Bloomberg News

Kenya Stocks Lure Templeton to World’s Third-Best Rally

June 28, 2012

Kenyan stocks, the worst performers in sub-Saharan Africa last year, are this year’s third-best worldwide as the central bank reins in inflation and spurs a rally in the currency.

The Nairobi Stock Exchange All-Share Index (NSEASI) has surged 24 percent this year, the most after Venezuelan and Egyptian equities and paring 34 percent losses in 2011, according to data compiled by Bloomberg. While valuations have climbed from an all-time low of 5.6 times earnings in March, the ratio of 6.4 is 42 percent below the average for the index since 2008.

Shares are rebounding after record-high interest rates cut inflation to 12.2 percent in May from 19.7 percent in November and sent the shilling to the biggest rally globally since October. Kenya’s $12.3 billion stock market will probably extend gains as economic growth accelerates, said Standard Bank Group Ltd., Africa’s largest lender.

“Companies are doing extremely well on the back of the current stability,” Carlos von Hardenberg, an emerging and frontier markets money manager at Franklin Templeton Investments, which oversees about $684 billion including Kenyan stocks, said in a June 14 interview in London. “We are quite confident at this point in time.”

Kenya’s benchmark gauge trades at a 41 percent discount to the MSCI Emerging Markets Index, compared with a record 53 percent gap on March 23.

The gauge for East Africa’s largest economy was unchanged at 67.62 as of 11:29 a.m. in Nairobi.

Earnings Growth

East African Breweries Ltd. (EABL), the local unit of Diageo Plc (DGE) and the country’s biggest company by market value, which has gained 32 percent this year, will see net income probably jump 41 percent in the financial year ending this month, after a 17 percent increase in the first half, according to the mean of six estimates in a Bloomberg survey of analysts. The brewer, based in the capital Nairobi, value has climbed to 24 times earnings from 19 times at the start of January.

Kenya Commercial Bank Ltd. (KNCB), the nation’s biggest lender by assets, has rallied 36 percent in 2012. Profit in the first quarter increased 37 percent as income from the interest received on customer loans rose 35 percent, the company said April 26. The bank fell to a record low value of 4.5 times earnings in January and is currently trading at 6.2 times.

Kenya’s five biggest companies by market value will increase profits by 13 percent on average during the 2013 fiscal year, according to estimates from 26 analysts compiled by Bloomberg. Kenya Commercial Bank, based in Nairobi, and Safaricom Ltd. (SAFCOM), East Africa’s biggest mobile-phone company, will lead the gains with earnings growth of about 18 percent, the projections show.

Political Unrest

Concern the rally has gone too far and that presidential elections next March may stir political unrest has made T. Rowe Price Group Inc. more cautious.

“We’re going to get booms and busts in sub-Sarahan Africa,” Oliver Bell, a fund manager at T. Rowe Price in London, said at a June 12 presentation in the British capital. “I suspect we’re in the latter stages of a boom in Kenya and we need to go through a correction in order for it to become attractive.”

Elections in December 2007 prompted allegations of vote- rigging by supporters of then-opposition leader Raila Odinga and two months of violence that left more than 1,000 people dead.

“This is the first election since the last one that went into bloodshed,” said Bell, whose Africa & Middle East Fund (TRPMEAA) has outperformed 80 percent of peers this year according to data compiled by Bloomberg with 5 percent returns. “We’d like to get comfortable that we can pass through the election without that happening.”

Stocks Tumble

The shilling tumbled as much as 16 percent in the month after the 2007 election and the stock index dropped as much as 14 percent. Clashes subsided in February as incumbent President Mwai Kibaki, a member of the most populous Kikuyu ethnic group, signed a power-sharing accord with Odinga, an ethnic Luo who was named prime minister.

Kenya enacted a new constitution in 2010 that devolved some power from the presidency to regional legislators to curb ethnic tension.

“We tried to carry out reforms to ensure we don’t repeat what happened in this country in 2008,” said Odinga at an aid donor conference in Nairobi on June 19.

Kenya’s economy is gaining strength, with growth probably accelerating to 5 percent this year from 4.4 percent, according to World Bank estimates on June 18. Inflation eased for a sixth consecutive month in May to a 13-month low of 12.2 percent and will slow to less than 10 percent in the next few months, Finance Minister Robinson Githae said in his June 14 budget statement.

World’s Best Currency

The shilling has advanced 19 percent against the dollar since October, the most among more than 170 currencies worldwide. Price swings in the currency have fallen to the lowest level since 2007, with a gauge of historical volatility dropping to 5.7 percent on June 26 from this year’s peak of 15 percent in January, according to data compiled by Blooomberg.

Reduced currency swings and increased rain boosting food production have helped ease consumer price pressures, Githae said. Agriculture accounts for a quarter of Kenya’s output, according to government data.

Slowing inflation and a stable currency will give policy makers room to cut borrowing costs as soon as next quarter, Absa Capital, a Johannesburg-based unit of Barclays Plc, said in an e-mailed note on June 6. Rates may fall at the next meeting on July 10, Giulia Pellegrini, an analyst at JPMorgan Chase & Co., said June 26 by phone from Johannesburg.

Central bank Governor Njuguna Ndung’u has kept borrowing costs unchanged at a record 18 percent this year, following six increases from an all-time low of 5.75 percent in March 2011.

“Lower rates will, on average, be positive for companies as well as the economy,” said Kojo Amoo-Gottfried, an analyst at London-based FM Capital Partners Ltd., which manages about $1.5 billion.

To contact the reporters on this story: Eric Ombok in Nairobi at eombok@bloomberg.net; Chris Kay in Abuja at ckay5@bloomberg.net; Michael Patterson in London at mpatterson10@bloomberg.net

To contact the editor responsible for this story: Gavin Serkin at gserkin@bloomberg.net


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