During the last two years, global frontier markets have faced significant challenges on account of a confluence of major economic developments. The challenges, a reflection of the heavy macroeconomic pressure, were characterised by the tightening of the monetary policy environment, a sharp escalation of inflationary pressure and adjustment in foreign exchange across various markets.
The headwinds are majorly caused and compounded by escalating geopolitical tensions in certain regions, heightened investor uncertainty and risk aversion, dampening investor sentiment and reducing capital inflows into frontier markets.
Despite the poor performance posted experts estimate that 2024 is the year frontier markets will experience a strong resurgence. With strong evidence and clear indicative signs, I believe this year will mark a turning point for frontier markets around the world driven by the following reasons;
Interest rate environment - monetary easing across the world
This year is likely to mark the beginning of the end of monetary tightening by global central banks. Between 2022 and 2023, the United States Federal Reserve Bank raised interest rates a notable 11 consecutive times.
Tightening global monetary conditions, particularly in response to rising inflationary pressures in major economies, led to capital flight from frontier markets as they increased the attractiveness of alternative investment asset classes, prompting investors to reallocate capital away from frontier markets in search of higher yields with lower risk profiles.
The rate hikes have had an impact on inflation and growth with the International Monetary Fund noting that inflation is falling faster than expected in most regions amid restrictive monetary policy.
Global headline inflation is expected to fall to 5.8 percent in 2024 and 4.4 percent in 2025, with next year's forecast having been revised down. The US inflation has declined from nine percent to 3.4 percent.
Now that inflation has eased, we expect the Fed and other central banks to hold rates steady before cutting them later in 2024. Improved inflation readings in the US and the European Union is likely to prompt a relief rally in frontier market assets.
We are expecting that favourable monetary policy will drive increased flows in frontier markets including Kenya in 2024.
Rebalancing of the macro-economic environment in Kenya
Kenya has prioritised economic reforms aimed at propping medium to long-term growth. The reforms by the government are gradually putting the economy back on a stable and sustainable growth footing.
The timely repayment of part of the $2 billion Eurobond played a critical role in eliminating default risk and has inspired confidence among domestic and international investors reflected by recent increased activity and demand of various assets listed on the NSE.
The reforms have also seen the Kenyan shilling register strong gains against major currencies and stabilise. A more stable currency environment in Kenya will encourage private capital flows and increase the amounts of investments in the Kenyan stock market.
Attractive valuations in frontier markets
Despite the challenges faced over the last two years, frontier markets continue to offer compelling long-term investment opportunities. Many are trading at an extremely high discount. As at January 2024, the NSE traded at an average price-earnings ratio of 6.94 against the frontier average of 11.06.
Attractive valuations of listed securities in our market offer domestic and global investors a cheap entry point and high equity returns to frontier equity investors.
To further enhance the appeal and growth of our stock market, I continue to appeal to the government to accelerate the privatisation of State-owned Enterprises. The sale of large-cap companies on the NSE will mark a decisive point in broadening Kenya’s appeal as a premium investment destination for international investors.
It will also play a critical role in enhancing the depth of our capital markets as envisaged in the country’s medium-term economic reforms.
I also invite Kenyans to take advantage of the discounted prices of various stocks and invest on the NSE. The prices provide Kenyans with a cheap entry point that will provide significant room for capital appreciation.
I urge investors to prioritise frontier markets and the Kenyan equity market in 2024 due to the potential for substantial returns.
The writer is the chairman of the Nairobi Securities Exchange.
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