Markets have fallen far and long enough to produce a near-perfect ‘heads and shoulders’ formation in nearly nine years with 3000 serving as the baseline. This pattern, which refers to a baseline with three peaks; the outside two are close in height and the middle is highest, means stocks could potentially enter a new phase of lower prices.
Whether markets skid or not, this event brings us to the nontrivial topic of asset allocation. Highlighted in the Capital Markets Report Q3 2018, we see some big-money asset allocation decisions. Local fund managers, sitting on a Sh57 billion mountain of assets, sell off their bond holdings, maintain their equity allocation, increase their the off-shore investments, pile into cash and cash equivalents and so on.
These moves offer a fitting encapsulation of how these market participants are perceiving the ongoing downdraft. Today we try to decipher the reasoning behind. But first, a quick primer on the concept of asset allocation. The capital markets can be broadly broken into many types of investments. At the 30,000-foot level, we can broadly categorise assets classes into four areas: stocks, bonds, cash and hard assets (real estate, commodities).
That said, equity holdings climbed up to represent 15.15 percent of the portfolio compared to 13.6 percent at the start of the year. These are possibly “average down” trades (worth Sh800 million) taking advantage of the market dip – shares had entered correction territory by end of June.
Overall, the equity portion remained muted in the first half of the year. Factors that fed into this risk-off sentiment include; weaker outlook on corporate profits, break-neck foreign investor exit sales (net outflows set to more than double last year’s), aggressive taxation, anaemic private sector credit growth, high volatility, mounting government debt bill and so on.
Bond holdings dropped from 45 percent of the portfolio at the start of the year to 8.6 percent by the end of June—a Sh21 billion. Much of this free capital went into other risk-averse investments; cash, fixed and demand deposits whose percentage allocation rose to 65 percent, up from 30 percent at the start of the year. Lower short-term yields (Current 91-day yields 7.39 percent, down from 8 percent. 182-day and 364-day yields stand at 8.5 percent and 9.5 percent respectively, down respectively in January) and a distorted bonds markets may have informed this pessimistic positioning.
Though a very risk-averse strategy, cash is probably the safest neighbourhood as a hedge especially as other assets continue to re-set. It is a good way to reduce volatility while churning out some respectable returns.
Off-shore investments increased to 3.55 percent in Q3, up from 1.55 percent. Increase in off-shore exposure totalling Sh1.2 billion is worth taking a note especially in view of the portfolio’s cautious positioning.
Overall, a net allocation towards cash means the fund management community feels less optimistic about the markets. The picture painted by their allocation reflects this. However, a “cautious stance” may not necessarily cut across the entire industry. Why? Top three managers (out of 15 licensed players) control over half of the assets thus skewing the overall allocation. Nonetheless, it’s most likely the closest representation.
Mwanyasi is MD, Canaan Capital Ltd