Money Market Shines As Kenya’s Economy Expected to Hit 5.8% in 2022

During the first half of 2021, the Kenyan economy recorded an average growth of 5.4 percent, an increase from the 0.2 percent decline recorded in H1’2020.

Growth was mainly driven by the recovery in the transport sector and the accommodation and food sector which grew by 16.9 percent and 9.1 percent, respectively, in Q2’2021, compared to the contraction of 16.8 percent and 56.6 percent, recorded in Q2’2020.

The growth in these sectors followed the easing of COVID-19 travel restrictions and the lift of the dawn to dusk curfew that was put in place since March 2020.

The average GDP growth for 2021 is forecasted to be 5.8 percent, with Cytonn Investments projecting Kenya’s economy to grow by 5.7 percent in 2021.

The growth will be supported by the continued recovery in the accommodation and food sectors, the easing of the COVID-19 restrictions, and the rollout of the vaccine.  However, the key challenge remains the COVID-19 pandemic given the emergence of new variants such as the Omicron variant.

ASSET CLASSES REVIEW

The returns by the various asset classes improved in 2021, with the 364-day, 182-day, and 91-day Government papers recording yields of 9.4 percent, 8.1 percent, and 7.3 percent, respectively, while Real Estate yield and NASI recorded returns of 7.1 percent and 5.5 percent respectively.

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However, the average returns of the top five Money Market Funds recorded a 0.2 percent points decline to 9.5 percent in December 2021, from 9.7 percent recorded in December 2020.

2020 and 2021 Return By Asset Class

Money Market Funds continued to perform better than all the other asset classes in 2021, for the second year in a row, due to their higher returns as compared to the returns offered by the other asset classes.

Money Market Funds offer a good safe haven for investors who wish to switch from a higher-risk portfolio to a low-risk portfolio, especially in times of uncertainty. During the period under review, the Cytonn Money Market Fund (CMMF) had the highest effective annual yield of 10.5 percent compared to an industry average of 8.8 percent.

Notably, the other asset classes recorded improvements from 2020 with NASI being the largest gainer having increased by 14.1 percent points to a return of 5.5 percent, from a decline of 8.6 percent in 2020, as investors sought to profit from the recovery in stock prices from last year’s lows.

Additionally, the gradual economic recovery following the reopening of the economy contributed to the improvement.

FIXED INCOME REVIEW

In 2021, there was relatively low demand for Treasury-bills auctions as the average subscription rate came in at 94.1 percent, down from the 130.9 percent subscription rate recorded in 2020. This was due to investors shifting their interest to the bond market in search of higher yields.

On the other hand, primary Treasury-bond auctions in 2021 were in high demand, with the subscription rate averaging 147.6 percent, which was higher than the 130.6 percent average subscription rate recorded in 2020, partly attributable to the ample liquidity in the money market. The market preferred the medium-term bonds, in a bid to hedge against duration risk.

The economic recovery seen in 2021 is likely to continue in 2022. Additionally, the interest rates environment will remain stable as the government continues to reject expensive bids in the auction market in an effort to keep the rates low.

EQUITIES REVIEW

In 2021, the Kenyan equities market gained, with NASI, NSE 25, and NSE 20 increasing by 9.5 percent, 9.8 percent, and 1.6 percent, respectively. The equities market performance during the year was shaped by gains recorded by stocks such as Equity Group, ABSA Bank Kenya, British American Tobacco Kenya (BAT), Kenya Commercial Bank (KCB), and Safaricom Plc.

The gains were however weighed down by losses recorded by banking stocks such Diamond Trust Bank Kenya (DTB-K), Standard Chartered Bank (SCBK), and NCBA Bank.

Cytonn Investments holds a “Neutral” position on the Equities markets in the short term as the market remained weak in 2021 with NASI’s Price to Earnings (P/E) ratio of 11.3x trading below its’ historical average of 12.9x, and below the most recent peak of 15.9x in April 2018, showing that pockets of value still exist.

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Investors should, therefore, reposition towards companies with strong earnings growth and are trading at discounts to their intrinsic value.

REAL ESTATE REVIEW

In 2021, the Kenyan Real Estate sector witnessed increased development activities with a general improvement in Real Estate transactions, attributed to the improved business environment. The reopening of the economy has also facilitated numerous expansion and construction activities by investors, in addition to various businesses also resuming full operations.

Consequently, the Real Estate sector grew by 4.9 percent in Q2’2021, 0.3 percent points higher than the 4.6 percent growth recorded in Q2’2020, according to the Quarterly GDP Report by the Kenya National Bureau of Statistics (KNBS).

“We expect the Real Estate sector performance to increase, supported by the government’s focus to implement affordable housing projects coupled with the improved investor confidence in the country’s housing market. We believe that the increased visitor arrivals into the country will continue boosting the performance of the hospitality sector,” Said Linah Onyango, a Real Estate Research Assistant at Cytonn.

“However, factors such as financial constraints, oversupply in the commercial office and retail sectors, as well as low investor appetite in Real Estate Investments Trusts (REITs) are expected to continue dragging the performance of the sector,” she added.