Kenya is still recovering from the economic effects of COVID-19 and as a result, analysts have predicted that investors will still be cautious and are unlikely be tempted to go on the offensive despite the attractive prices on offer at the moment at the Nairobi Securities Exchange (NSE).
According to the report released Tuesday dubbed Navigating the Now Normal which assesses business prospects for 2021, while prices remain attractive, cautiousness in terms of economic and business recovery still persists which may erode prospects of near-term significant price appreciation.
As at present, valuations are still attractive for most of the large and fundamentally sound counters which presents investors with an opportunity to continue diversifying their portfolios, in a year that is expected to post mixed economic results.
The analysts note that the exit of foreign investors from the NSE in 2020 after positive flows in 2019 highlights the expected impact on business performance of companies hard-hit by the effects of the pandemic on the domestic economy. This sell-off means majority of stocks’ prices are ever so attractive for long term investors.
Kenya is currently trading at discounted multiples compared to its historical average following last year’s pandemic-led market sell-off. The sell-off from across majority of the stocks deflated the Nairobi All Share Index (NASI) by 8.7% to 152.11 points.
In the playbook 2021, the research team at Genghis Capital have revealed their new look model equity portfolio, which features momentum stocks, income stocks and value stocks. In 2020, the three portfolios outperformed the market with cumulative returns of 13.4%, 7.7% and -8.9% from the respective portfolios. This was against the market returns of -34.1% on NSE-20 and 8.3% from the NASI.
“We have recalibrated the portfolios; with investors who are looking to take advantage of volatility/momentum swings being advised to consider Safaricom, EABL, KCB Bank and Equity Bank while those looking for value stocks are advised to consider EABL, KenGen and Kenya Re,” the report states.
“Further, for the income portfolio, companies are expected in the short-term to make significant dividend cuts to preserve capital and thus while we maintain the historically high yielding stocks, we advise that purely income investors make a short-term re-allocation towards the income-bonds within our fixed income model portfolio,” the report adds.
The report further envisages cautious foreign investor flows attracted by the discounted securities but concerned by economic and business recovery and likelihood of heightened political activities with a referendum in 2021 and general election in 2020.
Flows are likely to be skewed towards technology stocks and other stocks with a clearer post-pandemic recovery in financial performance backed by their current discounted valuations.
Overall, Genghis expects the economy to grow by 5.0% in the year; below the recent pre-pandemic average growth of 5.60%. The analysts acknowledge that the rollout of vaccine across the globe will help shape positive sentiment.
That notwithstanding, the sluggish private consumption poses a major downside risk to the economic recovery. This is cemented by the recent tax changes that will have a dampening effect on households’ disposable income and corporates’ business investment.
The report further notes the worrisome public debt levels that is projected at KSh. 7.7 trillion by the end of June 2021.
Although efforts have been placed to reduce the fiscal deficits, the emphasis on raising revenue in the current uncertain environment may be counterproductive.
“Despite ordinary revenue in the current fiscal year expected to be revised upwards with the Tax Laws (Amendment) No. 2 Act 2020, we view the current business cycle as less conducive to realize the target’, the report states.
The analysts expect cost price inflationary pressure in the first half of the year due to the reversal of the rate of Value Added Tax (VAT) back to 16.0%.
Gengis also expect demand pressure in the economy to remain muted. This, the report notes, will see the CBK Monetary Policy Committee maintaining the benchmark rate at 7.0% in the year.