The Kenyan economy has experienced a slowdown in 2017, with momentum affected by various headwinds. The Treasury’s GDP growth expectation for the year has been revised downwards to 5.0% from 5.8%. Prolonged drought conditions in the country have affected food prices resulting in a spike in inflation.
Private Sector Slowdown
Slowdown of Kenya’s Private Sector Continues amid Political Uncertainty
The political uncertainty observed in the country in the build up to the 2017 election has resulted in a slowdown in the Kenyan private sector. This intensified during the month of September, resulting in contractions in output and new orders. In response to lower output requirements, firms decreased their payroll numbers. In addition, firms continued to face increases in input costs at the end of the third quarter.
According to the Stanbic Bank Kenya Purchasing Managers’ Index™ (PMI™), the seasonally adjusted PMI dipped to a new survey-record low of 40.9 in September from 42.0 in August and was consistent with a sharp deterioration in the health of the private sector. The headline PMI has now recorded below the 50.0 no-change mark for five consecutive months, the longest period of decline observed in the survey’s history. Readings above 50.0 signal an improvement in business conditions from the previous month, while readings below 50.0 show a deterioration.
 Credit Growth
Fiscal Policy & Asset Quality Keep Credit Growth Subdued
Private sector credit growth has continued to slow down in the year, reflective of both the economic downturn as well as uncertainty over elections. The uncertainty is likely to have dampened both demand and supply of credit as business entities put expansion plans on hold and banks become more reluctant to lend in light of a deteriorating asset quality and risk pricing constraints brought on by interest rate caps. The industry gross non-performing loan ratio deteriorated to 10.7% in August from 9.2% at the end of 2016.
Kenya Credit Rating Downgrade
Sovereign Rating Up for Review due to Deficits and Liquidity Constraints
Moody’s Investors Service placed the B1 long-term issuer rating of the Government of Kenya on review for downgrade. This was prompted by persistent, large deficits and high borrowing costs which continue to increase government debt levels, increased liquidity risk in light of progressively more financing needs as well as uncertainty over the future direction of economic and fiscal policy, due to evolving political dynamics.
A rating downgrade would make it more expensive for the Kenyan government to access credit in international markets. This would likely result in higher demand for deomestic credit, further crowding out the private sector.
Domestic Borrowing
Domestic Borrowing Remains behind Target 4 Months into FY 2017/2018
Based on a net domestic borrowing target for FY2017/18 of KES 410.2bn, approximately KES c. 383.0bn in the four months of FY2017/18 has been raised against maturities of c. KES 367.0bn resulting in a new borrowing of c. KES 16.0bn in the fiscal year indicating that Treasury has raised 4% of their budgeted target.
Government borrowing has been affected by the prolonged electioneering period as well as high liquidity levels which have supported the stability of short-term interest rates. Inflation has continued to decline, coming in at 5.7% in October, the lowest reading in 17 months. For these reasons, interest rates are likely to remain at current levels in the near term.
EFFECTS OF POLITICAL UNCERTAINTY ON THE EQUITIES MARKET
Global Equities Performance
Global Equities have had sustained positive performance in the year. Some of the key drivers of these returns has been the gradual improvement in underlying global economic indicators such as the ongoing recovery in the US economy, with employment and housing data remaining robust; the continued positive impact of monetary easing in Europe as well as the contribution of expansionary policies in China and a recovery in global  commodity and energy prices.
Politics are expected to continue impacting market returns for the remainder of 2017, albeit for varied reasons. In the US, Donald Trump’s approach to protectionism, immigration, and tax reforms are likely to sustain the equities rally seen so far in the year. In China, policy measures have resulted in a restructuring of unproductive industries and a gradual re-balancing of the very large stock of debt.
Global Equities Performance Year-to-Date
Kenya Equities Performance
 After two years of negative returns, the Nairobi Securities Exchange has rebounded significantly in 2017, with the All Share Index (NSEASI) recording a gain of 23.0% year-to-date. From a low of 119.62 points in March, the NSEASI hit a high of 173.47 points in August 2017, representing a gain of 45.0%. There was increased volatility and price declines as the market responded to the Supreme Court nullification of the August 2017 election, with the market losing 5.5% on the day of the announcement. The NSEASI declined by 10.7% in the 2 month period between the nullification of the Presidential election and the repeat election in October as a result of heightened levels of political uncertainty which resulted in investors reverting to the previously held wait and see stance. The market has since gained 3.7% since the repeat Presidential election was held indicating renewed investor confidence in the equities market.
Valuations at the NSE remain below the 5 year historical average, with the NSE All Share Index (NSEASI) trading at 12.51x price-to-earnings (P/E) against a historical average of 13.51x. This is compared to a high of 20.13x in August 2010. This indicates that the market remains undervalued and still presents an opportunity for investors to enter at attractive price points.
NSE All Share Index 5 Year Historical P/E
Outlook
Investor sentiment has improved significantly since the begining of the year swinging from cautious, to optimistic despite heightened political uncertainty in the third quarter. Despite the significant rally observed year to date in the equities market, there is opportunity for further upside. There still remains a level of uncertainty on the political front as petitions regarding the validity of the repeat presidential election are presented to the Supreme Court which may further extend the election period. We however hold the opinion that the equities market is likely to rally in the event that the outcome of the repeat election is upheld.
About: Britam Asset Managers (Kenya) Limited is a subsidiary company of Britam Holdings Ltd. The company provides asset management and investment services to its customers through a wide range of investment products and services, such as: Unit Trust/Mutual Funds, Wealth Management, Property, and Discretionary Portfolio Management. The company is licensed as a Fund Manager by the Capital Markets Authority (CMA) and the Retirement Benefits Authority (RBA)
The company periodically conducts research and develops reports touching on the various sectors of the economy. The in-depth and analytical reports can be used as a basis to develop newsy and analytical stories on the various sectors, based on the research.