Kenya’s economy will rebound to a five per cent growth in the second half of 2021 after a flaccid start weighed down by Covid-19 pressures, Genghis Capital forecasts.
The investment bank pegs their projection to the rollout of the Covid-19 vaccine across the globe.
The growth projection is however 60 basis points lower than the pre-pandemic average growth of 5.6 per cent. Kenya’s economy contracted by 0.4 per cent in the first half of 2020.
It however anticipates sluggish private sector consumption to pose a major downside risk to the economic recovery.
”This is cemented by the recent tax changes that will have a dampening effect on households’ disposable income and corporates’ business investment,” Genghis says.
The positive growth projection is good news to the country that sunk to negative growth in June for the first time in 20 years, with companies closing, millions rendered jobless after a near-global shutdown to tame the spread of the virus.
Genghis projection mirrors that of the World Bank which predicts economic activities in Kenya to rebound relatively quickly in 2021, lifting real GDP by 6.9 per cent, the highest in Sub Saharan Africa.
The firm, which unveiled its microeconomic and investment playbook ‘Navigating the New Normal’ said the Covid-19 hit on the economy is expected to weigh investment decisions in the year ahead.
Analysts at the investment bank said that the exit of foreign investors from the NSE in 2020 after positive flows in 2019 highlights the expected impact on business performance of companies hard-hit by the effects of the pandemic on the domestic economy.
”This sell-off means the majority of stocks’ prices are ever so attractive for long term investors,” says the report.
Kenya is currently trading at discounted multiples compared to its historical average following last year’s pandemic-led market sell-off.
The sell-off from across the majority of the stocks deflated the Nairobi All Share Index (NASI) by 8.7 per cent to 152.11 points.
”While prices remain attractive, cautiousness in terms of economic and business recovery still persists which may erode prospects of near-term significant price appreciation,” the report says.
It adds that valuations are still attractive for most of the large and fundamentally sound counters, advising investors to continue diversifying their portfolios, in a year that is expected to post mixed economic results.
In 2020, the three portfolios outperformed the market with cumulative returns of 13.4 per cent, 7.7 per cent and -8.9 per cent from the respective portfolios. This was against the market returns of -34.1 per cent on NSE-20 and 8.3 per cent from the NASI.
”Flows are likely to be skewed towards technology stocks and other stocks with a clearer post-pandemic recovery in financial performance backed by their current discounted valuations,” Genghis report says.
The report further notes the worrisome public debt levels that is projected at Sh7.7 trillion by the end of June 2021, almost 70 per cent of the country’s total GDP.
It explains that although efforts have been placed to reduce the fiscal deficits, the emphasis on raising revenue in the current uncertain environment may be counterproductive.
“Despite ordinary revenue in the current fiscal year expected to be revised upwards with the Tax Laws (Amendment) No. 2 Act 2020, we view the current business cycle as less conducive to realise the target’, the report states.
Genghis expects the cost of living to shoot in the half of the year due to the reversal of the rate of Value Added Tax (VAT) back to 16 per cent. Even so, the report expects demand pressure in the economy to remain muted.
Furthermore, it expects the CBK Monetary Policy Committee to maintain the benchmark rate at seven per cent this year.