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- Nigeria's Buhari Suspends Top Aides Over Graft Allegations
- Economic Growth in Sub-Saharan Africa Rebounds to a Projected 2.6% in 2017
- Kenyan Economy Expands at Fastest Pace in Five Years in 2016
NAIROBI (Capital Markets in Africa) – The Kenyan stock market is going through a hard-hitting period, one that has been prevalent for the last three years. In 2016, the stock market carried on its lackluster performance registering a 29.7% y/y drop in turnover to USD 1.5B for the second year running, having shed 2.9% y/y in 2015. Foreign investor participation remained dominant, averaging at 67.8% compared to 59.4% in 2015. The NSE 20 share index shed 21.0% and the NASI 8.0%. Out of the 63 listed companies, only 9 closed in the green.
Trading activity is yet to pick up pace noting that the first month of 2017 has been characterized by continued minimal local investor participation with foreign investors displaying little appetite on a handful of stocks. The indices have taken a nose dive, with the NSE 20 share index losing 12.3% m/m in Jan and recording a seven-year low of 2,789.64 within the month. While one could argue that it is still early days, several factors seem to be driving the apprehensiveness that funds and investors have displayed. Some of the factors that will see us continue to adopt a cautiously optimistic stance in 2017 include:
- Too strong a dollar appreciation on the back of renewed optimism on the US economy as well as the rate hike in Dec and expectations of additional tightening within the year exerting pressure on the Kenya Shilling.
- The possibility of a rise in crude oil prices attributable to supply cuts resulting in the widening of Kenya’s current account deficit and a downside risk to inflation.
- General Elections– Political risk will remain a key driver of investor sentiment as the General Elections are set to take place on August 8th, 2017.
- The impact of capping of interest rates on the banking sector– While the fourth quarter of 2016 will give a glimpse into how the new regulation will impact the performance of the banking sector, 2017 will paint the full picture. Worries about profitability erosion amid margin compression besets the sector. We remain neutral on banks in the interim.
- Drought in 2017: The Met department has forecasted a severe drought to be experienced in Kenya this year, more so in the first quarter. Consequently, the Government may spend more than the KES 21.5B budgeted to support 1.3M people. With agriculture accounting for 22% of the country’s GDP, dented agricultural productivity may dampen the country’s GDP growth and impact inflation.
- Foreign capital flight? We remain cautious of capital flight owing to recovery of the US. However, we believe that much as US growth will accelerate in the short run, SSA continues to present faster growth prospects, currency and political risks notwithstanding.
- The slowdown in GDP growth to about 5.7% from 5.9% in 2016 mainly owing to adverse effects of the prevailing draught and constrained private sector credit growth.
That said, we see some opportunities in the following sectors:
- Telco (Safaricom– Fair Value KES 22.60, upside 22.2%) with growth pegged on accelerated mobile data, sustained MPESA revenue growth and opex optimization.
- Oil and Gas (Kenol Kobil– Fair Value KES 15.00, upside 20.0%) owing to excellent inventory management, expansion of retail network and focus on high margin business segments.
- Tourism (TPS Serena– Fair Value KES 27.35, upside 36.8%) as other markets (Tanzania, Uganda, Rwanda) continue to contribute more to the bottom line and the tourism industry in Kenya makes a recovery after the General Elections.
- Media (Nation Media and Scangroup)-both companies trade at historically low multiples, have zero leverage, are cash rich and may benefit from increased ad spend on political advertising in 2017.
- Cement (Bamburi)- continued investment in infrastructure by the government including phase 2A of the Standard Gauge Railway coupled with a burgeoning Real Estate sector will continue to drive cement consumption. Bamburi’s balance sheet is fully deleveraged and pays attractive dividends (8.7% div yield).
This article is featured in the March 2017 edition of INTO AFRICA Magazine, Africa’s Lions: Trust in Fundamentals.
Joy D’Souza is the Head Of Research at ApexAfrica Capital Limited, a subsidiary of AXYS Group- Mauritius. Prior to this role, Joy was a Research Analyst with Kestrel Capital (EA) Limited for five years. She holds a Bachelor of Science in Statistics degree from the University of Nairobi and is working towards the Chartered Financial Analyst (CFA) designation.