How investors can navigate the now normal during 2021

Coming from a tumultuous year, which was ravaged by the Covid-19 scourge, the biggest question is, how do we navigate what has become the now normal in 2021?

To aptly answer the question, it is imperative that we take stock of the macro-economic environment for the year.

Although the pandemic is, by and large a health issue, it has had a lingering effect on the economy. Nonetheless, the prospects of large-scale vaccination is seen as a forerunner to a total overhaul of containment measures currently in place.

This has injected (no pun intended) a doze of optimism in growth prospects in the year.

That said, we are alive to the fact that the knock-on impact of the pandemic may have a lag to completely dissipate.

Unemployment levels, last reported at 7.4 per cent, may ease back to pre-pandemic average of 5.3 per cent with a lag.

This will be acute in those sectors bearing the most brunt of the pandemic such as tourism.

The government further intends to dole out post Covid-19 economic recovery strategy to turbocharge growth. That further implies additional pressure on Treasury spending over the next two years. We note that this additional cash use will be partly funded by revenue arising from the tax changes at the start of the year. That said, we see execution risks in implementing the strategy.

Related to this, we flag debt pressures will be a key theme in the year. Although Kenya last week announced its participating in the debt service suspension initiative, the ‘savings’ in the order of Sh32.9 billion is roughly 10 per cent of total external debt costs in the financial year.

This signals that debt sustainability will remain a key issue with debt service costs as a per centage of ordinary revenue already at elevated levels.

Both globally and locally, we are in an era of increased economic uncertainty, financial markets volatility and heightened trade tensions.

However, amid uncertainty and risk aversion, financial investments offer attractive opportunity for investors looking at the longer term picture.

Following the dip in 2020, the equities market is trading at ever attractive multiples, with an expected recovery albeit on a cautious tone.

The Nairobi All Share Index (NASI) dropped 8.7 per cent to close at 152.11 as investors took off from risky financial assets during 2020.

With the sell-off last year across most of the counters, entry points for stocks are now attractive especially for large and fundamentally strong counters trading at below multi-year historical averages.

Erosion of earnings over last year is likely to reverse in the medium-term from the depths of the economic recession of mid last year and their strong fundamentals will only make the recovery process faster.

The banking sector had significant sell-off, evidently from their expected hit on their bottom lines. It is likely that almost all the listed banks will issue profit warnings.

This short-term pain (and likely significant cuts in dividends) should be flipped and looked at as an opportunity for long-term investment gains at current discounted prices of the large banks.

KCB tops our list in the banking sector based on its price-to-book multiple. We also note that KCB and Equity Group doubled down on investments into new growth areas with subsidiaries in Rwanda.

In the non-financial segment, EABL and KenGen have in recent years invested significantly in capacity additions, which should start contributing to revenue.

Their discounted valuations and the fact that markets continue mispricing these fundamentals makes them attractive value stocks.

Against uncertainty and likelihood of volatility, risk aggressive investors can position and/protect the value of their investments through the derivatives market (NSE Next).

These securities act as both a speculative (for short-term trades) and as an insurance policy on current investment portfolio.

Foreign investor flows are expected to be cautious attracted by the discounted securities but concerned by economic and business recovery and likely heightened political activities with a referendum in 2021 and general election in 2022.

Flows are expected to be relatively skewed towards technology stocks and others with clearer post-pandemic recovery in financial performance backed by their currently discounted valuations.

Muriuki, is a research analyst at Genghis Capital