Why Kenyans are investing in global financial markets – Business Daily
Trader at the floor of the New York Stock Exchange (NYSE) on May 18, 2022, in New York City. PHOTO | AFP
Your primary objectives as an investor are high profits, low risk, high liquidity, and easy access. Global financial markets provide a diverse range of investment windows, each with its set of risk, liquidity, opportunity and access characteristics. You should also consider the impact of taxes and inflation on your investment, whether in the local or global markets.
To make an informed decision, weigh the benefits and drawbacks of investing in local and global markets and build a portfolio of local, global, or hybrid assets to maximise returns while minimising risk.
A majority of best-performing firms are in the developed world. This means if you focus on investing in equities in the Kenyan market, you may choose stocks that are almost certainly not the best on a global scale.
While Safaricom has been the best performing stock on the Nairobi Securities Exchange and is arguably the most valuable stock in Africa, it ranks lower on a global scale than behemoths like Apple, Tesla, Nvidia, and Google.
If you decide to invest in the bond market, you should be aware that bonds in frontier markets, such as Kenya, have some of the highest returns because the governments that back them have a lower credit rating than those in emerging and developed markets.
Investments in frontier market bonds are subject to higher inflation risk and inflation-adjusted returns may not differ significantly from those in emerging and developed markets. With good research, one can identify a valuable opportunity in frontier market bonds and invest in it.
Global investing, on the other hand, allows one to benefit from a diverse range of products that they use daily.
This includes well-known companies such as Netflix, Philips, Uber, Unilever and Nike. This enables one to level up from being merely a Kenyan consumer to becoming a beneficiary of the brand’s growth and profitability.
Investing in developed-world equities provides greater investor protection than investing in local markets. Strong regulations ensure sound corporate governance and severe penalties for market abuse in developed market firms.
This safeguards retail investors against potential fraud and insider trading losses. For example, the US Securities Investor Protection Corporation (SIPC) guarantees up to $500,000 in losses if your broker or dealer goes bankrupt.
Modern developments in financial tech have allowed investors to reach global financial markets from the comfort of a smartphone, laptop or tablet.
Account opening is free and regulated financial markets brokers such as FXPesa offer investing education free of charge. This gives access to virtually everyone with an internet-enabled device and a willingness to learn and invest.
The risk of investments losing value as a result of economic developments or other market-wide events is always a reality. Market risk is classified into three types — equity risk, interest rate risk and currency risk.
Market risk exists whether your investments are in domestic or international equities. As a result of economic developments, their value can rise or fall.
They are exposed to the jurisdiction’s interest rate risk if they are allocated in debt markets such as bonds, where a rise in interest rates would result in lower bond valuations. Furthermore, if they are offshore, the funds are exposed to currency risk, as the investment amounts are subject to fluctuating exchange rates as well as profits, yields and dividends.
When investing directly in foreign markets, you must first convert the Kenya shilling into a foreign currency at the current exchange rate.
Assume you own a foreign stock for a year and then sell it. The foreign currency is then converted back into shillings. Depending on the direction of the domestic currency, this could help or hurt your return. The shilling has been losing ground over the last decade, and if this trend continues, an investment in dollar-denominated assets will benefit your returns.
Liquidity refers to the efficiency or effortlessness with which an asset or security can be converted into ready cash without affecting its market price. Liquidity risk refers to the risk of not being able to sell your investment at a fair price and withdraw your money when you want to. You may have to accept a lower price to sell the investment or wait longer.
Global equity, commodity, forex, and derivatives markets are highly liquid and retail transactions are settled almost instantly. This means they have low liquidity risk. Local equity, land and property markets tend to trade on thin liquidity and carry a higher liquidity risk.
Investing in the global markets gives one instant access to high liquidity, allowing for easy conversion of investments to cash at a fair price.
If you have all your investments in Kenya, you expose yourself to concentration risk because events such as unstable political environments can impact the value of your portfolio.
Rufas is a Markets Analyst at EGM Securities