Guest traders and stock brokers participate in the Nairobi Securities
Exchange (NSE) second Charity Trading Day last year. T-Bills currently
offfer the best returns on investments. FILE PHOTO | NMG
Does the 364 T-bill trump stocks? The
answer is: Most of the time it does. Stated in terms of wealth creation,
the compounded annual growth rate (CASGR) for the 364 T-bills is a
strong 11.45 per cent since 2009 compared to a weak 0.66 per cent (minus
dividends) return for the benchmark stocks in the same period.
What’s
worse, throughout this time inflation averaged about 8 per cent. This
simply implies that stocks have actually destroyed wealth on an
inflation-adjusted basis.
Ironically, stock is an
asset class which is supposed, by exposing you to future cash flows and
the benefits of human ingenuity and productivity gains, to help you beat
inflation and build wealth. Not this time.
But why
this serious over-performance? There are several reasons but inflation
easily takes the crown. In my opinion, the inflationary cycle has long
added to the gravitational pull to the 364’s as investors seek to
protect their funds.
With relative high inflation, the
market has generally tended to favour the high-yielding 364 T-bills when
stocks have failed to offer an attractive yield.
Eight-year
dividend yields have roughly averaged about 4 per cent,
seven-and-a-half-percentage points lower than the 364 yields in the same
period and four-percentage points lower than the average inflation
rate.
With such a long-term record beating inflation, one may argue they are the closest thing to inflation-linked securities.
This is because increasing inflation continues to raise
nominal yields on conventional bills as savvy investors seek for
compensation for being repaid in “shrunken” shillings. Investors wary of
being caught flat-footed on inflation will keep asking for high risk
premiums (if the rising inflation outlook doesn’t change).
This
means one thing; this trade may continue to trump equities in the
foreseeable future – if stocks don’t wake up from their slumber.
So
long as inflation (up to 11.5 per cent in April, from 10.3 per cent in
March) continues to inch upwards, 364’s are assured of being the trade
to beat on a risk-adjusted basis.
Moreover, with the
government (Kenya Revenue Authority) having missed its first half of
2016/2017 fiscal year revenue collection by 3.2 per cent, and is further
expected to miss their overall revenue collection target of Sh1.5
trillion for their current fiscal year, 364 may just keep doing well.
At
present, average rates stand at about 10 per cent, which is closer to
its historical levels (11.45 per cent). In the past eight years, they
have touched a high of 22.36 per cent in October 2015.
So,
with the flagging economy and inflation outside the Central Bank’s
bounds, the 364 offers the best house in a bad neighbourhood. That
reality may continue to make this instrument a safe bet.
Nonetheless,
if one decides to pick stocks, they’d better be truly exceptional
otherwise they would be taking on a hugely asymmetrical risk, with a
tiny chance of a great return but a very large chance that would lose
ground to inflation.
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