Stock Market Continues On A Downward Trend

Stock Market Continues On A Downward Trend

During the week, market indices continued on a losing streak with NASI falling by 2.2% while NSE 20 lost 1.9%, bringing the year to date performance to -9.3% and -4.4% for NSE 20 and NASI, respectively. During the week, the key declines were Kenya Power and Lighting Company, Britam and Centum Investments that fell by 7.8%, 8.2% and 9.7%, respectively. The market continues to undergo correction, as it has lost 12.1% for NASI and 15.7% for NSE 20 since its February peak.

Safaricom stock price has been on a losing trend since the first quarter of 2015, initially because it had really rallied in quarter one and investors were taking profit; and most recently, we have seen the company being investigated by Communications Authority of Kenya as to whether that they are a dominant player, which is bad for competition. In the week, the stock lost 5.3% and it is down 15.4% from its all time high reached in February 2015.

In our view, Safaricom has a number of key positives supporting it, which include (i) a strong brand and customer loyalty, and we have not seen significant churn rates in the past, (ii) wide reach in the country which makes it very easy for clients to remain in the network irrespective of where they are, (iii) innovation and use of partnerships which has made them remain ahead of the competition, and (iv) with the current price correction in the stock, the company is trading close to its historical PE and is comparable to other listed telecommunication stocks. In our view, this is a stock to watch closely given that it has the largest market capitalisation and is liquid, hence any positive sentiments in the country will lead to an increase in its price.

Partnerships between money transfer companies and the banks continues to gain traction, a move that is expected to create a lot of efficiencies in the banking sector, which could lead to increased financial penetration rates. This week, Standard Chartered Bank announced that they have partnered with Safaricom to introduce a platform that allows business customers and M-Pesa agents to deposit and access up to Kshs 50 mn per transaction. The minimum amount transferrable also reduced from Kshs 35,000 to Kshs 10,000, enabling merchants with lower turnover who were previously locked out to access M-Pesa to bank transfers. Safaricom also signed an M-Pesa deal with NIC bank, with the bank seeking to offer transactional services including the purchase of virtual cash balances to M-Pesa agents. These, alongside other earlier partnerships, will go a long way in cementing Safaricom’s place in the market as a leading mobile transfer company; and the trend will continue enhancing the future earnings prospects for both banks and the mobile transfer companies.

Despite correction in valuations given the market decline, we remain neutral on equities due to lower earnings growth prospects and especially given the high interest rates in the market, which is likely to impact economic growth.