Narrower investment options in the coming year for Kenya’s stockmarket

The Nairobi Securities Exchange 20-Share Index dropped 28 per cent over the course of 2015. PHOTO | FILE 

By James Anyanzwa and Scola Kamau

In Summary

Lucrative options

• Fixed income securities remain attractive for investors seeking to protect their capital.
• Money market returns with rates above 15 per cent should provide investors with adequate returns.
• Opportunities offered by the fall in global oil prices, which closed the year at $36 per barrel.

Rising interest rates and a depressed stockmarket have narrowed the options for investors in East...
Africa in 2016, with analysts opting for money, currency and offshore stakes for predictable returns.

Market analysts and fund managers said fixed income securities remain attractive for investors seeking to protect their capital in the wake of volatility in the equity markets and increased borrowing costs that are choking the property market.

“Looking at guaranteed products would be the best option in the short term, as investors are assured of returns within the specified periods. Money market returns with rates above 15 per cent should provide investors with adequate returns to weather the volatile market in the short term,” said Daniel Kuyoh, a senior investment analyst at Alpha Africa asset managers.

Forex market

According to Amish Gupta, the director of investment banking at Standard Investment Bank (SIB), the forex market also offers good prospects because of the widening current account deficit in the region that will put pressure on exchange rates.

“I think investors should also think of putting money in offshore investment products,” he said, adding that the deficit in Kenya was 6.9 per cent of the country’s GDP for the 12 months to November 2015.

Investors should look for opportunities offered by the fall in global oil prices, which closed the year at $36 per barrel from more than $100 mid 2014. This is expected to bolster the performance of oil distribution companies like Total and Kenol, as lower capital requirements reduce financing costs.

“The margins for oil companies with operations in East Africa will be bigger, and investors will be expecting high returns. A requirement for lower working capital passes a positive message of no requirement for immediate debts,” said Eric Musau, a research analyst at SIB.

Low oil prices are also expected to drive the cost of energy low, with manufacturing companies seen as big winners.

“Cost of production will come down, boosting returns for investors,” Mr Musau added.

Savannah Cement managing director Ronald Ndegwa said there were already indications that the building and construction sector was picking up steadily.

Thiagarajan Ramamurthy, the regional director of supermarket chain Nakumatt, said 2016 would probably be a better year for sales, especially if regional governments formulate a policy to guide the growth of the retail and wholesale sector.

Short-term growth

High interests pose mixed risks for the banking sector, with bad debts likely to increase with lending at higher rates.

“Investors will be watching how specific banks will balance between lending and debt recovery. Performance could pick up towards the end of 2016,” said Mr Musau.

KCB chief executive Joshua Oigara said the economic outlook for Kenya and the region was good, with key indicators looking stable for better growth in 2016.

“SMEs, agriculture and manufacturing will continue to be the drivers of growth in the short-term,” Mr Oigara said, calling for more investments to enable the youth to become entrepreneurs.

Interest rates are expected to remain volatile, especially with the expectation of another increase in the Fed rate this year, which could force emerging markets to keep policy rates high in order to curb capital outflows and protect currencies.  

READ: Local currencies face new hurdle over US Fed decision

“There could be a good balance in stocks and government securities. While interest rates are likely to remain moderate to high, valuations are easing, which should provide some comfort for long term investors,” said Einstein Kihanda, the chief investment officer at insurance firm ICEA Lion.

The insurance sector, which suffered from unrealised losses on equity holdings last year, faces another uncertain year with good valuations in the stockmarket only offering a platform for future returns. 

The performance of the agriculture sector will largely depend on global commodity markets, which are now depressed, and conducive weather with La Niña, a period of low temperatures that cause drought, expected during the second quarter of the year. 

“The impact will be mixed for different actors in the economy, based on their cash and debt position. How debt is held, whether in foreign currency or domestic denomination, will also exacerbate the scale of the impact for some companies,” said Eric Munywoki, head of research and business development at Sterling Capital Ltd.

Kenya’s stockmarket lost 12 per cent of its value slumping to Ksh2 trillion ($19.22 billion) by mid last month.

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The Nairobi Securities Exchange 20-Share Index dropped 28 per cent, from 5,112 points at the beginning of the year to as low as 3,989 by mid-December 2015, while the Nairobi All Share Index lost 10.48 per cent. 

“For the better part of the year, we witnessed significant foreign outflows, but we have begun to see that trend reverse over the past quarter. The current economic climate still presents enough room for further downward pressure in the equities market. The majority of investors have taken flight to short term fixed instruments to protect their capital and ride out the period of volatility,” Mr Munywoki said.