Why investors shun equities to pour money into govt securities

The Bank of Tanzania headquarters in Dar es Salaam.

What you need to know:

Despite decreasing yields in the debt market, investors continue to pour their money in there– resulting in massive oversubscriptions to the bonds and bills issued at any given time!

Dar es Salaam. Prospective investors are increasingly shifting their attention to government securities as stock market prices remain volatile, capital market reports by the Bank of Tanzania (BoT) and the Dar es Salaam Stock Exchange (DSE) show.

Despite decreasing yields in the debt market, investors continue to pour their money in there– resulting in massive oversubscriptions to the bonds and bills issued at any given time!

Auction summaries of Treasury bills and bonds issued by the central bank from September 13 to October 4 this year show that the issues were oversubscribed by anything between 150 and 300 per cent!

BoT auction results show that the 15-day Treasury bond floated on September 13 seeking to raise Sh97.8 billion received bids to the tune of Sh126.5 billion – while the Treasury bills floated a week later seeking Sh169 billion received a whopping Sh519 billion in bids!

On September 27, the Central Bank floated a 2-year Treasury bond with an offer of Sh84 billion. In the event, a total ofSh258 billion was received in bids. Similarly, the T-bills floated on October 4 seeking Sh169 billion received Sh407 billion in bids!

While interest rates have been dropping, the Government was nonetheless able to ‘borrow’ Sh531 billion from the market on the back of the four auctions, leaving billions of Shillings idle, as no other investment opportunities were immediately available.

Analysts say that the funds which remain following oversubscriptions to Government securities – as well as the funds that are obtained after maturity of previous bonds and bills – all end up ‘gunning’ for new bill-and-bond issues. The reports by the Stock Exchange (DSE) indicate that there have been more shares on offer than bids, causing the equity market to perform at a low pace.

DSE also reports that the equity market recorded a total turnover of Sh129.2 billion during the period from July to September this year – which is equivalent to the bids for the Treasury bonds floated in the single day of September 13.

According to the DSE reports, the equity market during the third quarter of this year (Q-3/2017) recorded a total turnover of Sh1.5 billion, largely on the back ofa few local companies!

Indeed, Sh1.19 billion out of the turnover recorded during the first week of October was from foreign investors.

DSE’s daily market reports show that investors offering their shares for sale are mainly from CRDB, DCB, DSE, MCB, MKCB, MBP, TOL, MUCOBA, PA, TPCC, TTP, TCCL, TBL, TCC and Vodacom Tanzania Plc (VODA), the latest addition to DSE.

However, most of the existing investors have been more selective, as they are targeting only a few companies, including especially TBL, TCC, CRDB, VODA and Swissport.

Analysts’ views

Commenting on this trend, financial markets analysts say the volatility of the share prices should be the result of the shrinking numbers of prospective investors in the equity markets.

At different times last week, analysts who spoke to The Citizen said investors are currently opting for Government debt instruments because they still are the most secure.

Juvenary Simon – the Chief Executive Officer of Orbit Securities Limited, Brokers & Investment Advisors – said the market is currently liquid, and billions of Shillings might very well lie idle.

“In the case of Government debt instruments, investors are assured of fixed income – and the returns are more favourable compared to other investment options,” Simon told The Citizen.

Noting that the market has been liquid over the last six months, Simon said“that is why there have been massive oversubscriptions to Government securities, both Treasury bills and bonds,”

He further said that investors have continued to invest in that area because it is virtually risk-free compared to the equity market, where investors tend to lose when share prices go down. The volatility in the equity market is caused by weak demand and falling share prices, basically due to the economic turbulence caused by increasingly tight fiscal and monetary policies.

However, most of the investors in the Tanzanian equity markets are foreign, with many of them targeting TCC, TBL, VODA, Swissport and CRDB because their relatively good performance and bright prospects – all of which are stated in their financial statements.

The trend

Companies whose share prices were ‘green’ last week as compared with the situation in the first week of June were TCC (Sh14,600 a share, up from Sh11,500 in June); TBL (from Sh11,000 in June to Sh13,300); EABL (rom Sh5,210 to Sh5,400), and KCB, up from Sh860 last June to Sh970.

On the other hand, companies which recorded a drop in share prices during the same period were Acacia (down from Sh8,970 a share in June to Sh5,230 last week); TPCC (from Sh2,000 to Sh1,520); MKCB (from Sh1,000 to Sh890); DCB (from Sh400 to Sh395), and CRDB: down from Sh190 to Sh175!

All in all, this has caused DSE’s market capitalization to shrink to Sh18.5 trillion as of the last session, down from the Sh20.8 trillion recorded during the first week of June this year.

In any case, the market is currently dominated by foreign investors who account together for more than 80 per cent of the total value of all shares transactions.