Kenyans are flocking to US dollar-based investments to cushion themselves against the effects of a weakening local currency.
The drive towards dollar-denominated investment products by both domestic and diaspora investors has seen fund managers setting up forex investment vehicles in response to the demand.
Last year, for instance, the Capital Markets Authority (CMA) granted approvals to multiple fund managers to set up dollar-denominated money market funds and fixed-income funds as the shilling saw its sharpest depreciation against the dollar in 30 years.
Between April and June last year, for instance, the CMA gave approvals for the registration of the Old Mutual Dollar Money Market Fund.
This was followed by the registrations of the ICEA USD Fixed Income Fund and Sanlam USD Fixed Income Fund in the third quarter of 2023 and the registration of Etica USD Money Market Fund, Etica USD Shariah Fund, Etica USD Wealth Fund, Etica USD Fixed Income Fund and Enwealth Dollar Money Market Fund.
According to the CMA, third quarter statistics on collective investment schemes, assets under management in dollar-denominated funds stood at Sh12.3 billion compared to just Sh5.1 billion in September 2022, which represents a 140 percent growth in assets over the past year.
“The main reason for interest in dollar investments is that the Kenya shilling has been depreciating against the US dollar, and there is demand from investors who want to hedge against the currency depreciation. Yields on Kenyan Eurobonds have also rallied presenting the opportunity for fund managers to package dollar-based products,” Kenneth Maina, the co-founder and Portfolio Manager at Etica Capital says.
Yields refer to interest rate returns based on prevailing bond prices.
Dollar-based investments have delivered returns on two fronts with the first being gains made from the depreciation of local unit when investors change their foreign notes for Kenyan shillings.
This return has been sweetened by increased yields from dollar-denominated assets with central banks in advanced economies having raised interest rates over the last year to counter inflation.
Yields on Kenyan Eurobonds have meanwhile been elevated, driven primarily by investor jitters around Kenya’s ability to settle its debut 2014 Eurobond this June with the higher yields presenting short-term opportunities to both investors and fund managers.
The shilling ended 2023 on its worst run against the US dollar since 1993 as the local currency came under pressure from reduced foreign currency inflows amid rising external debt service obligations.
Despite the expectations for new inflows from multilateral lenders, the shilling began 2024 on an extended losing streak which has seen it shed more than two percent of its value so far against the greenback.
The continued weakness has seen investor jitters exacerbated as the Eurobond redemption questions continue to hover.
Analysts, however expect pressure on the shilling to ease slightly as advanced economies are projected to begin cutting interest rates this year cushioning foreign inflows into emerging and frontier economies.
“Looking ahead to 2024, we pencil a marginal easing in the local currency’s volatility driven by a recovering agricultural exports sector alongside anticipated foreign direct investments induced by expectations of interest rate easing across key developed markets,” noted analysts at AIB-AXYs Africa.
The projection is pegged on prolonged monetary tightening and increased global competitiveness of Kenya’s exports abroad which primarily cover coffee, tea and horticulture.
The proliferation of dollar-denominated investments in the country is meanwhile expected to facilitate the return to foreign inflows as diaspora investors find it easier to invest back home in foreign currency.
