Kenya Bank Stocks Seen Leading Nairobi Gains as Bond Yields Drop

NAIROBI (Capital Markets in Africa) – Kenyan banks are expected to lead a rally in local stocks as investors switch out of government bonds because of falling yields, said Muathi Kilonzo, head of equities at EFG Hermes Kenya Ltd.

“When you look at yields in fixed income, they have started to come down and that is because there is a lot of liquidity so there will be an inflection point,” Kilonzo said. “As yields continue to decrease more money will come to the equities market.”

Kenya’s benchmark index rose 5.6% in the first half of this year, lagging behind the 14% advance in an MSCI Inc. index of frontier markets. Those gains may pick up as investors seek alternatives to bonds, with yields on 15-year Kenyan government debt at the lowest since February 2014, while those on two-year debt are at an eight-year low.

The outlook for banking stocks may partly hinge on whether lawmakers seek to revive legislation capping the interest lenders can charge customers, said Renaldo D’Souza, head of research at Nairobi-based Sterling Capital Ltd. A court in March annulled a law that limits interest on loans to 4 percentage points above the benchmark central bank rate.,

Banking stocks could lose value if the law remains, while abolishing rate-caps would prompt inflows to the sector, D’Souza said. Uncertainty over this policy and volatile company earnings could prolong investors’ preference for fixed-income assets, he said.