Kenyan stocks have been rated as best options for investors among the frontier markets in 2019, despite growing concerns about the debt dynamics that can be affected by potential higher global interest rates.
The forecast has been attributed to Kenya’s reasonable economic growth, and acceleration in GDP growth, pushing expected earnings growth to above 15 per cent.
In its Frontier Markets in 2019 research, CITI points out that it expects Kenya to log a positive, if not stellar return this year.
“Kenya looks very cheap, especially relative to its history, while other factors are mostly in line with the rest of FM. Offsetting this are weak recent price momentum and a tightening in the interbank rate in recent months,” says the research by Andrew Howell, CFAAC and Vineet K Kheria.
The Kenyan economy is on an upswing as rising business confidence, higher agricultural sector growth and rising tourist arrivals mean the official forecasts of real GDP growth of above 6 per cent in the coming year now look credible.
Despite this, after a strong 2017, the Kenyan equity market slumped lower last year, as previous high-flyer Safaricom came under pressure along with other benchmark heavyweights, amid low trading volumes.
The strength of the Kenyan shilling seems to be deterring international investors; however robust FX reserves and strong capital flows into Kenya suggest that there is no imminent threat of devaluation, says CITI.
Last year, despite long-term bullish optimism projected for frontier markets due to an environment of maturing global growth, rising global equities and firm commodity prices, the annual performance tanked, with MSCI FM USD index declining by 16.2 per cent, including dividends, trailing all other regional indices.
The corresponding result was disappointing earnings growth. The FM EPS growth forecast has fallen to 5.8 per cent, a big cry from the 2018 projected EPS growth of 13.2 per cent.
This represented FM’s worst annual performance since 2011, and its third consecutive year trailing the MSCI EM (Emerging Markets) index.
FM index is looking cheaper in 2019 than it has in some time, in contrast with a year ago when valuations were elevated.
“The frontier market has seen forward PEs come down to 10.7x, well below the 14x in mid-2017 and about in-line with the 5-year average,” says CITI.
Other top attractive countries supported by CITI’s ranking model in the frontier markets are Egypt, Romania, Argentina and Georgia while Kazakhstan, Vietnam and Morocco are the least attractive.
Market outflows continues to threaten the FM performance, exacerbated by stubbornly low trading liquidity in many stock. This constrains fund capacity and is acting as a deterrent to investors who wants to be involved in frontier markets.