Citigroup says Kenyan stock market on strong growth path

Kenya’s capital market growth prospects remain bullish compared to other frontier markets due to a stable currency and a reducing current account deficit, a new report by Citigroup’s global investment banking arm says.

Basing the analysis of the market on the MSCI Index that compares performance of 23 countries classified as having frontier markets, Citi says that Kenya should continue to deliver strong earnings growth, although expensive valuations on stocks in the financial sector remain a concern.

Citi Research says in its Frontier Market in 2015 report that Kenya’s historically high current account deficit (CAD)which came down with the recent rebasing of the GDP will likely wane further if the country carries out a proposed revision of the balance of payments statistics.

“These revisions should reduce Kenya’s previous headline CAD of 9.3 per cent of GDP (2014 estimate) to as little as six per cent of GDP. Coupled with the steady building of foreign exchange reserves, investors should be less concerned about currency volatility,” said Citi.

The MSCI Index Kenyan component tracks five of the biggest counters in the Kenyan market namely Safaricom, EABL, Equity Bank, KCB and Cooperative Bank, with international investors relying on the index performance when picking their investment option in the local market.

The report notes that Kenyan equities have been outperforming the general frontier market again this year.

“The index is now the best in frontier markets over the past three years, up 180 per cent. Much of this has been driven by earnings growth, although the market has also re-rated to trade at 15.6 times trailing PE—well above the index average of 11.9 times,” said Citi.

READ: Citigroup says Kenyan bank stocks overvalued

Citi cautions, however, that Kenya needs to avoid a rapid easing of monetary policy, especially in cutting rates to support the economic pick-up given that inflation remains at the top end of the 2.5 to 7.5 per cent target.

This could lead to a faster depreciation of the shilling beyond the comfort of the regulator CBK.

For the oil-dependent frontier economies such as Nigeria, Kuwait and Kazakhstan, Citi says that the falling oil prices will present a challenge in 2015. On the other hand, such price movement will be good news for major oil importers such as Kenya, Pakistan, Morocco and Romania.

Citi says however that the fall in prices so far seems to have been, to a large degree, priced into frontier markets equities, which are still expected to outperform emerging markets in 2015.

Kenya is classified alongside Oman, Vietnam and Romania as the bright spots in the frontier markets for investors, in contrast with Bangladesh, Lebanon, Jordan and Argentina which are deemed expensive, risky or fundamentally weak.

Nigeria is deemed cheap in terms of entry, but there remain concerns over its currency performance and its upcoming elections.