Initial Public Offerings
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Seeing opportunities in economic storms

Global growth is speculated to slow down this year mainly due to factors such as escalating trade tensions, the just concluded US government shutdown, uncertainty about policy rates in various regions among others. Notably, according to International Monetary Fund (IMF), growth in sub-Saharan Africa is expected to grow at 3.5 per cent in 2019 an increase from 2.9 per cent in 2018. One of the countries expected to spur this performance is Kenya with the World Bank predicting a growth rate of 5.8 per cent and National Treasury upping the same to 6.1 percent, forecasts we believe are slightly misplaced considering the facts on the ground.An analysis on major components of gross domestic product namely; consumption rate, gross investment, government spending and net exports, point to a slower growth. If we analyse private consumption which contributes up to 79 per cent of GDP, we have to ask ‘What are its driving forces?’ The ideal answer would be mainly wage, taxation, interest rates and inflation.The economic expansion in past years has not translated into real growth for business and enterprise. Employment in the formal sector has grown by an average of 4 per cent and about 7 per cent in the informal sector over the last five years.Majority of the formal employment is concentrated in education, agriculture and manufacturing. The average wage in Kenya is estimated to be Sh57,000 per month with financial services, electricity and gas recognized as highest paying sectors. Regrettably, these sectors have been scaling down on staff and reducing wages over the last two years. We therefore do not see a more than five percent increase in wages due to stagnating and declining employment terms.The 2018/19 budget had a number of tax changes that predominantly affected consumption side of taxation and that might lead to reduction in disposable income and expenditure. Whether this will spur more people to save as an alternative to spending is yet to be seen.Interest rates have been steady most of 2018, however due to debt repayment pressures there will be upward pressure on baseline rates. Tax revenue is below target and a pension liability that is also due this year will keep local borrowing by the government high. We therefore expect a gradual increase in rates throughout the year, with a simultaneous increase in the CBK base rate raising the cost of credit. This, however, won’t be high enough to see a huge movement from consumption to saving, nor spur banks to lend more, therefore interest rate forecast will have a neutral effect on consumption.All the same, Kenya’s economy still provides a number of opportunities for investments:

This year, the capital market is tipped to record good performance as regulators remain vigilant to make sure the market activity contributes to liquidity. Recently, the Nairobi Securities Exchange (NSE) announced it is in the process of listing two firms and also eyeing possible Initial Public Offerings (IPOs) from poorly performing state corporations.While the NSE 25 and NSE 20 dropped by 17.1 per cent and 23.7 per cent respectively in 2018 as a result of poor trading activities, the downturn might not be over yet as the economic fundamentals that drive growth are still not yet in place.Why then should equities be an opportunity in 2019? With most counters trading near their 52-week lows, we believe the lows will act as resistant floors for any further drop. This is an opportunity for long term investors not short term speculative gamblers.With the shilling remaining artificially stable, we believe central bank will have utmost pressure to retain it range-bound in the year. Discussions are underway to set up a new standby facility with the IMF and undoubtedly one of the requirements is for the regulator to stop manipulating the Kenya shilling. Pressure will also come from the widening balance of trade position pushed by an expected increase in global oil prices. Exports have also been on a decline in the last year. Much support for an increase is not expected as it will boost demand for the shilling.The opportunities that lay in here is having dollar-denominated investments whilst the shilling is still in the 100-101 range. With an expected 3–5 percent depreciation of the local unit, enhanced dollar returns on regional investments present interesting investment opportunities.Property prices have been dropping over the last two years, and the housing bubble is reaching unsustainable limits. Credit flow to the sector has also reduced or stagnated and rental yields falling below eight percent, hence due to rising defaults property prices will significantly drop towards the end of 2019. For those who are liquid, bargains may be around the corner.Overall, the economic fabric does not match up to the statistics projections due to variance in market activities on the ground. There are inherent risks, but for the upcoming months there is also scope for interesting opportunities.

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