The post-Brexit Kenyan stock market decline has opened up opportunities for new investors to buy into equities on the cheap as multiples dip below historical averages, research analysts say.
In the two weeks since the UK voted to leave the EU, the NSE 20 Share Index has declined by 3.4 per cent or by 128 points to 3616 points, continuing the already bearish sentiment that has the year to date decline at 10.5 per cent.
In a research note on the implication of Brexit on Kenyan market, Dyer & Blair head of research Linet Muriungi says the current market trading multiples present a good entry point into the market, especially with the shilling exchange rate and interest rates remaining stable.
“Given that the outlook of the local currency and interest rates point at stability on both fronts, current market trading multiples present a good entry point, as the market appears to be relatively cheap, all factors considered,” said Ms Muriungi.
“The NSE’s market cap-weighted price-to-earnings and price-to-book ratios stand at 13 times and 4.9 times, down 28.4 per cent and 27.3 per cent year on year respectively, while offering a dividend yield and return on equity of 4.5 per cent and 32.5 per cent, up two and 16 basis points year-on-year respectively.”
Bank and insurance stocks have seen their valuations drop this year, and with the lenders expected to keep reporting good financial results, their multiples are likely to look even more attractive going forward.
In the second half of the year, Ms Muriungi said, the market will be driven more by investor sentiment rather than fundamentals as investors employ a wait-and-see approach to asset allocation, until the full implications of the UK exit from the European Union are clear.
The market is likely to keep a keen watch on the reaction of foreign investors over coming months on signs whether they will sustain their selling activity of the past three weeks as they seek safer options in advanced markets.
Foreign investors assumed a net selling position over the first two weeks of the post-Brexit period, accounting for 77.7 per cent of market purchases and 82.4 per cent of market sales.
This seems to be in line with an analysis by ratings agency Moody’s that says Kenya is among African countries at the risk of capital outflows in the aftermath of Brexit.
Due to a more developed financial market, the country gets a significantly larger amount of inflows into the capital markets than other states in the region.