By Gerald Muriuki, Investment Analyst at Genghis Capital
Coming from a year that offered mixed fortunes to investors, questions abound over the most prudent vehicle that will offer investors the best returns for 2020 – a year which, from the onset, projects a façade similar to last year’s.
To settle on the most appropriate investment vehicle, we must consider the macro-economic indicators for the coming year in order to decipher what they portend for the investment space in the country.
First, the economy is expected to post a real Gross Domestic Product (GDP) growth of 5.7%; signifying a stagnation in growth from last year. Secondly, the Kenya Shilling is projected to remain stable, trading against the greenback at an average of between KES 100 and KES 104. Thirdly, private sector credit growth is expected to post a cautious recovery following the repeal of interest rate caps.
However, risks abound with the expected aggressive Government domestic borrowing in the first half of the year (crowding out private sector), a rise in the fiscal deficit and depressed private consumption on the back of cost cutting initiatives by the private sector.
Both globally and locally, we are in an era of increased financial markets volatility and heightened geo-economic uncertainties. However, there remains various investment options that still represent value following heavy investment in strengthening their fundamentals, thus trading at substantial discounts to their value.
On average, our capital markets are still trading at attractive multiples despite the rally of 2019, which primarily represented a recovery from the massive sell off in 2018. The Nairobi All Share Index (NASI) posted a return of 18.5% to close at 166.41 from an almost similar but negative return of 18.0% in 2018.
Despite the rally, valuations are still attractive for some of the counters especially fundamentally strong counters that missed out on the market rally of late last year despite their attractive prices. Current local market pricing also compare favorably to historical averages.
The market is likely to see a bounce this year for some of the large corporates with strong earnings growth which will drive activity on the bourse. Blue chip counters are poised to record strong earnings growth on the back of capacity expansion and introduction of new products.
Most of the opportunities are evident in the large banks, with KCB topping the list in the banking sector based on its price-to-book multiple. The insurance sector has immense potential due to low insurance penetration, but challenges undermine the sector including fraud and price undercutting. For this sector, considerable technological investments to tap into the micro-insurance space must be harnessed to realize the hidden value. In this sector, Kenya Re trades at a steep 33.5% discount to its 3-year average price-to-book and this year, and is expected to post stronger investment income growth.
In the industrials and manufacturing space, EABL and KenGen, which in the last two years have invested significantly in capacity additions, show promise with revenue contribution from these investments expected as from this year. Their discounted valuations and the fact that markets continue mispricing this fundamental information offers attractive entry levels for the two counters.
In mid-January, the first ever green bond (a corporate paper issued by Acorn Holdings, a real estate developer) was listed at the NSE in what was is a test of the revival of the corporate bond market in Kenya which has been grappling with investor confidence challenges after the fall of two corporate bonds by Chase Bank and Imperial Bank.
With the investment market conditions indicating signs of improvement with the debut listing of the Acorn Holdings corporate paper, we anticipate additional listings at the NSE, either in equities or corporate bond.
For the first time in Kenya’s public investment markets, investors are able to protect the value of their stock holdings from a downturn in the market through the recently formalized derivatives market (NSE Next).
While these are complex securities, the instruments basically serve a critical purpose of protecting an investment in stocks from bearish market conditions by realizing a profit when markets are tumbling (the practice of hedging). As a hedging tool, they can be thought of as an insurance policy against market risks. Additionally, risk aggressive investors can take short-term market positions to realize quick profits from market movements (volatility) from their trades (the practice of speculation).
Foreign investor inflow will continue supporting our market this year backed by expectations of higher earnings growth and our comparatively better priced equities market. It is on this backdrop that the securities market make for appropriately priced opportunities for investment and returns for investors.