During the week, the Kenyan shilling depreciated marginally by 0.1 percent against the US dollar, to close at 108.5 shillings from 108.4 shillings recorded the previous week.
The slight depreciation, according to Cytonn Investments, was mainly attributable to the build-up of dollar demand ahead of the end of the month when firms typically meet their hard currency obligations.
On a YTD basis, the shilling has depreciated by 7.0 percent against the dollar, in comparison to the 0.5 percent appreciation in 2019.
The shilling will be shielded by the high levels of forex reserves, currently at USD 8.6 million (equivalent to 5.2-months of import cover).
The forex reserves are above the statutory requirement of maintaining at least 4.0-months of import cover, and the EAC region’s convergence criteria of 4.5-months of import cover.
Currently, there is a relatively strong Diaspora remittance that increased by 27.9 percent to USD 274.1 million in August compared to USD 214.3 million in August 2019, despite being 1.0% lower than the USD 277.0 million in July 2020.
“We are projecting the y/y inflation rate for September 2020 to increase marginally to between 4.6 – 4.9 percent, compared to the 4.4 percent recorded in August, supported by the gains from the stable food prices while fuel prices only increased marginally,” said experts from Cytonn Investments.
During the month, petrol prices increased by 1.3 percent, while both diesel and kerosene have declined marginally by 0.1 and 0.6 percent respectively.
The current pump prices are likely to have an upward pressure on the transport index which holds a weighting of 8.7 percent since it has been on the increase in line with recoveries across the globe.
“Also, we expect the increased fuel prices to not only affect the transport index but have a trickle-down effect on the prices of other commodity basket food prices due to higher transport costs,” added Cytonn.
Food prices have remained relatively stable during the month given the favorable weather and an improvement in agricultural output.
Rates in the fixed income market have remained relatively stable due to the high liquidity in the money markets, coupled with the discipline by the Central Bank as they reject expensive bids.
The government is 79.2 percent ahead of its prorated borrowing target of 121.6 billion shillings having borrowed 217.9 billion shillings.
“In our view, the government will not be able to meet their revenue collection targets of 1.9 trillion shillings for FY’2020/2021 because of the current subdued economic performance in the country brought about by the spread of COVID-19, and therefore leading to a larger budget deficit than the projected 7.5 percent of GDP,” said Cytonn.
last week, the equities market was on an upward trajectory, with NSE 20 recording marginal gains of 0.01 percent.
Both NASI and NSE 25 gained by 0.1 percent, taking their YTD performance to losses of 15.6, 20.9, and 30.4 percent, for NASI, NSE 25, and NSE 20, respectively.
The performance was driven by gains recorded by large-cap stocks, with the highest gains being recorded in BAT, NCBA Group, KCB Group, and ABSA, which gained by 6.4, 3.8, 2.6, and 1.6 percent, respectively.
The gains were however weighed down by declines recorded by stocks such as Bamburi and Diamond Trust Bank (DTB-K) which both declined by 4.0 percent.
Equities turnover declined by 33.1 percent during the week to USD 31.7 million, from USD 47.4 million recorded the previous week, taking the YTD turnover to USD 1.1 billion.
Foreign investors turned net sellers during the week, with a net selling position of USD 3.6 million, from a net buying position of USD 7.6 million recorded the previous week, taking the YTD net selling position to USD 254.4 million.
The market is currently trading at a price to earnings ratio (P/E) of 9.2, 29.5 percent below the 11-year historical average of 13.0x.
The average dividend yield is currently at 5.0 percent, unchanged from the previous week, and 1.0 percentage points above the historical average of 4.0 percent.
With the market trading at valuations below the historical average, we believe there are pockets of value in the market for investors with higher risk tolerance and are willing to wait out the pandemic.
The current P/E valuation of 9.2x is 19.1% above the most recent valuation trough of 7.7x experienced in the first week of August 2020. The charts below indicate the historical P/E and dividend yields of the market.