Highlights of International and Local Markets

Past few days have seen China devalue Renminbi by about 2% that caused quite some excitement in the markets. The depreciation is seen by some participants as a symptom of slowdown in Chinese economy especially in exports which comes as a strong reminder on the importance of maintaining robust domestic demand. Basing long-term growth model on exports alone means the economy becomes dependent on global growth. Devaluation and subsequent depreciation that followed the PBOC announcement had a wider effect on the currency market through safe haven flows. Swiss Franc and Japanese yen strengthened as emerging market currencies weakened. Speculation on the devaluation impacting on FOMC rate setting as well resulted in weakening of the US dollars across the board (yet to quite fully understand some of the exaggerated moves, seems to have been a combination of panic, short-covering and misconceptions behind China’s move).

US & UK markets

Its a bit surprising US dollar and British pound are still in consolidation with tightening cycles just a few weeks away(If Central Bank comments are anything to go by, likely the case). Market participants generally expect the US Fed to hike rates before year end and for the Bank of England to follow immediately after. Although currency appreciation in both instances may complicate situation, both central banks may have to accept stronger currencies since at the moment economic conditions do no warrant extra-ordinary measures.  Holding interest rates at ZLB carries significant risks on the economy since the market might become too accustomed to low interest rates and accumulate too much risks. Goldman Sachs have been calling for a buy in US dollar anticipating a 20% rally in the currency.

Chinese currency devaluation of 2% shouldn’t be a concern in my view, US still has an inflation differential advantage of about 1.5%(prices of goods and services rise faster in China than US, making US more competitive assuming both currencies are unchanged). This means that even though China devalued by 1.9%, the real devaluation was 0.4%. US only starts losing competitiveness once its inflation starts rising to levels at par with China and China continues to depreciate at similar rates.

I am anticipating significant rally in US dollar over coming months.

 

Swiss Franc

Inflation in Switzerland has dropped well into the negative territory. In order to counter deflationary spiral risk (Bad cycle where lower prices of goods cause firms profits to fall, falling profits reduce investments by firms, reduced expansion and investment leads to rise in unemployment, rise in unemployment reduces household incomes, reduced household incomes reduce demand for goods and forces firms to reduce prices of goods and the cycle begins all over again, Japan’s story) and support its industries. SNB imposed unprecedented negative rates on deposits balances exceeding specific thresholds taking into account liquidity in the banking system.

Currency market intervention and negative deposit rates in theory are supposed to work in the following way: Increase in liquidity (lots of cash in the market) increases interest burden on deposits(institutions hold more money in form of deposits). Interventions in foreign exchange markets increase liquidity in the banking system making negative interest rates and foreign exchange markets mutually reinforcing. Increase in cost of holding Swiss Franc deposits is supposed to force banks into diversifying into other currencies.

Interest rate differentials between US and Swiss Franc should ideally see USDCHF rally to parity, some significant rally as well in GBPCHF and other Swiss Franc crosses. Should depreciation cycle in the Swiss Franc begin, would expect declining returns from speculative capital investments in Swiss Franc to cause an unwind of present  accumulation of capital investment and at some point cause sharper falls. But should the unwind fail to get underway, expect more drastic measures from Swiss Central Bank as it will likely resort to desperate measures in weakening the Swiss Franc in order to support its exports and counter deflationary risks. Direct SNB interventions through EurCHF purchases could mess up the ultimate EurUsd short set up atleast in the short-term but it will be a big risk on SNB’s portfolio to have too much exposure to Euro, it might later begin unwinding when CHF depreciation is on course through Eurusd sales (Selling Euros and replacing with dollars).

Will keep tracking the fundamentals but account for margins on either side due to volatility but would advice either refraining or trading on the trend depending on your assessments of technicals(quite subjective).

Kenya

Stock are still in bear market alongside the Shilling. The two could as well be mutually reinforcing, falling shilling is creating expectations of higher rates and expected higher rates creating expectations of slower growth in company earnings. It is also possible anticipation of decline in shilling against US dollar after possible rate hike is influencing foreign investor participation. It would be a great time to watch for the attractive counter before the market bottoms out.

[Post will be updated with more information]

Private Equity in Kenya

In wealth creation there is various investment vehicles that one can choose to use to grow their money and secure their old age. Private equity happens to be one of the ways to invest your hard earned money and watch it grow over a specified period of time.

The PE Concept

The concept is simple; fund managers pool money from high net worth individuals and institutional investors to invest in companies not listed at the securities exchange. The underlying principle is that of getting a controlling stake in the companies through purchase of majority of their equity, improving efficiency in the companies and later on selling off the companies after their value has grown.

The steps sound very easy and fast to achieve, but there are a number of things one must put in place before venturing into the PE industry.

Requirements Before Starting a PE Fund

For first-time fund managers with an interest in the PE industry, a little house keeping is in order before you swallow the bullet. A little it is, but it might take a long time and be very exhausting before you finally can turn on the engines of your PE fund and start sailing through the stormy waters of the PE industry.

First of all you need to have a track record of having successfully grown other companies in the past thus creating value for investors in the companies. Without proof of a superb performance in the past, you are unlikely to get anyone interested in your PE fund. No one wants to risk their money with amateurs! So if you want to one day own and run your own PE fund, you better be getting down hard and dirty in creating value in existing companies and driving them to excellence.

The second most important thing in the PE industry is networks. No other place is social capital a necessity than in PE fundraising. To successfully raise enough funds for your fund, you need to be well networked with respectable business leaders in town. Your former employer and your fellow former employees should be able to sell you for free to investors they are connected to. Your business partners should be your marketing agents and walking billboards all over. In summary, you need to have a strong positive reputation among your peers and in the industry as a whole for you to launch your PE successfully.

The other fundamental requirement is that you should be having your own capital to invest in your PE fund. The investment can range between 1% to 5% of the fund; and it helps the investors to also have faith in the fund by having the owners of the fund investing their money in it too.

Finally, you need to have a placement agent to help you link up with the institutional investors and high net worth individuals. These are the people who help you market your PE fund to the potential investors and help you mobilize the funds you need to launch it. They are very vital in that they are well connected to the investors and will assist you in doing due diligence before getting investors on board. On the other hand, they can advise on the strategic plan for the fund and ease your pressure so that you concentrate on portfolio management rather than the day to day running after investors.

With the above in place you are then good to try your boat in the sea of private equity investments.

In Kenya the PE industry is not as vibrant as in the developed world. This can be attributed to the fact that we are still a developing economy and our financial markets are still growing. However, foreign investors in PE from the West are moving towards the East in China and India as emerging markets; and we can only expect the tide to turn to Africa very soon as our markets mature.

A guest post by RIRO JEREMY of fieconsult.co.ke