Hot Money Tip: Where to hunt for bargains this year

Last year was characterised by a stable macroeconomic environment. This saw the value of goods and services produced locally rise 5.8 per cent, from 5.7 per cent in 2015. Accommodation and food services, and real estate drove a lot of this growth, highlighting the recovering tourism sector and investors’ confidence in real estate.

This year is an election one, which is bound to see politics take centrestage and be among the key determinants of spending and Government policy. Government spending on infrastructure is expected to increase as the current administration aims to retain power, as well as recover from the low absorption of development expenditure, which stands at 73.8 per cent for the first half of the 2016-17 financial year.

The bear run witnessed at the Nairobi Securities Exchange has left investors shying away from the equities market. Still, market activity at the bourse this year is likely to be driven by: a high GDP growth projection for the year of between 5.4 per cent and 5.7 per cent; relative stability in corporate earnings growth, expected to come in at 8.0 per cent; and attractive stock valuations. Market valuations remain attractive and provide attractive entry points for long-term investors, especially in the banking sector.

There’s also set to be increased investor confidence in the equities market following the implementation of regulations for issuers of securities to the public, such as the Code of Corporate Governance and the Stewardship Code for Institutional Investors.

In the fixed income market, interest rates have been fairly stable since the turn of the year, with the Central Bank remaining disciplined by rejecting bids above market rates.

However, there still exists possible upward pressure on interest rates – despite the Government being ahead of domestic borrowing targets – as it has only achieved 44.5 per cent of its foreign borrowing target of Sh462.3 billion.

Further, the Kenya Revenue Authority is expected to miss its revenue collection target of Sh1.5 trillion for the current fiscal year, having already missed its first-half target and with expected subdued corporate earnings growth. We think it’s prudent for investors to be biased towards short-term fixed income instruments.

Patrick Mumu, investment analyst at Cytonn Investments