Smart investment: How to build wealth in a volatile economy

In times of economic turbulence and shifting market sentiment, one question dominates investor minds: Where should I put my money?

This was the tone set at the third Investor Education Forum hosted by the Business Daily, themed "Navigating Economic Uncertainties."

The forum brought together financial experts, investment professionals and real estate experts to explore ways to make safe, sustainable, and growth-oriented investment decisions.

The takeaway?

You have to think of the long-term, be realistic about risks and invest in a way that doesn’t just preserve your money but grows it beyond the inflation curve.

“No such thing as complete safety.”

“You have to remain calm. There is no such thing as complete safety, everything has some risks,” says Rina Hicks, Director at Faida Investment Bank.

Her words cut through the illusions that many investors hold onto believing that there is a perfectly safe option, especially when the economic climate wobbles and markets behave like roller coasters.

“Are there some that are safer than others? Yes,” she says. “One of the things that you have to look at is: how can I consistently get returns, irrespective of what is happening in the environment around me? You have to allocate wisely.”

Treasury bonds and treasury bills are some of the financial instruments that Ms Hicks points to. Although they are not as glamorous, these financial instruments have stood their ground even during the Covid-19 pandemic with the inflation spikes that followed.

“They have generally remained fairly good as investment options,” she says.

Ms Hicks also highlights gold as a seemingly quiet star in the investment world.

“In Kenya, we have the ABSA Gold ETF (Exchange-Traded Fund) listed on the Nairobi Securities Exchange. In the last three years, it has grown. If you took the price three years ago and the price now, it's actually grown by almost 90 percent. In the last one year, it's grown by about 33 percent. Gold is generally seen as a safe haven in times of uncertainty.”

As many investors aim to beat inflation first then celebrate the returns, Ms Hicks argues that often than not returns that look good on paper can quickly turn into poor decisions if they don’t outperform inflation.

The investment expert stresses that the key thing with investing is also looking at how you can make sure that your investment is earning higher than the inflation.

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“When you look at the average inflation rate in Kenya, the long-term inflation rates, you're looking at about 6.2 percent. So how can I invest higher than that rate? If I'm getting at least four to seven percent above inflation, then I'm doing well,” she says.

From the money market funds to special funds, Ms Hicks says investors should have a mindset shift that instead of chasing names they should chase performance.

“If you're getting 10 percent to 12 percent, it's a great investment, things like even money market funds, where most people say you should only park your money there. If you're getting a return that is higher than inflation, whatever the name of the investment option, what's wrong with it? ”

In terms of rec (recurring income), a sustainable investment means one that gives you consistent returns over time and retains or grows its value. For instance, if you’re earning Sh10,000 every month from an asset, but its value keeps falling or the inflation erodes the value of that income, then it's not sustainable.

Some of the sustainable investment options are like unit trusts, money market funds, agricultural investment schemes and private equity in high-growth sectors like health tech, fintech, or affordable housing.

We are facing a time bomb

Ezekiel Macharia, Managing Director and Chief Actuary at Kenbright Holdings, gives a glimpse into the looming structural problem, the quiet pulling away of capital from the productive economy.

“I see a time bomb ticking, I always look at the liability side and it’s the way our laws are being structured, we are borrowing from the European markets,” he says.

He explains that under the new capital requirements, financial institutions are penalised for investing in anything that isn’t classified as ‘safe.’

“If I invest in a business, I’m deducted. Let’s say I have Sh1 billion and I put in an uncoded equities, day one, my Sh1 billion is slashed by 40 percent and I have Sh600 million in my balance sheet.”

Mr Macharia’s proposed solution? De-risk the investors.

“The key areas of de-risking is illiquidity. If I give you my money, in a capitalistic world, I want my money back as quickly as possible.”

A capitalistic world is an economic system where individuals and private businesses own and control property, resources and the means of production where the profits drive decisions.

Mr Macharia also points out on the need for an exit structure in stressed assets, support for distressed properties and frameworks to protect investors from loss.

“If we can find a way to incubate our SMEs in that structure, then we have a way to bring in all this cash through the investment banks and maybe stock market and pump it into the system.”

His advice to investors, he says is to rethink what sustainability means in their portfolio.

Sustainability is about playing the long game

For Bernard Kiragu, Managing Director at Scribe Services Registrars, sustainable investing is not a buzzword, it’s about building long-term value with your money and aligning your values with your wallet.

“Sustainability talks about how we intend to play the long game. We must focus on creating long-term value and as investors you need to look at which companies are socially aligned with your needs.”

Mr Kiragu adds that investors need to become more discerning, especially with rising public scrutiny.

“There’s a lot of pressure from the population and there will definitely be a consequence to that. As an investor ensure you consider where they advice you to put your money.”

More than anything, Mr Kiragu points out that information asymmetry continues to block people from making the most of their investment opportunities.

“We should invest in research. There’s a lot of this information with our advisors, but we opt for the safe option. We are trying to encourage people to always consider and look at where they are headed. What do we have as products that we sell? The emerging middle class, the growing younger population, who will not be so young in the future but they have the power.”

The real estate promise

Consequently, real estate is often viewed as illiquid and risky during uncertain times but it still offers promise especially in Kenya, where the demand for housing continues to outpace supply.

Kenneth Mbae, Managing Director at Centum Real Estate, made it plain.

“I think the answer is that everyone here came from somewhere, a home. There's an opportunity there, in Nairobi for instance, the government data shows nine in every 10 Nairobi residents are tenants,” he says.

“Of the 1.6 million homes in Nairobi, 88.8 percent are occupied by renters, that’s roughly 1.4 million households paying rent, not to institutions, but to individual investors. Real estate is one of those places that will support you in the future.” Mr Mbae adds.

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