Recommendation: BUY KENYA
Kestrel Capital (03.02.2014)

In 2013, the country had its first elections under the new constitution. There were campaigns for peace which sought to avoid a repeat of the post election violence in the 2007/2008. Despite this, the business community cut back on investments and held back on lending pending the peaceful conclusion of the election. The elections were concluded peacefully without the need to go into a presidential run-off. While the new constitution has brought new structural and institutional reforms, there have been some problems in its implementation. As a result, the economy grew at a slower pace than expected in 2013.

In 2014, some of the problems in the implementation of the new constitution have now been resolved. The new government has launched several infrastructure projects. The government hopes to issue a Eurobond in 1Q14 that will help finance these infrastructure projects, shore up foreign exchange reserves and reduce private sector crowding out by externalizing some of its domestic borrowing. Improved tax collection and tax reform have seen the new government meet its tax revenue targets in the last two consecutive quarters. The political landscape is likely to remain stable save for the President’s and Deputy President’s pending issues at the International Criminal Court. Based on this, we expect the economy to grow faster (5.5% to 6.0% y/y GDP growth) in 2014.

Macroeconomic Factors

Inflation
· Higher food prices and the upward review power tariffs in 2H14 could result in cost inflation
· The Eurobond and the resulting, private sector credit growth are likely to lead to demand inflation

Interest Rates
· Yields on Treasury Bills and Bonds are likely to decline on increased money supply · Central Bank Rate will be retained at 8.5% but the Monetary Policy Committee could review it upwards should private sector credit growth rise above 30.0%
· Commercial Bank lending rates should decline as a result of increased private sector liquidity

Foreign Exchange
· We expect a slight weakening of the KES against the USD, however, we expect the weakening to be slow and steady within a monthly range of KES 2.00

GDP growth
· We believe that GDP growth will be between 5.5% and 6.0% on the back of increased government spending, lower interest rates and stable exchange rates


Nairobi Securities Exchange

· The rise in equity turnover will be driven by increased local investor participation as their allocation to equities increases due to low yield on government securities
· Share prices will continue to rise as a result of improved corporate earnings · Foreign investor participation will remain strong due to a stable shilling and strong growth in corporate earnings


Top Picks for 2014

· Growth Stocks – Safaricom, Equity Bank and ARM Cement
· Value Stocks – Kenya Re
· Rights Issues Opportunities - KenGen
· Dividend Stocks – BAT Kenya, Bamburi Cement, EA Cables
· Return to profit Plays – KenolKobil, Kenya Airways, Total Kenya
· Power Tariff Realignment – Kenya Power
· Real Estate Exposure – Housing Finance, Centum, Britam
· East African Emerging Middle Class – KCB Bank, EA Breweries

Counties are busy spending on recurrent needs...

Signs of the market correction bottom are visible.

LONDON, February 03 (Fitch) Following Fitch Ratings' affirmation of Kenya's ratings on Friday 31 January, the agency will host a teleconference discussion at 11:00 GMT on Tuesday 4 February to discuss the fundamentals of Kenya's credit story and likely drivers of the ratings. Hosted by Richard Fox, our Head of Middle East and Africa Sovereigns, the discussion will offer an updated perspective on Kenya's economic and political environment after a visit to Nairobi in early January. Mr Fox will be joined by Carmen Altenkirch, Director, and Lead Analyst for Kenya. Key topics will include: - How likely is Kenya to hit 6% growth in 2014 and beyond? - Prospects and implications of its eurobond issuance... http://www.reuters.com/a...d-idUSFit68926720140203

Kenya to press ahead with Eurobond, undeterred by tapering; "We have not seen major revision of interest rates globally and that is why we are working quite fast to ensure we complete the process as quickly as possible," Henry Rotich said. http://www.reuters.com/a...d-idUSL5N0L81O120140203