Market Commentary:
The All Share Index retreated by 0.1% w-o-w to close the week at 140.22 while
the NSE 20 Index gained 0.2% w-o-w to close at 1,852.17. Market turnover
declined by 55.7% w-o-w to KES 1.5 billion as the number of shares traded
declined by 44.6% to 67.6 million. Safaricom was the top mover of the week
(price declined by 0.2% w-o-w to KES 30.00). The top gainer of the week was
Jubilee holdings (+32.6% w-o-w to KES 291.75) attributed to positive investor
sentiment (either on dividend expectation or selling down a less profitable
insurance business) following the announcement of a strategic partnership with
global insurer and asset manager Allianz SE. This will involve Jubilee selling
controlling stakes (51.0% to 66.0%) of its general and short business in its regional
subsidiaries and acquisition of Allianz’s general insurance business in Kenya for a
total consideration of KES 10.8 billion. We expect price stability in the coming
week.
News Highlights:
MPC Retains CBR at 7.0%
The Monetary Policy Committee (MPC) retained the Central Bank Rate (CBR) at
7.0% for the 3rd consecutive month. The MPC noted that the accommodative
policy was effective in stimulating the economy. The following was noted by the
MPC regarding the state of the economy and the policy measures put in place:
The Kenyan economy is expected to rebound in 3Q2020 in comparison
to 2Q2020. The increase in economic activity is expected to be buoyed
by strong growth in agricultural production, increased activity in key
sectors (services especially), normalization of exports and government
interventions to reduce the adverse effects of the pandemic.
MPC noted that 89.0% of hotels were open in September (35.0% in May)
with improved occupancy rates and positive private sector market
perception on economic improvement.
Export orders improved by 0.8% y/y in August predominantly driven by
tea and horticulture. Horticulture exports benefited from the
normalization of demand in the international market and the availability
of adequate cargo space. Remittances grew by 27.9% month on month
to USD 274.1 million in August (+6.6% y/y).However, receipts from the
export of services fell by 22.4% in the period to August, owing to the
restriction on international travel and transport. This is offset by the lower
international oil prices. Further, the MPC projected the current account
deficit at about 5.1% of GDP in 2020.
The MPC noted that the current CBK foreign exchange reserves worth
USD 8.6 billion (5.2 months of import cover), were sufficient to offer
adequate cover and a buffer against short-term shocks in the foreign
exchange market.
MPC expects inflation to remain subdued and within the target range
(2.5% -7.5%) in the near term supported by lower food prices, the impact
of the reduction of VAT and muted demand pressures (in our view, this
may signal muted economic activity if it persistently remains muted or
falls).
The banking sector’s non-performing loans (NPL) ratio (gross NPLs/gross
loan book) deteriorated to 13.6% in August from 13.1% in June. The rise
in NPLs was primarily attributed to the real estate, personal and transport
and communication sectors which were affected by the subdued
business environment. Loans worth KES 1.2 trillion (38.0% of the total
banking sector loan book) had been restructured. Of this, KES 271.0
billion were personal loans and KES 849.9 billion was split among: trade
(20.7%), manufacturing (20.2%), real estate (18.3%) and agriculture
(11.1%).
Private sector credit growth increased by 8.3%y/y in August 2020. The
growth was buoyed by continued recovery in demand following the
implementation of the accommodative monetary policy. Increased
credit uptake was mainly reported in manufacturing (+13.1%), transport
and communication (+19.0%), trade (+8.1%) and consumer durables
(+13.7%). The operationalization of the Credit Guarantee Scheme for
MSMEs is considered critical for the sector by the MPC and is expected
to lower lending risk for commercial banks.
MPC noted that the continued implementation of fiscal policies
announced in the FY2020/2021 Budget Statement, including the
economic stimulus package, are expected to stimulate the economy
and provide reprieve for citizens and businesses from the negative
effects of the pandemic.
We expect the easing of restrictions and gradual re-opening to boost economic
recovery. We note that some sectors, for instance agriculture and building and
construction, remained more or less resilient during the pandemic with
production growing in agriculture and growth only tanking in July for the latter.
We however note that sectors such as hospitality may take time to recover. We
note that globally uncertainty still remains over a possible second wave.
However, we anticipate that in the event of a second wave, the country would
be better equipped to manage the adverse effects given the measures already
implemented (such as upgrading of health care centers, home based care
system etc.).
Inflation decreases to 4.2% in September 2020
Kenya’s annual headline inflation eased to 4.2 % in September 2020
(August: 4.4 %).
The food and non-alcoholic drinks index rose by 0.2 %m/m as some of
the food items’ price increases outweighed the decrease in others.
Some of the key increases included peas (+13.7 % m/m), oranges (+3.8
% m/m) Irish potatoes (+2.7 % m/m), and cabbages (+1.7 % m/m).
The housing, water, electricity, gas and other fuels index declined by
0.1 % m/m owing to a decrease in gas (-1.39% m/m) and kerosene (-
0.6% m/m).
The transport index also declined marginally by -0.01% m/m due to a
decrease in the pump prices of diesel which outweighed the 1.4 %
m/m growth in petrol prices.
Commentary
We note that the inflation rate is still within the CBK target and we expect
the rate to remain subdued.
As the economy re-opens we are likely to see demand driven
inflationary pressure pick up.
We note the strong growth in agriculture cited in the Monetary Policy
Committee statement last month (agriculture is expected to grow by
about 6.0% in 2020). We therefore expect increased output/ production
which should in turn ease food inflationary pressure. Moreover, the
Kenya meteorological department (MET) forecasts near to above
average rainfall in October, (in the highlands west, central and north of
the Rift Valley) which should sustain agricultural production.
Recommendation:
Buy– BAT
Long-Term Buy – Equity
Sell – HF
