Third Eye

Why securities is the best investment option in 2020

Friday, February 7th, 2020 15:40 |

By Gerald Muriuki

Coming from a year that offered mixed fortunes to investors, questions abound over the most prudent vehicle that will offer investors the best returns in 2020.

To settle on the most appropriate investment option, we must consider the macro-economic indicators in order to decipher what they portend for the investment space. 

First, the economy is expected to post a real Gross Domestic Product (GDP) growth of 5.7 per cent; signifying a stagnation in growth from last year.

Secondly, the Shilling is projected to remain stable, trading against the greenback at an average of between Sh100 and Sh104. Thirdly, private sector credit growth is expected to post a cautious recovery following the repeal of interest rate cap. 

However, risks abound with the expected aggressive government domestic borrowing in the first half of the year, a rise in the fiscal deficit and depressed private consumption due to cost cutting by the private sector.

Our capital markets are still trading at attractive multiples despite the rally of 2019, which primarily represented a recovery from the massive sell off in 2018.

The Nairobi All Share Index posted a return of 18.5 per cent to close at 166.41 from an almost similar but negative return of 18.0 per cent in 2018.

Despite the rally, valuations are still attractive for some of the counters especially strong counters that missed out on the market rally of late last year despite their attractive prices. Current, local market pricing also compare favourably to historical averages.

The market is likely to see a bounce this year for large corporates with strong earnings growth which will drive activity on the bourse. Blue chip counters are poised to record strong earnings growth on the back of capacity expansion and introduction of new products. 

Most of the opportunities are evident in the large banks, with KCB topping the list in the banking sector based on its price-to-book multiple.

The insurance sector has immense potential due to low insurance penetration, but challenges undermine the sector including fraud and price undercutting.

For this sector, considerable technological investments to tap into the micro-insurance space must be harnessed to realise the hidden value.

In this sector, Kenya Re trades at a steep 33.5 per cent discount to its three-year average price-to-book and this year, and is expected to post stronger investment income growth. 

In the industrials and manufacturing space, EABL and KenGen, which in the last two years have invested significantly in capacity additions, show promise with revenue contribution.

Their discounted valuations and the fact that markets continue mispricing this fundamental information offers attractive entry levels for the two counters.

In mid-January, the first ever green bond (a corporate paper issued by Acorn Holdings) was listed at the NSE in what is a test of the revival of the corporate bond market in Kenya which has been grappling with investor confidence challenges after the fall of two corporate bonds by Chase Bank and Imperial Bank.

With the investment market conditions indicating signs of improvement with the debut listing of the Acorn Holdings corporate paper, we anticipate additional listings at the NSE in equities or corporate bond. 

For the first time in Kenya’s public investment markets, investors are able to protect the value of their stock holdings from a downturn in the market through the recently formalised derivatives market. 

While these are complex securities, the instruments basically serve a critical purpose of protecting an investment in stocks from bearish market conditions by realizing a profit when markets are tumbling (the practice of hedging).

As a hedging tool, they can be thought of as an insurance policy against market risks. Additionally, risk aggressive investors can take short-term market positions to realize quick profits from market movements from their trades (the practice of speculation).

Foreign investor inflow will continue supporting our market backed by expectations of higher earnings growth and better priced equities market. It is on this backdrop that the securities market make for appropriately priced opportunities for investment and returns for investors.

—The writer is a research analyst at Genghis Capital

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