The confluence of negative factors for KE kicking in to the new year is quite remarkable to say the least. It looks like a replay of 2011 but several octane levels higher:
1. KES held its ground in 2016 vs the USD but has started 2017 on reverse gear. Once we exhaust the reserves and the IMF loan what next? A third IMF loan? Dollar shortage? A continuous depreciation will trigger a run on KES or worse still force a devaluation (outside chance). My base case scenario is 120 to the $ before the year is out. Our debt position is precarious especially if it blows past the 70% mark vs the GDP and debt service is above 50% of revenue on the back of recessionary economic conditions. KES weakness and dollar strength equals imported inflation.
2. Food inflation is picking up and if the weather guys got it right this time - extended drought - then this will push overall inflation into double digits.
3. More thermal energy is being used up in the grid thanks to low hydro levels driving up the fixed electricity charges. If KES weakness persists, pass through fx elec. costs will increase...two elec. cost items increasing means more price burden is passed to the consumer feeding the inflation monster once again.
4. Interbank rate spiked in Xmas week and has remained at those elevated levels to date. Bank distress? If it crosses the 10% then it would signal a liquidity shortage. The interbank rate tends to lead the 91 day Tbill rate trend wise. Assuming the same correlation then GOK will have a nasty funding headache. 91 day Tbill bottomed out in sync with the international markets back in June/July of 2016. KE cannot fight the global trend. Expensive cost of funds is a wrecking ball if GOK is forced to square it out with the banks in a survival match.
5. KES down, tbill/bond up necessitates hiking the CBR regardless of a recessionary threat. With credit growth back to GFC/post PEV levels and a wobbly economy to boot, I am not sure KE has much wiggle room on this front. In illiquidity, asset values/prices will tank heavily - NSE and real estate.
6. Oil is still inching up to $60. Which is the lesser evil as far as KE is concerned; strong USD or high oil prices? I think it is the latter but the former will prevail.
7. KE still has a budget to fund and judging by CBK's actions to reject funds on the basis of high bids implies domestic borrowing will do the heavy lifting for the remainder of the current financial year and the one that follows. CBK even cancelled an auction last week - no reasons given. Private sector crowded out.
8.Elections...contrary to popular opinion this one does not worry me much. My hunch is that by the time the elections come around, the aforementioned factors will have already caused too much havoc for electioneering to have much of an impact. Could make things worse if PEV erupts but I highly doubt it will be a game changer. The first order of business for the next govt will be damage assessment followed by damage mitigation.
NSE20 has held onto the 3,000 mark to close out 2016 but that could be challenged as soon as next week. Even assuming the best case scenario where inflation is contained and we steady the ship in 2017 I still don't see how 3000 will be defended.
If the above issues get out of hand, there is no telling the extent of the ensuing repercussions for both the economy and the NSE. More so since all the above situations have assumed limited or no external factors will come into play and there are plenty of those.
A KE recession is a distinct possibility in Q3/4 or early 2018 especially if real estate takes a huge knock or a severe bank/GOK funding crisis develops.
Sub 2000 still remains my working theory. However, the harder NSE20 falls the stronger the bull when it's all over - possibly late 2018 or early 2019. Discounts abound, load up stealthily.
The main purpose of the stock market is to make fools of as many people as possible.