been a slight increase in the rates over the last three months).

The net effect of this on real estate has been an increase in mortgage loans. Rents, charged under property, both residential and commercial lease agreements have also gone up in line with inflation. Cost of construction has increased in line with inflationary trends, and so has the speculative tendencies.

Properties continue to be over valued, and the values continue to rise driven by speculation. With the continued increase in demand, the real estate bubble will not be bursting any time soon in Kenya. Property investment therefore remains a great opportunity for many Kenyans working abroad, especially in the developed market.

The questions to ask yourself are whether you are in an income generating activity that can service your loans in the medium term. If so, are the interest rates in your market lower than in Kenya and finally, can you access credit? If yes, borrow and buy land in some emerging areas in the fast developing suburbs of Nairobi.

You can keep the costs of construction down by engaging a competent and creditable construction firm, and there are quite a few in the Kenyan market. The secret is that you need to do a proper due diligence lest you burn your fingers. Construction, any day if managed well is less expensive than buying a finished property. In fact, you are likely to pre sell the unit before you complete construction. Alternatively, you can rent it out and have a regular stream of income for life.

One other factor in favor of Kenyans earning their income in foreign currency is the recent depression of the local currency against the US Dollar. Coupled with the lower lending rates, these represent a great opportunity for Kenyans in the Diaspora. Your dollar earns you more shillings than before upon conversion, and this cushions you reasonably well against the effect of inflation, while investing US dollars in the shilling economy.

What of the fixed income securities. Kenya has a vibrant bond market. Most of the Treasury Bonds trade in the Nairobi Stock Market, Bonds section. This market is reasonably quite liquid.

Bonds are mostly issued at a fixed coupon rate for medium to long term (2 to 20 years), and attract reasonably high rates of interest.  The regular interest income payable to the investor guarantees a regular income, either quarterly or semi annually over the tenure of the bond.

The term of investment is flexible, in the sense that an investor can pick a bond issue that matches his investment period expectation. At the end of the term, the bond the capital invested in repaid together with the final coupon payment. Moreover you can cash in by selling the bond at any time at the stock market. Currently, the minimum investment in Treasury Bonds is as low as Sh.50,000 (US$ 625) for the primary offers.

This leads us to the question of bonds trading at a premium or a discount. Where interest rates are rising, existing investors are likely to sell their bonds at discount so that they can take advantage of the higher interest securities available in the market.

Conversely, where the general interest rates in the economy are falling, investors seek to dispose off their bonds at a premium. For the buyer investing at a discount, this represents an enhancement in the earnings over the tenor of the bond and the discount therefore increases the yield the investor gets on the bond. Buying at a premium has the opposite effect of reducing the yield to maturity for the new investor.

Bonds are issued in the primary market (initial offer), and traded at the secondary market. At either stage, the issue can be at par (the face value), discount or premium.

All these opportunities are available in the Kenyan market today in spite of the global recession. It is only appropriate for an investor to engage the services of a professional adviser who will understand their personal investment circumstances and recommend appropriate investment solutions without bias. Such an adviser is called an independent personal financial adviser and in the next week, I will give suggestions on how to choose an adviser who will work in your best interest, and how to identify your personal investment goals.

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