Equities On A Downward Trajectory With NSE, NASI Heading South

Last week, the equities market was on a downward trajectory, with NASI, NSE 20 and NSE 25 declining by 5.5, 2.3 and 4.4 percent respectively.

The downward trajectory of the three indices took their YTD performance to losses of 21.2, 25.9, and 25.2 percent for the NASI, NSE 20 and NSE 25, respectively.

The YTD losses recorded by all the three indices breach the threshold of a bear market, which is a condition in which securities prices fall by 20.0 percent or more.

The performance of the NASI was driven by losses recorded by all large-cap stocks with Safaricom, EABL and Bamburi recording losses of 8.3, 6.6, and 5.6 percent respectively, while both Equity Group and Co-operative Bank declined by 3.5 percent.

Equities turnover increased by 2.3 percent during the week to USD 26.0 million from USD 25.5 million recorded the previous week, taking the YTD turnover to USD 479.7 million.

Foreign investors remained net sellers for the week, with the net selling position increasing by 117.1 percent to USD 8.4 million from a net selling position of USD 3.9 million recorded the previous week. The trend reflects the global equity markets with foreign investors disposing riskier assets in favor of safe havens.

The market is currently trading at a price to earnings ratio (P/E) of 8.5x, 35.9% below the historical average of 13.2x, and a dividend yield of 7.3 percent, 3.3 percentage points above the historical average of 4.0 percent.

“With the market trading at valuations below the historical average, we believe there is value in the market,” said analysts from Cytonn Investments.

The current P/E valuation of 8.5x is 12.9 percent below the most recent trough valuation of 9.7x experienced in the first week of February 2017, and 1.8 percent above the previous trough valuation of 8.3x experienced in December 2011.

Rates in the fixed income market have remained relatively stable as the government rejects expensive bids. The government is 10.2 percent behind its domestic borrowing target, having borrowed 217.9 billion shillings against a pro-rated target of 242.6 billion shillings.

The uncertainty brought about by the novel Coronavirus will make it harder for the government to access foreign debt due to uncertainty affecting the global markets, which might see investors attaching a high-risk premium on the country.

A budget deficit is likely to result from the depressed revenue collection with the revenue target for FY’2019/2020 at 2.1 trillion shillings creating uncertainty in the interest rate environment as additional borrowing from the domestic market goes to plug the deficit.

Owing to this uncertain environment, our view is that investors should be biased towards short-term fixed income securities to reduce duration risk.

READ: Equities Turnover Sheds 8.3% as Foreign Investors Emerge Week’s Net Sellers