Potential Effects of COVID-19 on Money Market Funds

Last week, we discussed the Impact of Coronavirus to the Kenyan Economy, covering how the pandemic started, the current state of affairs, noting that despite the virus spreading, emotional contagion also played a significant role in amplifying the effects of the pandemic on the global economy.

Following last week’s Focus Note, several of our readers requested us to focus on the effect on Money Market Funds. Consequently, this week, we revisit the topic, with our focus being on the possible effects the Coronavirus might have on Money Market Funds. Under this, we shall be discussing the following;

Money Markets Funds in Kenya account for 87.0% of all the funds under management by Collective Investments Schemes.

We expect the following on each of the asset classes:

• Bank deposits- Owing to favorable liquidity conditions in the money markets, the prevailing environment and flight to safe havens such as bank deposits, government instruments and gold, we do not expect any changes in deposit rates,
• Bond Yields- Yields on government papers are expected to stay the same, despite the expected cut on the CBR, with a likelihood of increasing because of expectations of heightened inflationary pressures, and
• Listed Securities Excluding Gok/ Other Unlisted Securities/ CISes- Investments in listed securities excluding Gok, any other unlisted securities, and other Collective Investment Schemes exposes money market funds to higher returns while providing diversification, however, we foresee little to no additional allocation away from bank deposits and government securities due to uncertainty.

The table below highlights the composition for the above-mentioned asset classes for the current MMF industry and our expectations on the effects potent to them from the current ongoing pandemic:

Conclusion:

Based on the above-mentioned factors, we expect that for Money Market Funds:

1. Returns for Money Market Funds will remain stable with a bias to a slight increase upwards should rates on government securities increase, and,
2. They will remain the most liquid of all mutual funds providing a short-term parking bay that earns higher income yields compared to deposits and savings accounts.

Below is the table of current MMFs, ranked by yields as published on 21^st March 2020;

To access CMMF, dial *809#. For a more detailed analysis, Potential Effects of COVID-19 on Money Market Funds.