Cytonn Q3’2022 Equities Markets Review Note
In Q3’2022, the global equities market witnessed increased capital outflows, following a series of interest rate hikes in advanced economies in a bid to curb high inflationary pressures. The hike in interest rates saw investor’s flock to the fixed income market which are deemed less risky. Additionally, the increased inflationary pressures worsened macroeconomic conditions in the majority of the emerging markets economies, further leading investors away. During the period, the Nairobi Securities Exchange all share index was the largest gainer, recording a 0.3% gain, while the Ghana stock composite index was the largest decliner recording losses of 24.2%. In this note, we will analyze the Q3’2022 Equities Markets Performances in the following sections;
- Global Markets Review,
- Sub-Saharan Africa Regional Review,
- Kenya’s Equities Market, and,
- Outlook.
Section I: Global Markets review
The Global equities market recorded mixed performance in Q3’2022, with most indices declining as uncertainties about the economies intensified following a series of interest rate hikes around the world aimed at curbing the inflationary pressures. As such, this led to capital outflow as investors sought less risky markets such as government papers and other investments alternatives. The Nairobi Securities Exchange All Share Index (NASI) was the largest gainer, recording a 0.3% gain during the quarter, largely driven by increased investor confidence in the country following a peaceful conclusion of the August 2022 General Elections. Ghana Stock Composite Index (GGSECI) was the largest decliner recording losses of 24.2% during the quarter, mainly due to continuous deterioration in the country’s business environment arising from high inflation and continued weakening of the local currency coupled with the re-imposition of capital gains tax on securities listed on the Ghana Stock Exchange, which saw investors prefer fixed income securities. Below is a summary of the performance of key indices:
Source: S&P Capital IQ (Dollarized)
Section II: Sub-Saharan Africa Review
Sub-Saharan Africa (SSA) stock markets recorded mixed performance in Q3’2022 with majority of the indices recording declines. The performance was mainly driven by increased capital flight to the US market and other advanced economies that have hiked their interest rates leading to steep price falls of African blue chip firms. The Zambia’s stock market (LASILZ) was the best performing market gaining by 17.0% attributable to increased foreign investor sentiments following improved macro-economic conditions in Zambia following debt restructuring reforms, coupled with local currency appreciation. Ghana’s GGSECI was the worst-performing index, recording a loss of 23.8% during the quarter, largely driven by sell offs from foreign investors due to continuous deterioration in the country’s business environment arising from high inflation at 33.9% as of August 2022 coupled with continued weakening of the local currency. Below is a summary of the performance of key indices:
|
Equities Market Performance (Dollarized*) |
||||||
|
Country |
Index |
Jan-22 |
Jun-22 |
Sep-22 |
YTD Change (%) |
Q3'2022 Change (%) |
|
Zambia |
LASILZ |
362.2 |
398.6 |
466.2 |
28.7% |
17.0% |
|
Uganda |
USEASI |
0.4 |
0.3 |
0.3 |
(18.0%) |
7.2% |
|
Kenya |
NASI |
1.48 |
1.1 |
1.1 |
(28.0%) |
0.3% |
|
Tanzania |
DARSDEI |
0.6 |
0.6 |
0.6 |
(6.5%) |
(0.2%) |
|
Rwanda |
RSEASI |
0.1 |
0.1 |
0.1 |
(0.8%) |
(0.8%) |
|
Nigeria |
NGSEASI |
104.1 |
124.5 |
113.5 |
9.0% |
(8.8%) |
|
South Africa |
JALSH |
4,639.6 |
4,197.9 |
3,524.9 |
(24.0%) |
(16.0%) |
|
Ghana |
GGSECI |
454.6 |
318.1 |
242.5 |
(46.7%) |
(23.8%) |
|
*The index values are dollarized for ease of comparison |
||||||
Source: S&P Capital IQ (Dollarized)
Section III: Kenya Equities Markets Review
- Stock Performance
During Q3’2022, the equities market was on an upward trajectory, with NASI, NSE 20 and NSE 25 gaining by 3.2%, 6.5% and 5.0%, respectively, taking their YTD performance to losses of 23.2%, 10.3% and 17.4% for NASI, NSE 20 and NSE 25 respectively. The equities market performance during the quarter was driven by gains recorded by large cap banking stocks such as NCBA which gained by 28.4% as well as ABSA and Standard Chartered Bank (SCBK) of 9.6% each, while Co-operative Bank gained by 8.7%. The gains were however weighed down by losses recorded by other large cap stocks such as Bamburi of 0.7%. Foreign investors remained net sellers in Q3’2022 with a net selling position of USD 58.4 mn, from a net selling position of USD 91.1 mn recorded in Q2’2022. Below we look at NASI and NSE 20 indices movement since 2017:
Source: Nairobi Securities Exchange (NSE)
The table below highlights the performance of some of the large cap stocks in the Kenyan stock market in H1’2022;
|
Kenyan Equities Performance – Large Cap Stocks Q3’2022 |
|||||
|
No. |
Company Name |
Period End Share Price-Q2’2022 (Kshs) |
Period End Share Price-Q3’2022 (Kshs) |
Q3'2021 Performance |
Q3’2022 Performance |
|
1 |
NCBA Bank Kenya |
23.6 |
30.3 |
2.0% |
28.4% |
|
2 |
Standard Chartered Bank Kenya |
124.8 |
136.8 |
0.4% |
9.6% |
|
3 |
ABSA Bank Kenya |
10.5 |
11.5 |
6.4% |
9.6% |
|
4 |
Co-operative Bank Kenya |
10.9 |
11.9 |
(3.3%) |
8.7% |
|
5 |
Equity Group |
43.0 |
46.5 |
13.4% |
8.0% |
|
6 |
BAT Kenya |
407.8 |
440.0 |
0.2% |
7.9% |
|
7 |
KCB Group |
38.7 |
41.5 |
9.6% |
7.2% |
|
8 |
East African Breweries Limited (EABL) |
137.3 |
142.0 |
(5.5%) |
3.5% |
|
9 |
Diamond Trust Bank Kenya (DTB-K) |
50.0 |
50.0 |
5.1% |
0.1% |
|
10 |
Safaricom |
25.0 |
25.0 |
1.6% |
0.0% |
|
11 |
Bamburi Cement |
34.4 |
34.1 |
6.7% |
(0.7%) |
The key take-outs from the above table include:
- The Banking sector performance was on an upward trajectory in Q3’2022, with all the large cap stocks recording gains. NCBA gained by 28.4%, ABSA Bank and Standard Chartered Bank(SCBK) each gained by 9.6% while Co-operative Bank gained by 8.7%. Similarly, Equity Group, KCB Group and Diamond Trust Bank (DTB-K) recorded gains of 8.0%, 7.2% and 0.1% respectively. The gains were driven by improved sentiments following the banking sector’s resilience in the tough operating environment as evidenced by the H1’2022 results. Core Earnings per Share (EPS) recorded a 34.0% weighted average growth of 34.0% in H1’2022, compared to a weighted average increase of 136.0% in H1’2021. Additionally, ABSA Bank and NCBA announced interim dividends of Kshs 0.2 and Kshs 2.0 respectively in August following the release of H1’2022 results which boosted their performance during the quarter. Despite the banking sector recording continued recovery and increase in EPS in H1’2022, we expect continued sell offs of the sector’s stock by foreign investors due to uncertainties caused by profit-taking as well as inflationary and currency depreciation pressures,
- The Manufacturing sector was also on an upward trajectory with BAT and EABL share prices recording gains of 7.9% and 3.5%, respectively. BAT’s performance was partly attributable to improved investor confidence in the counter as the firm’s EPS increased by 17.5% to Kshs 64.8 in FY’2021, from Kshs 55.2 in FY’2020. This was on the back of a recovery in gross revenues which increased by 3.1% y/y in FY’2021 coupled with a 9.5% reduction in cost of operations in FY’2021 to Kshs 16.1 bn from Kshs 17.8 bn in FY’2020. On the other hand, EABL’s performance was mainly driven by improved investor confidence in the counter as the firm’s EPS increased by 172.2% to Kshs 15.0 in FY’2022, from Kshs 5.5, due to a rise in gross revenues by 41.3% to Kshs 52.9 bn in FY’2022 from Kshs 37.4 bn in recorded in FY’2021. Additionally, EABL announced a final dividend of Kshs 7.25 in July 2022 following the FY’2022 results, adding to the Kshs 3.75 interim dividend paid in April 2022 (7.9% dividend yield on the share price as of 30th June 2022). Despite the increase in sector’s share prices during the quarter, we expect the sector’s performance to continue being weighed down by high cost of shipping and challenges arising from increased dollar demand and persistent supply chain constraints. As such, the sector’s share price performance is expected to remain uncertain,
- On the Construction front, Bamburi’s share price declined by 0.7% in Q3’2022, as investors maintained a cautious stance with regards to the counter given the high cost of production stemming from the high cost of raw materials. We expect the sector’s share price performance to be weighed down by the new government’s proposal to cut down spending on capital intensive projects which is expected to reduce demand of cement, and,
- In the Telecommunication Sector, Safaricom continued to exert its dominance in the bourse, with its market cap at 50.4% of the entire bourse as at September 2022. The share price remained unchanged during Q3’2022 as was recorded in H1’2022. However, on a year to date basis, the share price declined by 34.6% driven by increased foreign investor sell-offs and profit-taking from investors. Safaricom continues to retain a strong long-term proposition evidenced by its continued strong performance as the firm’s core earnings per share increased by 1.8% to Kshs 1.74 in FY’2022, from Kshs 1.71 in FY’2021. Additionally, its entry into the Ethiopian market with more than 117.9 mn people as of 2021, is expected to gain further traction after commencement of large scale customer pilot of its network in August 2022 with national launching of its operation expected to be done in October 2022. However, concerns remain high due to the continued civil war in Ethiopia which is expected to disrupt the operations of the Ethiopian subsidiary coupled with M-PESA segment that is to be separated from Safaricom by January 2023.
- Profit Warnings
In Q3’2022, two companies; Centum Investment Plc and Sameer Africa Plc issued profit warnings to investors compared to four companies issued in the entirety of 2021. Centum Investment Plc cited a decline in performance mainly as a result of lower revaluation gains on investment property in FY’2022 compared to those posted in FY’2021. On the other hand, Sameer Africa Plc attributed the announcement to global supply chain disruption as a results of geopolitical tension between Russia and Ukraine as well as effects of COVID-19 pandemic which have weighed down availability of key inputs in their tyre business. Companies are required to issue profit warnings if they project a more than 25.0% decline in profits year-on-year.
Section IV: Outlook
We expect the Global equities market performance to remain subdued in the short-term, with further interest rate hikes expected in the advanced economies like the United States where inflation continues to be a major headwind. The effects of tightening of monetary policy in advanced economies is expected to trickle down to emerging markets, in the form of increased capital outflows and pressure on their Central Banks to hike interest rates as well. Further, worsening of pre-existing supply chains as a result of the Geo-political tension arising from Russia’s invasion of Ukraine to continue to lead to increased input costs for businesses around the world, which will eat into their margins, and subsequent reduced returns to investors.
Closer to home, we are “Neutral” on the Equities markets in the short term due to the current adverse operating environment and huge foreign investor outflows, and, “Bullish” in the long term due to current cheap valuations and expected global and local economic recovery. With the market currently trading at a discount to its future growth (PEG Ratio at 0.9x), we believe that investors should reposition towards value stocks with strong earnings growth and that are trading at discounts to their intrinsic value. We expect the current high foreign investors sell-offs, the upcoming Kenyan general elections and the slow vaccine rollout to continue weighing down the economic outlook in the short term.
The views expressed in this publication are those of the writers where particulars are not warranted. This publication, which is in compliance with Section 2 of the Capital Markets Authority Act Cap 485A, is meant for general information only and is not a warranty, representation, advice or solicitation of any nature. Readers are advised in all circumstances to seek the advice of a registered investment advisor.
