African stocks have fallen off many speculators’ radar screens.
An economic slowdown in China, a sharp drop in commodity prices, unorthodox economic policies in Nigeria, and questionable political leadership in South Africa, have scared off all but the most patient investors.
But there are bright spots in the gloom that shrouds the continent’s stock markets, and I believe the Nairobi Securities Exchange (NSE) will soon be one of them.
Here are a few reasons to be bullish.
- Kenya’s electricity output is at an all-time high, which makes it easier for businesses to operate and expand.
- Oil prices are at multi-year lows, which makes it cheaper to transport people and goods.
- Strong tea sales and a recovering tourism industry have taken downward pressure off the shilling, which helps to contain the cost of imported materials and products.
- Interest rates are high but appear relatively stable.
The factors above are why the IMF predicts Kenya’s GDP will expand by 6.0% this year – making it one of the fastest-growing economies in Africa.
But, for me, the most compelling reason to invest on the NSE now comes down to value.
Quite simply, Kenyan stocks are cheaper today than they have been in years.
Let’s take a look at the recent returns of Kenya’s ten largest stocks.
|2. East African Breweries||-16.7%|
|3. Equity Bank||-26.2%|
|4. KCB Bank||-35.0%|
|5. Co-operative Bank||-14.7%|
|6. BAT Kenya||-11.1%|
|7. Barclays Bank Kenya||-24.2%|
|8. Bamburi Cement||14.6%|
|9. Standard Chartered Kenya||-43.1%|
|10. Diamond Trust Bank||-22.6%|
|* 52-week return as of 1 February 2016|
It’s a pretty dismal looking set of returns, isn’t it? Safaricom and Bamburi were the only shares to increase in value, and most of the others dropped by more than 20%.
But in spite of the market’s pessimism, these companies continued to go about their business unfazed, quietly reaping profits and creating value for their shareholders.
As a result, investors now have the opportunity to pick up a shilling’s worth of earnings at price tags not seen in several years.
The table below displays the current price-to-earnings (P/E) ratio for each of the NSE’s ten largest companies. It also shows how long it has been since each stock has traded at a similar valuation.
|Company||P/E Ratio (ttm)||Years since similar Valuation*|
|1. Safaricom||17.5||3 years|
|2. East African Breweries||21.5||4 years|
|3. Equity Bank||8.0||4 years|
|4. KCB Bank||6.4||more than 5 years|
|5. Co-operative Bank||7.8||2 years|
|6. BAT Kenya||18.0||2 years|
|7. Barclays Bank Kenya||7.7||more than 5 years|
|8. Bamburi Cement||12.9||4 years|
|9. Standard Chartered Kenya||7.3||more than 5 years|
|10. Diamond Trust Bank||8.4||3 years|
|* calculated as of 1 Feb for each year|
As you can see, the market is pricing Kenya’s blue chip firms at a significant discount to their historic averages. In some cases, it’s been more than five years since their P/E ratios were this low.
With valuations this low and the economic forecast this bright, Kenya investors should be very pleased with their returns five years from now.
[Disclosure: At date of post, I (Ryan) held a beneficial interest in shares of KCB Bank.]
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