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During the first half of the year the economy contracted by 0.4% due to the 5.7% contraction in Q2’2020 down from a growth of 5.3% recorded in a similar period in 2019.

The contraction was largely driven by the 83.3% decline in the accommodation and food sector following the closure of most facilities and also the reduction in tourist arrivals into the country.

Some of the other sectors like agriculture helped cushion the economy from further decline.  This is the first contraction since the third quarter of 2001 when the country recorded a 2.5% contraction.

Considering the recent easing of some of the restrictions and reopening of some of the sectors we expect the economy to slightly rebound and this is already reflected by the improvement in PMI where we’ve seen readings as high as 59.1 in October 2020, pointing to an improvement in the Kenya private sector outlook. 

The IMF October Report: A long and difficult ascent also expects the Kenyan Economy to grow by 1.0% an improvement from the June projections of a (1.0%) growth but the economy should recover to grow at 4.7% in 2021. Notably, H1’2020 average GDP growth now stands at 1.0%. For more information, see our Q2’2020 GDP Note.


FIXED INCOME REVIEW: During the year 2020, T-bills auction recorded an oversubscription with the average subscription rate coming in at 130.3% compared to an average of 118.7% in 2019. The yields on the 91-day, 182-day and 364-day T-bills declined to 6.9%, 7.4% and 8.3% in 2020 from 7.2%, 8.2% and 9.8% at the end of 2019, respectively.

This is mainly attributed to the Central Bank of Kenya’s (CBK’s) efforts to keep rates low by rejecting expensive bids in the auction market as well as increased demand as Banks shied away from lending to the public due to the increased credit risk. Primary T-bond auctions in 2020 were oversubscribed with the subscription rate averaging 130.6%, which was higher than 109.7% average subscription rate in 2019. The market maintained a bias towards the medium-term bonds mainly driven by the perception that risks may not be adequately priced on the longer end of the yield curve.

Rates in the fixed income market have remained relatively stable due to the high liquidity in the money markets, coupled with the discipline by the Central Bank as they reject expensive bids. The government is 11.1% ahead of its prorated borrowing target of Kshs 243.1 bn having borrowed Kshs 270.1 bn.

In our view, due to the current subdued economic performance brought about by the effects of the COVID-19 pandemic, the government will record a shortfall in revenue collection with the target having been set at Kshs 1.9 tn for FY’2020/2021 thus leading to a larger budget deficit than the projected 7.5% of GDP, ultimately creating uncertainty in the interest rate environment as additional borrowing from the domestic market may be required to plug the deficit. Owing to this uncertain environment, our view is that investors should be biased towards short-term to medium-term fixed income securities to reduce duration risk.

EQUITIES REVIEW: During the year, the Kenyan equities market was on a downward trajectory, with NASI, NSE 25, and NSE 20 declining by 8.6%, 16.7%, and 29.6%, respectively. Large-cap decliners during the year included Bamburi, Equity Group, Diamond Trust Bank, KCB Group, and Standard Chartered which declined by 52.7%, 31.7%, 31.2%, 29.4%, and 28.8%, respectively. Key to note, Safaricom recorded gains of 8.7% YTD as they benefited from the working from home environment and increased digitization trends. Safaricom continues to be a key part of Kenyan equities portfolios, accounting for 59.6% of Nairobi Stock Exchange (NSE’s) market capitalization and has dominated on both the market turnover and in determining the direction of the market given its weight and liquidity in the Nairobi Securities Exchange.

“We are “Neutral” on the Equities markets in the short term but “Bullish” in the medium to long term. We expect the recent discovery of a new strain of COVID-19 coupled with the introduction of strict lockdown measures in major economies to continue dampening the economic outlook. However, we believe there exist pockets of value in the market, with a bias on financial services stocks given the resilience exhibited in the sector. The sector is currently trading at historically cheaper valuations and as such, presents attractive opportunities for investors.” said Ann Wacera, Investment Analyst at Cytonn.

For more details see the report.

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