Risk asset prices rebounded globally with the benchmark MSCI (Morgan Stanley Composite Index) World trimming first quarter losses to -6.6% at the end of the first half of the year. The steady state in the global financial markets has been anchored on the accommodative policies in the developed economies and easing of containment measures in some pockets across the globe.
Some equity markets such as in the emerging world have recouped back the first quarter losses while frontier markets are trailing 18.1% from the start of the year levels. US Dow Jones Industrial Average benchmark that tracks the 30 largest listed companies, posted its hitherto best quarterly performance in 33 years with a return of 17.8% in the quarter ending June 2020.
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Closer home, revised estimates have struck a bearish tone as per our second quarter outlook. The IMF has further slashed Kenya’s 2020 growth projections to -0.3% (1.0% in its April review) and we are staring at the first contraction in 30 years. We expect a contraction of 1.9% in the third quarter ending September. To further accelerate economic activities, the government in early July relaxed some of the earlier imposed cessation of movement of people in select counties.
The combined effect of the Covid-19 shock and the containment measures resulted in a slowdown in business activity in the second quarter. Furthermore, cross-border tensions with neighbouring Tanzania and Uganda simmered during the last quarter which could derail a synchronized economic re-opening with one of Kenya’s largest trading bloc—the East African Community that accounts for roughly 20% of Kenya’s external trade.
The highly uncertain environment posed by the pandemic on businesses and consumers is likely to cloud the financial markets’ performance in the third quarter. The first half earnings begins in July and is expected to give a clearer picture of the subsequent quarters as we emerge from the hitherto worst economic period (second quarter) under the pandemic. Last quarter, we assessed that the market was mostly in the deer-in-the-headlights stance with prices of the key listed counters locked within a tight trading range (+/- 5.0% levels). Against the backdrop of results announcements, we expect increased volatility especially in the banking stocks.
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The sector recorded deep loan restructuring in the mid-March to end-June period in the order of KES 679.9Bn (23.4% of sector loan portfolio) and is expected to report heightened credit loss provisioning levels.
With the domestic equity market at multi-decade low levels, we see attractive entry points in some of the best picks. With the expected volatility bouts in the market as listed counters release half-year results, investors should position for the strong and fundamentally sound counters currently at or near 52-week low levels.
Coupled with the defensive strategies through allocation to risk-free assets, we are especially biased towards stocks with fortress balance sheets to endure the pandemic without reliance on significant leverage and to accelerate growth in the post-Covid era. As such, we see bargain entry levels on KCB Group, East African Breweries Limited, Co-operative Bank, KenGen and Safaricom.
