This material must be read in conjunction with the Disclosure Statement.
A Presentation to: Business and Financial Journalists
JONATHAN STICHBURY Managing Director & CEO PineBridge Investments, Nairobi
Nicholas Malaki, CFA Senior Investment Manager PineBridge Investments, Nairobi
Joel Warutere Investment Manager PineBridge Investments, Nairobi Presented By: January, 2014 Q4 2013 Investment Briefing 1 Agenda I. Introduction - Jonathan Stichbury (Managing Director and CEO)
II. Macro- Economic Outlook - Joel Warutere (Investment Manager)
III. Financial Markets Review Nicholas Malaki (Senior Investment Manager)
Macro-Economic Outlook 3 Kenyan economy taking off Source: Kenya National Bureau of Statistics, PineBridge Forecasts Increased public spending, especially on infrastructure will support growth.
Year 2014 growth will be driven by credit expansion and investment spending by both the Central and County Governments. 5.8% 4.4% 4.6% 4.8% 5.8% 2010 2011 2012 2013E 2014E Kenya GDP growth 4 GDP Growth & Outlook Joel Warutere, Investment Manager Kenyan Economic Take-off
Economic growth accelerated in 2013 as macroeconomic conditions continued to improve. Kenyas economy entered the third year of relative stability, with single-digit inflation and a stabilized exchange rate.
We estimate that the economy grew by 4.8% in 2013 an improvement from the 4.6% achieved in 2012. This is the highest growth rate since 2010.
That said the we still feel that the country has continued to perform below its potential, and is capable of breaking the 7% GDP growth threshold in the next three years.
The Kenyan economy has the potential for a massive take off in terms of economic growth in 2014 and we estimate a projected economic growth rate of 5.8%.
Kenyas overall macroeconomic conditions are favourable, growth is picking up, inflation remains low, the fiscal deficit remains manageable and the exchange rate remains stable
Kenya opened the year 2014 from a strong economic position with inflationary pressures subdued, underpinned by stable energy prices, moderation in food inflation, a stable exchange rate, and supportive monetary. 5 Kenyas Key Trading Partners in Africa 67 46 21 19 18 18 16 5 Uganda Tanzania Egypt Somalia Congo South Sudan Rwanda Burundi Total Exports (Kshs Billions) Direct impact of Southern Sudans turmoil on Kenyas exports are minimal. Impact to be felt mainly on services - financial Source: Kenya National Bureau of Statistics Economic Survey 2013 6 Kenyas Key Trading Partners Joel Warutere, Investment Manager
Uganda and Tanzania continue to occupy the top spots as destination for Kenyan Exports..
The questions begs what will be the impact of the Turmoil in South Sudan and the continued political stalemate in Egypt on Kenya in economic terms?
a) Sudans contribution albeit having grown in leaps and bounds in the recent years is however not significant enough to impact the Kenyan economy. However if any the largest impact would be felt on the services front and more specifically financial services.
b) Egypts turmoil and its impact, having been running for a while, we feel that is already factored in and managed so far. Any improvement on the political front and by extension the economic resumption will only serve to enhance the performance locally.
7 Inflation to soar in 2014 Source: Kenya National Bureau of Statistics, PineBridge Forecasts Cost of living expected to rise in 2H 2014 and affect low income earners more. 10.09% 15.52% 11.08% 0.00% 2.00% 4.00% 6.00% 8.00% 10.00% 12.00% 14.00% 16.00% Dec-12 Jun-13 Dec-13 Jun-14 Dec-14 OVERALL INFLATION FOOD & NON-ALCOHOLIC BEVERAGES HOUSING, WATER, GAS & FUELS 8 Inflation to Soar in 2014 Joel Warutere, Investment Manager Inflation in 2013 remained modest underpinned by relatively stable energy prices and moderation in food inflation, albeit expectation that prices would pick up in 2013.
Looking forward we expect that the cost of living will rise in the first half of 2014.
This will be driven by rising food prices, annual hike in cost of education and the continued implementation of the VAT bill and last but not least the base effect especially since the inflation levels in the first half of 2013 were low single digit.
Any rise in the cost of living normally impacts the lower income group, who are the majority more intensely than any other class.
Since July 2013, there have been mild increases in inflation, as a result of two factors. a) First the implementation of the Value-Added Tax (VAT) Act in September 2013, leading to increases in prices of some essential food items. b) Secondly, food prices have been increasing faster than other commodities, driving overall inflation higher.
Looking further forward, key developments that may impact the trend inflation, will most certainly be in the energy sector with the coming online of the Geothermal power plants Olkaria I & IV in July 2014, that are expected to further reduce the cost of power.
9 Kenya Shilling expected to trade 85-89 to US dollar Source: Bloomberg
Eurobond issuance and IMF support to play a key role in the Kenya Shilling movement
10 Currency The Kenya Shilling Performance Joel Warutere, Investment Manager One of the key driving factors in Kenyas economic resurgence has been the stability of currency, the shilling has remained range bound over the last couple of years.
Kenya has also strengthened its external position substantially in the recent years, accumulating international reserves to meet various target among them the IMF program targets.
The current account which averaged more than 10% of GDP in 2011 and 2012, narrowed in November 2013 to 8.5%, reflected in the lower import demand and higher export services.
Looking forward the Kenya Shilling outlook is as story of two halves with the shilling expected to remain strong in the 1 st Half of 2014 operating in the 85 86 range. While in the 2 nd Half, we expect the shilling to weaken up to the lows of 89 against the US dollar.
On a positive note the expected issue of the sovereign bond coupled in the hyped interest in frontier markets from international investors are likely to provide a working buffer for Foreign currency inflows and by extension stability in currency from improved external position.
The key risk to the Kenya Shilling stability, lies in the likelihood that the current account status would deteriorate as soon as import demand picks up, which would more likely happen in the 2 nd Half of 2014. Financial Markets Review 12 Short term interest rates to decline Source: Bloomberg Short term interest rates to trend lower in H1 2014
13 Fixed Income returns in 2013
Short and medium term bonds held well in 2013.
Long term bonds witnessed - ve capital movements.
14 Financial Markets Review and Outlook Nicholas Malaki, Senior Investment Manager 2013 witnessed a progressive reduction in interest rates over the year, extending a trend we have seen over the past two years. The decline in rates was pronounced at the short-end of the yield curve.
We attribute this to the monetary transmission mechanism continued to improve. We can see clear market response to the movements in the CBR.
There does not seem to be any imminent internal shocks to the economy. Hence we would expect to see a more accommodative monetary stance over the short-to-medium term.
And thus we expect to see further dips in interest rates especially at the short-end. This is positive for bond investors as well as for credit expansion to support various sectors.
A stable interest environment saw a bit of activity in the corporate debt market with about 3 corporate bonds issued. We expect that over 2014, we could see more debt raising in the market in the year.
Despite the lower rates, bonds investors made lower returns in 2013 when compared to 2012. We hope to see bond investors to benefit from lower rates in 1H 2014. 15 Positive sentiment drives stock market higher Source: Bloomberg NSE - a top perfoming market in SSA in 2013
16 Stellar equity market performance for Kenya Nicholas Malaki, Senior Investment Manager
Kenyas equity market had a stellar performance in 2013 gaining 43.7%. This was on the back of positive sentiment, foreign portfolio flows and general improvement in global liquidity that increased appetite for risk assets.
This compares quite well with other Sub-Saharan markets as well as Frontier markets
The rally in the market over the past two years has led to much higher valuations close to where the market was before the sharp decline in 2011.
Valuations such as price to earnings have risen while dividend yield has declined
So is the market too expensive for investors at those valuation levels?
17 Is the market too expensive...? On a stand alone basis, the market is a bit more expensive compared to a few years back, but strong earnings could be supportive of these forward valuations
31st December 2010 2011 2012 2013 Price to Earnings Ratio (x) 15.38 9.84 12.06 14.3 Price to Book Value (x) 3.85 2.74 4.02 5.17 Dividend Yield 3.22% 5.49% 4.43% 3.01% 18 Comparable Valuations Valuations are comparable across most SSA markets; Emerging Markets are cheaper due to structural issues. Source: Bloomberg, December 2013 19 Comparable Valuations Nicholas Malaki
On a stand alone basis this would appear so than a year ago.
But when you take a step back and compare with other markets markets that attract a similar breed of investors - the domestic equity market is fairly priced.
We are confident that growth in profitability and better global liquidity will support the market, place it in a position to compete favorably with other markets.
One fact that cannot be ignored is that the flow of investment funds across the globe has increased. Emerging and Frontier Markets continue to record substantial portfolio flows.
Therefore the domestic market can not be looked at it isolation, but rather on a relative basis. Trends in these markets can indicate to us how our market is likely to fair on.
20 Is there support for equity markets into 2014? Macro economic environment continues to remain supportive
Strong GDP Growth, Manageable levels of inflation for the year Lower interest rates Stable currency
Earnings progression likely to be key support for equity market performance: some sectors that are likely to do well
Banks, Construction, Media/Telecoms
External events also support attractiveness of Kenyan Equity market
Events in other Emerging and Frontier Markets.
Key risk factor Potential introduction of Capital Gains Tax
21 Is there support for equity markets in 2014% Nicholas Malaki
From the fundamentals and the macro perspective, there is support. GDP growth is projected to remain strong, inflation is tamed although there could be some upside risk; and the currency is not expected to fall out of bed.
Earnings are likely to be the key driver of markets; with some sectors expected to do well. These include Banks which could see accelerating loan growth as well as lower non-performing loans on account of lower rates;
Construction that is projected to be supported by spending on infrastructure and growth in credit to households, and
Media and telecom that should benefit from increased advertisement spend with that comes with a better economic environment, this is in addition to lower commodity prices and stable currency that should help , maintain margins.
Outside of the domestic scene, we see other events being supportive of the Kenya equity market. Key emerging markets are undergoing structural reforms, and there is an election cycle across the continent. 22 Contd .
This is not without the usual risks to the markets.
Perhaps the greatest risk we see for the market at the moment is the potential introduction is capital gains tax would be a major drawback for the market.
Whereas this could add something to the exchequer, the potential fall out could be significant over an extended period of time
Most immediate would be a possible reversal in portfolio flows in both public and private markets that could erode, dilute or even reverse the potential flows that have been very supportive of various sectors in the economy.
We could even see slowdown in the savings sector, which makes it a bit more difficult to be able to raise long term capital from public markets.
23 Summary GDP growth - expectations remain high with our forecast ranging 5.6% - 5.8 %
Inflation trend could change materially in 2H 2014 moving above 10%.
Exchange rate likely to be range bound between 85 89 to the US dollar
Interest rates Further decline in short-term rates over 1H 2014 should lead to increased bank lending and more corporate debt issuance
Equity Markets Sustained momentum expected in the market barring any external shocks. Likely to see further capital raising from the markets, including more M&A activity.
24 Q & A 25 Disclosure Statement PineBridge Investments is a group of international companies that provides investment advice and markets asset management products and services to clients around the world. PineBridge Investments is a registered trademark proprietary to PineBridge Investments IP Holding Company Limited. Readership: This document is intended solely for the addressee(s). Its content may be legally privileged and/or confidential. Opinions: Any opinions expressed in this document may be subject to change without notice. We are not soliciting or recommending any action based on this material. Risk Warning: Past performance is not indicative of future results. Our investment management services relate to a variety of investments, each of which can fluctuate in value. The value of portfolios we manage may fall as well as rise, and the investor may not get back the full amount originally invested. The investment risks vary between different types of instruments. For example, for investments involving exposure to a currency other than that in which the portfolio is denominated, changes in the rate of exchange may cause the value of investments, and consequently the value of the portfolio, to go up or down. In the case of a higher volatility portfolio the loss on realization or cancellation may be very high (including total loss of investment), as the value of such an investment may fall suddenly and substantially. In making an investment decision, prospective investors must rely on their own examination of the merits and risks involved. Unless otherwise noted, all information contained herein is sourced from PineBridge Investments internal data. The content included herein has been shared with various in-house departments within the member companies of PineBridge Investments, in the ordinary course of completion. All PineBridge Investments member companies comply with the confidentiality requirements of their respective jurisdictions. Parts of this presentation may be based on information received from sources we consider reliable. We do not represent that all of this information is accurate or complete, however, and it may not be relied upon as such. PineBridge Investments Europe Limited is authorised and regulated by the Financial Conduct Authority ("FCA"). In the UK this communication is a financial promotion solely intended for professional clients as defined in the FCA Handbook and has been approved by PineBridge Investments Europe Limited. Should you like to request a different classification, please contact your PineBridge representative. Approved by PineBridge Investments Ireland Limited. This entity is authorised and regulated by the Central Bank of Ireland. www.pinebridge.com Last updated July 2013 In Australia, this document is intended for a limited number of wholesale clients as such term is defined in chapter 7 of the Corporations Act 2001 (CTH). The entity receiving this document represents that if it is in Australia, it is a wholesale client and it will not distribute this document to any other person whether in or outside of Australia. In Hong Kong, the issuer of this document is PineBridge Investments Asia Limited, licensed and regulated by the Securities and Futures Commission (SFC). This document has not been reviewed by the SFC. PineBridge Investments Asia Limited holds a Representative Office license issued by the Central Bank of UAE and conducts its activities in the UAE under the trade name PineBridge Investments Asia Limited Abu Dhabi. This document has not been reviewed by the Central Bank of UAE nor SFC. In UAE, this document is issued by PineBridge Investments Asia Limited Abu Dhabi Representative Office. PineBridge Investments Singapore Limited is licensed and regulated by the Monetary Authority of Singapore (the MAS). In Singapore, this material may not be suitable to a retail investor and is not reviewed or endorsed by the MAS. PineBridge Investments Middle East B.S.C.(c) is regulated by the Central Bank of Bahrain as a Category 1 investment firm. This document and the financial products and services to which it relates will only be made available to accredited investors of PineBridge Investments Middle East B.S.C. (c ) and no other person should act upon it. The Central Bank of Bahrain takes no responsibility for the accuracy of the statements and information contained in this document or the performance of the financial products and services, nor shall it have any liability to any person, an investor or otherwise, for any loss or damage resulting from reliance on any statement or information contained therein.
26 What about Valuations.? 14.3 14.0 14.2 14.0 19.3 16.0 19.0 12.1 2.4 2.6 1.1 1.6 2.2 4.0 2.2 1.5 Kenya Nigeria Mauritius Zimbabwe Ghana South Africa MSCI World Index MSCI Emerging Markets Index P/E P/B Valuations are comparable across most SSA markets; Emerging Markets cheap due to structural issues.
Key Risks to Positive Equities Outlook QE tapering could lead to lower liquidity flows; However, appears to still be a lot of fund raising for frontier markets Earnings quality and growth likely to come into focus into 2014; valuations will need to be justified Macro economic fundamentals turnout to be less favorable than expected Local politics, and policies could start impacting on investor/business sentiment Better than expected outlook for SA and Egypt could see rotation of Pan African portfolios from SSA to these markets.
Source: Bloomberg, 31 December 2013 Strong fundamentals and earnings growth momentum should support valuations in 2014
27 Where to from here.is there support for equity markets into 2014? Macro economic environment continues to remain supportive; Strong GDP Growth Manageable levels of Inflation for the year Lower Yields Stable Currency
Earnings progression likely to be key support for equity market performance: some sectors that are likely to do well Banks accelerating credit growth into 2014 (improved confidence), lower non-performing loans should be supportive of strong growth in the sector; Construction - Increased infrastructure investment in the economy should increase sales for construction companies; manageable inflation levels should help improve margins. Media/Telecoms Better economic environment should increase marketing/advertisement spend by companies, low commodity price and stable currency should help maintain margins.
External events also support attractiveness of Kenyan Equity markets Emerging markets - still looking weak; Brazil , India and South Africa going to face elections in 2014; Investors will watch these keenly; and structural reforms will be key; Nigeria Economic outlook looking less appealing (2014 could become a pre-electioneering year); CBN Governors term ends in June 2014, uncertainty could make Kenyan market look more favourable However, weight in MSCI Frontier basket will mean allocations will increase both to Nigeria and Kenya Egypt - Egypt equity market have rallied 56%; 2014 will be key for reforms draft constitution, parliamentary and presidential elections until June 2014; Egypt will need to translate investor confidence into growth and deal with unemployment.