Kenya Equities Outlook, February 2018

Economic Outlook for 2018

GDP

Stronger headline GDP growth in FY18 c. 5.3% Р5.7%, driven by a recovery of private sector confidence (post elections) and the agricultural sector (resumption of normal rainfall patterns). Expected headwinds for 2018 include the interest rate caps and slower government spending on account of fiscal concerns.

Interest Rates

Market anticipation is that interest rate caps will be relaxed in 2019. We believe Government borrowing costs at present are artificially suppressed although government yields are trending downward due to market expectations of a reduction of the Central Bank Rate (CBR) in 1H18.

Political Outlook

Elections completed in October 2017 – we expect political stability going forward. Opposition activities continues to pose some uncertainty, but we expect this to dissipate over 2018.

Market Performance & Outlook

  • The S&P SSA Ex SA Index was up 40.9% in FY17, indicating improved performance of African indices. The Nairobi All Share Index was up 27.5% in USD terms, outperforming the Nigeria All Share Index. The NSE largely turned more expensive in 2017, despite the political and economic headwinds seen during the year.
  • For the most part we think the NSE is fairly valued.
  • A potential reduction of the CBR may be marginally negative for banking stocks due to an anticipated negative impact on net interest margins. The fixed income market also appears to be signalling a relaxation of interest rate caps 2019 onwards and not in 2H18.
  • We believe a specific approach to stocks will yield investors positive returns. We recommend select stocks on slide 6.

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