Category Archives: hedge funds

Investing: Use Social Networks, don’t be used

All data indicates a new age of interest in retail investing. Across the world more people than ever are starting to trade for the first time, with reports of retail participation in the US stock market, for example, increasing from 10% in 2019 to 25% in 2020. Even during a public relations disaster, Robinhood- the U.S retail-focused trading app- onboarded 600k new clients in a single day. Our brokerage, Equiti Group/ FXPesa, saw volumes and client numbers increase by multiples across all our key markets and this will continue through this year.

The pandemic created an environment where people were looking for an income in the safety of their own home and, logically, that trading/ investing answered that need. Anything that brings a heightened awareness of financial literacy is a great thing, but it’s also something that we need to nurture. With millions entering the financial markets for the first time, unfortunately, scams, misinformation and false promises follow, and we must increase consciousness of this.

Social Networks: Most of the world has been following the journey of a supposed war between those on a Reddit forum called r/WallStreetBets and hedge funds betting on the demise of American electronic games supplier GameStop (going ‘short’). This battle was trending on all major social networks, such as Twitter, Facebook, Telegram and Instagram. These networks are powerful, Reddit has 160 million unique visits to its site each month.

People that had never invested before frantically set up trading accounts and placed trades with as much capital as they could put their hands on. Some naïve first-timers often had very little notion of risk or what they were doing, but instead paid full attention to the latest funny meme or influencer that told them that this stock was ‘going to the moon’. It did, and then it came back again leaving a lot of people losing a lot of money.

Ignoring Fundamentals: Social networks and online personalities have an increasing amount of influence over investors. Recently, Elon Musk the CEO of Tesla added 12% to the value of Bitcoin simply by changing his bio to the bitcoin Twitter hashtag. With the wave of memes, online ‘experts’ and celebrities pushing their agendas, the fundamentals of great companies are becoming secondary. We need to acknowledge this and attempt to educate differently.

A perfect example of this was the recent movement in the Silver price. Silver is widely regarded as an undervalued metal, mainly because of its increasing utility in ‘green technologies’, such as solar panels. Various reports declare solar panels and wind turbines will require three times more silver than what is used today. Silver is also used in electric car production and other tech of the future. When the silver price jumped 12% (its biggest intraday rise since 2008), it was not because of these fundamentals. The price jumped primarily because social media declared the same war with hedge funds and decided to try to do the GameStop ‘trick’ again, making the Twitter hashtags #shortsqueeze and #silvershortsqueeze trend across the world. The silver market is huge and not as easily manipulated as a relatively small stock such as GameStop, and so this attempt was doomed, with silver retracing back very quickly and lots of retail traders losing more money. 

All this focus away from fundamentals, meant that the market was quite late to understand the stellar Q4 earnings shown by some great companies, especially Big US Tech firms. Amazon posted $126 billion Q4 revenue and shows no sign of slowing. Google saw a 23% revenue growth in Q4. Unfortunately, the circa 4-6% share price increases these saw due to these results aren’t considered attractive enough to those only seeking the 16x returns GameStop gave some in just 2 weeks. There is so much real opportunity in the markets, especially now.

Scams: If you were to investigate your junk mail (don’t!), you would have probably been sent a scam email within the last 24hrs. It is most likely centred around cryptocurrencies, where it is promising huge returns from trading obscure crypto that you have never heard of. Some of the recent scams are from hackers sending out tweets from reputable, businessmen like Jeff Bezos and even former presidents such as Barack Obama’s certified accounts. They ask for the trusting public to send bitcoin to a wallet and then wait for 2x back.

Unfortunately, as unlikely as these scams may seem, the public is losing millions of dollars to them daily. In today’s ‘at once’ society, many aren’t thinking of growing knowledge and wealth over a long period. Instead, they want instant gratification and huge profits, as is the expectation in most walks of life now. Now, if you want something, you want it immediately- but my experience of wealth generation is the very opposite of this. It takes time to do it right.

Long-term side-effects: Social media has been an excellent source of information for new traders, keen to improve their financial futures. However, there is cause for concern if these young and new entrants blindly follow investment ideas that they do not understand, just because the herd are doing the same thing. We have a huge wave of first- time traders ignoring great companies that have incredible distribution channels and solid, multiple revenue streams, instead opting to follow a funny meme of Elon Musk and a Shiba Inu dog (DogeCoin).

A glaring issue is I don’t see how it can work out for these traders. If they make money in these pump-and-dump Reddit schemes, for example, they will invariably put more into the next one and continue until they lose everything. In this search for increasing returns, they are also susceptible to false promises and scams. On the flip side, if they lose their money in the first attempt, they are likely to shut their accounts and never think about their financial futures again. That is a tragedy.

It is far better to work with a brokerage to diversify your investments across global asset classes, regions and short and long-term plays, concentrating on sound fundamental and technical analysis…improving your knowledge day by day, year by year. Understanding this gives you a great chance at achieving real wealth. This has always been exciting enough for me, no meme needed. 

A guest post by Brian Myers (@bjmyersUK), the CEO at Equiti Capital UK.

Cellulant investment mega deal

Yesterday Cellulant announced a new deal record Series C financing round to grow the digital payments company into markets on the African continent where two-thirds of the population remains unbanked.

The investment deal for $47.5 million (Kshs 4.8) billion was led by the TPG Rise Fund alongside Endeavor Catalyst and Satya Capital. The company is now in 11 countries in Africa and reaching 40 million customers. These include 7 million farmers on Agrikore an agri-business platform in Nigeria.

A recent report on the financing of fintech companies released by the East Africa Venture Capital Association (EAVCA) noted that there were trends towards the financing of non-traditional companies, who were involved in decentralized networks and enabling the use of alternative data to develop new scoring models. Also that once such companies enabled customers to have mobile wallets, their usage can be more frequent and the platforms can be extended towards government, utilities and other payments. The report noted other recent large financing deals included $80 million (of debt) to M-Kopa, the pay-as-you-go-solar firm and $65 million to Branch, the lending app.

The team at the signing go the Cellulant financing deal.

Part of the new funding will go towards building a world-class payments team,  according to Ken Njoroge, the co-founder and Group CEO of Cellulant.  The new investors join the other shareholders at Celluant who are Velocity Capital, Progression Capital Africa, and TBL Mirror Fund while representatives of the TPG Rise Fund will join the board of Cellulant. Other TPG Growth investments in Africa include Gro Intelligence (an agricultural data business firm), Frontier (a platform which powers Cars45, a second-hand car-sale site in Nigeria) and Ecoles Yassamine (a Moroccan private school network).

Read more on this at the Cellulant blog.

Barclays Kenya Previews IFRS9

Barclays Kenya held a workshop session in Nairobi today to explain about the coming of IFRS9, a set of new accounting standards that will replace IAS 39 on January 1, 2018. which will have a great impact on banks, their capital, customer assessment and ultimately their profits.

Some of the highlights of the day:

Compliance Impact

  • Even as banks are still digesting the impact of interest rate caps, along comes IFRS9.
  • All institutions will adopt the impairment standard in 2018.
  • One challenge will be on how to report for impairment: Banks will have to do three sets of accounts, one for impairment according to Central Bank of Kenya (CBK) rules, one for the Kenya Revenue Authority to calculate taxes on profit after impairment, and another for Impairment according to IFRS9. This makes compliance a costly affair.
  • IFRS9 is data intensive, so auditors will be concerned with the quality of data and reconciling it to bank financial statements. They will have to trust that management is providing the right data to make decisions, and if not, they will engage with the bank board, then the bank regulator (CBK).
  • Banks need systems that are able to capture a lot of this customer data and products and come up with impairment models.
  • Banks will use predictive analytics, and big data to manage risk in customer lending.  

Customers

  • IFRS9 brings cross-product default, and if a customer defaults on one loan item like a credit card, a bank has to provide for impairment across all products advanced to them
  • Expect a change from the current practice of using credit reference more from the negative  perspective (a blacklist of borrowers) to a good one (banks will check to see who has been paying on time and offer them better rates)
  • Collection strategies will become very important, given the financial impact of IFRS9 for defaults over 30 days and 90 days.
  • Kenyan bankers are working to enable customers to get access to their own data and shop for products that will be easy to compare across different banks. This will be an enhancement of the loan calculator that the bankers association rolled out earlier.
  • IFRS9 seems to give an incentive for banks to lend shorter duration loans. 

    IFRS9 gives incentive to shorter loans

Profits

  • With IFRS9 banks estimate the credit risk of an instrument, at the point of origination – so losses are recognized earlier.
  • Previously, under IAS 39. banks only recognized a loss once an event occurred e.g customer does not pay a loan for many months. Now banks will have to expect and estimate some defaults and recognize the loss upfront.
  • Under IFRS9, accounting provisions are expected to be higher than the current regulatory provisions.

Financial Statement Changes

  • From day one of IFRS9, there will be an impact on retained earnings and a reduction in Tier 1 capital at all banks
  • Under IFRS9, letter of credit, financial guarantees, performance guarantees, unused credit cards, non-traded government bonds will also be used to calculate impairment.
  • Studies show that IFRS9 running concurrently with IAS 39 can impact on the capital of a bank by between 25 to 100 basis points.
  • Are government securities still risk-free for local traders and investors? Not so under IFRS9. But since Kenya has never defaulted on debt so IFRS9, provisioning will be minimal compared to bonds of some other nations

Way Forward

  • On 1 Jan 2018, international accounting standard IFRS9 will replace IAS 39.
  • Kenyans banks are at a fairly satisfactory stage in terms of getting ready for IFRS9 with Tier I banks, and those with global parentage at an advanced stage compared to local indigenous banks e.g. Barclays has been working on IFRS9 for two years
  • ICPAK (Institute of Certified Public Accountants of Kenya) is working on. rules for the consistent and uniform application of the IFRS9 standard and these will be ready by the end of October.
  • ICPAK will have other forums to further explain IFRS9 as will the Central Bank. 
  • CBK will come up with new classification of loans to replace the current measures of normal, watch, sub-standard, loss etc..

Financing Lake Turkana Wind

Monday saw the signing of final agreements for the financing of the Lake Turkana Wind Power – LTWP project.

This was the completion of a long, 9-year process that began with a fishing trip on Lake Turkana, that yielded no fish, but a lot of wind on the boat trip. The LTWP which will generate 300 MW, using 365 turbines in Laisamis (Marsabit) was registered in 2006. Aldwych International  was brought on  as an investment and development partner in 2009.

The signing of finance deals worth 498 million euros (~ Kshs. 60 billion), will go towards LTWP which at Kshs. 75 billion is arguably both, the largest single wind power plant in Africa and, the largest single private investment in Kenya. 

The Kenya Government has committed to raising the country’s electricity generation capacity to 5,538MW (from the current 1,533MW) by the year 2017. 630MW of that will be from wind, and they have identified five strong wind areas in Ngong, Turkana, Kinangop, Kipeto, and Isiolo – and hopes that using renewable sources of energy like the wind will bring down the cost of electricity to consumers, and save on fuel import costs for the country. The government’s KETRACO agency will build a 428 kilometre, 400 kV line, from Loyangalani to Suswa Suswa to Laisamis that they say will be ready in 24 months and which will also link up with geothermal plants along the way.
Image from LTWP website

Financiers in LTWP include the African Development Bank (AfDB) who are the lead arrangers and who have provided a guarantee against some delays. The bank has also financed $1.7 billion in power generation in Africa, with 39% of that going to private sector companies. Others are the European Investment Bank. Standard Bank (Stanbic), FMO, Nedbank, EADB, PTA, PKF, DEG, Proparco and soon OPIC (US). Other partners in LTWP include Vestas (turbine supplier), the governments of Denmark (providing EUR 135 million including 120M in export credits), Netherlands, and Spain (who are financing the Laisamis- to Suswa transmission line).

Next, the Kenya government wants to expand the number of last-mile electricity connections while KETRACO also plans to extend the transmission lines to Northern and North Eastern Kenya – and on to Ethiopia, Tanzania and Uganda. This will serve the regional transmission purposes and also open up Northern Kenya. Joseph Njoroge, the Energy Principal Secretary, said additional electricity opens up opportunities such as enabling the pumping of crude oil, the possibility for electric trains to run on the Standard Gauge Railway, iron smelting, as well as clinker production (by Athi River Mining and Dangote).

edit October 2015: A deal by Google to buy shares from Vestas fell through in 2016.

edit March 2023. Some shareholding changes at Lake Turkana Wind Power as CPF UK Holdings to acquire a controlling 31.25% stake from other shareholders.

edit: The new investor buying out Finnfund, is the Climate Finance Partnership (CFP), a fund managed by BlackRock Alternatives. Finnfund, which was a shareholder since the construction began in 2014, exits after doubling its investments in “undeniably one of the best wind sites in the world” – that was built on time and on budget despite its size and remote location. Finnfund will continue to make more renewable energy investments, including a recent one in a geothermal power project in Nakuru County, Kenya.

Derivatives in East Africa

On Monday, May 16, Strathmore University invited Eduardo Schwartz a UCLA Professor and world-renowned lecturer, advisor, expert and author to give a talk on derivatives.

Introducing the talk, Strathmore Director Jim McFie talked of the plan for Strathmore to be at the academic forefront for learning on derivatives in Kenya, which they are doing with the Global Board of Trade (GBOT) – and that for Kenya to compete with Mauritius as a financial centre, derivatives markets will have to be established in Kenya.

McFie also mentioned a tendency for Kenyan parents to push their children into pre-formed careers at an early age, which was wrong, as he noted that Prof. Schwartz trained and started working as an engineer before he branched into financial markets.

Prof. Schwartz was giving his first talk in Africa on the subject and chose to give a Derivatives 101 talk, even as he knew there were investment bankers, and officials from the Treasury and Nairobi Stock Exchange present. He observed that it would be difficult to set up such markets given the economic challenges here, but that ultimately, the development of efficient markets was necessary for economic development.

He noted:

  • You can have derivative on any variable that can be measured without discussion between the parties – e.g. rainfall, presidential elections, sports.
  • Popularity? Interest rate contracts are the biggest (390 trillion) followed by credit default swaps (which had rapid growth from 2006 ), then foreign exchange contracts, commodities and finally equity-linked contracts, in that order.
  • In any Wall Street Journal, you get a quick reading of all the major forwards e.g. quotes for the UK pound – 1, 3, and 6 months forward, and futures prices of metal & petroleum (gold, silver), agriculture (wheat, corn, orange, juice, pork bellies, rice) and interest rates.
  • Some arguments in favour of hedging: Companies can focus on their main business and take steps to minimize market risks such as interest rates, by hedging, which also minimizes the probability for financial distress.
  • Arguments against /dangers of hedging? Shareholders are well diversified and can make their own decisions, it may increase risk to hedge when competitors do not (Southwest Air), and it is possible to take large positions with very little money (traders can change from hedgers to speculators)
  • You can get more reading of a local perspective on derivatives here

While he was said he was shocked that there no forward market in foreign exchange in Kenya, there are forward markets for currencies, and for some commodities like flowers and fuel, which are done in private arrangements with partners, buyers, and customers, but mainly through large banks. They are not exchangeable, and there is no capital markets mechanism now for this.

The most memorable one was Kenya Airways fuel hedging which they have employed for a number of years during rising fuel prices, but which resulted in a loss of Kshs 5.6 billion (~72 million) in 2009 (more)

With time there could be a few more to deal with gaps such as the current situation where farmers are hoarding maize harvests to draw the government out into paying more for the crop.