q4 2013 investment briefing - final with script (1)

This material must be read in conjunction with the Disclosure Statement.

A Presentation to: Business and Financial Journalists

JONATHAN STICHBURY

Managing Director & CEO

PineBridge Investments, Nairobi

Nicholas Malaki, CFA

Senior Investment Manager


Joel Warutere

Investment Manager


Presented By:

January, 2014

Q4 2013 Investment Briefing

1

Agenda

I. Introduction - Jonathan Stichbury (Managing Director and CEO)

II. Macro- Economic Outlook - Joel Warutere (Investment Manager)

III. Financial Markets Review – Nicholas Malaki (Senior Investment Manager)

Macro-Economic Outlook

3

Kenyan economy taking off

Source: Kenya National Bureau of Statistics, PineBridge Forecasts

Increased public spending, especially on infrastructure will support growth.

Year 2014 growth will be driven by credit expansion and investment spending by both the

Central and County Governments.

5.8%

4.4% 4.6%

4.8% 5.8%

2010 2011 2012 2013E 2014E

Kenya GDP growth

4

GDP Growth & Outlook

Joel Warutere, Investment Manager

Kenyan Economic Take-off

Economic growth accelerated in 2013 as macroeconomic conditions continued to improve.

Kenya’s economy entered the third year of relative stability, with single-digit inflation and a

stabilized exchange rate.

We estimate that the economy grew by 4.8% in 2013 an improvement from the 4.6%

achieved in 2012. This is the highest growth rate since 2010.

That said the we still feel that the country has continued to perform below its potential, and

is capable of breaking the 7% GDP growth threshold in the next three years.

The Kenyan economy has the potential for a massive take off in terms of economic growth

in 2014 and we estimate a projected economic growth rate of 5.8%.

Kenya’s overall macroeconomic conditions are favourable, growth is picking up, inflation

remains low, the fiscal deficit remains manageable and the exchange rate remains stable

Kenya opened the year 2014 from a strong economic position with inflationary pressures

subdued, underpinned by stable energy prices, moderation in food inflation, a stable

exchange rate, and supportive monetary.

5

Kenya’s Key Trading Partners in Africa

67

46

21 19 18 18 16

5

Uganda Tanzania Egypt Somalia Congo South Sudan Rwanda Burundi

Total Exports (Kshs Billions)

Direct impact of Southern Sudan’s turmoil on Kenya’s exports are minimal.

Impact to be felt mainly on services - financial

Source: Kenya National Bureau of Statistics Economic Survey 2013

6

Kenya’s Key Trading Partners


Uganda and Tanzania continue to occupy the top spots as destination for Kenyan Exports..

The questions begs what will be the impact of the Turmoil in South Sudan and the continued

political stalemate in Egypt on Kenya in economic terms?

a) Sudan’s contribution albeit having grown in leaps and bounds in the recent years is

however not significant enough to impact the Kenyan economy. However if any the

largest impact would be felt on the services front and more specifically financial

services.

b) Egypt’s turmoil and its impact, having been running for a while, we feel that is

already factored in and managed so far. Any improvement on the political front and

by extension the economic resumption will only serve to enhance the performance

locally.

7

Inflation to soar in 2014

Source: Kenya National Bureau of Statistics, PineBridge Forecasts

Cost of living expected to rise in 2H 2014 and affect low income earners more.

10.09%

15.52%

11.08%

0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%

14.00%

16.00%

Dec-12 Jun-13 Dec-13 Jun-14 Dec-14

OVERALL INFLATION FOOD & NON-ALCOHOLIC BEVERAGES HOUSING, WATER, GAS & FUELS

8

Inflation to Soar in 2014


Inflation in 2013 remained modest underpinned by relatively stable energy prices and

moderation in food inflation, albeit expectation that prices would pick up in 2013.

Looking forward we expect that the cost of living will rise in the first half of 2014.

This will be driven by rising food prices, annual hike in cost of education and the continued

implementation of the VAT bill and last but not least the base effect especially since the

inflation levels in the first half of 2013 were low single digit.

Any rise in the cost of living normally impacts the lower income group, who are the majority

more intensely than any other class.

Since July 2013, there have been mild increases in inflation, as a result of two factors.

a) First the implementation of the Value-Added Tax (VAT) Act in September 2013, leading to

increases in prices of some essential food items.

b) Secondly, food prices have been increasing faster than other commodities, driving overall

inflation higher.

Looking further forward, key developments that may impact the trend inflation, will most

certainly be in the energy sector with the coming online of the Geothermal power plants Olkaria

I & IV in July 2014, that are expected to further reduce the cost of power.

9

Kenya Shilling expected to trade 85-89 to US dollar

Source: Bloomberg

Eurobond issuance and IMF support to play a key role in the Kenya Shilling movement

10

Currency – The Kenya Shilling Performance


One of the key driving factors in Kenya’s economic resurgence has been the stability of

currency, the shilling has remained range bound over the last couple of years.

Kenya has also strengthened its external position substantially in the recent years,

accumulating international reserves to meet various target among them the IMF program

targets.

The current account which averaged more than 10% of GDP in 2011 and 2012, narrowed in

November 2013 to 8.5%, reflected in the lower import demand and higher export services.

Looking forward the Kenya Shilling outlook is as story of two halves with the shilling expected

to remain strong in the 1st Half of 2014 operating in the 85 – 86 range. While in the 2nd Half,

we expect the shilling to weaken up to the lows of 89 against the US dollar.

On a positive note the expected issue of the sovereign bond coupled in the hyped interest in

frontier markets from international investors are likely to provide a working buffer for Foreign

currency inflows and by extension stability in currency from improved external position.

The key risk to the Kenya Shilling stability, lies in the likelihood that the current account status

would deteriorate as soon as import demand picks up, which would more likely happen in the

2nd Half of 2014.

Financial Markets Review

12

Short term interest rates to decline

Source: Bloomberg

• Short term interest rates to trend lower in H1 2014

13

Fixed Income returns in 2013

Short and medium term bonds held well in 2013.

Long term bonds witnessed - ve capital movements.

14

Financial Markets Review and Outlook

Nicholas Malaki, Senior Investment Manager

2013 witnessed a progressive reduction in interest rates over the year, extending a trend we

have seen over the past two years. The decline in rates was pronounced at the short-end of

the yield curve.

We attribute this to the monetary transmission mechanism continued to improve. We can

see clear market response to the movements in the CBR.

There does not seem to be any imminent internal shocks to the economy. Hence we would

expect to see a more accommodative monetary stance over the short-to-medium term.

And thus we expect to see further dips in interest rates especially at the short-end. This is

positive for bond investors as well as for credit expansion to support various sectors.

A stable interest environment saw a bit of activity in the corporate debt market with about 3

corporate bonds issued. We expect that over 2014, we could see more debt raising in the

market in the year.

Despite the lower rates, bonds investors made lower returns in 2013 when compared to

2012. We hope to see bond investors to benefit from lower rates in 1H 2014.

15

Positive sentiment drives stock market higher

Source: Bloomberg

NSE - a top perfoming market in SSA in 2013

16

Stellar equity market performance for Kenya

Nicholas Malaki, Senior Investment Manager

Kenya’s equity market had a stellar performance in 2013 gaining 43.7%. This was on the

back of positive sentiment, foreign portfolio flows and general improvement in global

liquidity that increased appetite for risk assets.

This compares quite well with other Sub-Saharan markets as well as Frontier markets

The rally in the market over the past two years has led to much higher valuations close to

where the market was before the sharp decline in 2011.

Valuations such as price to earnings have risen while dividend yield has declined

So is the market too expensive for investors at those valuation levels?

17

Is the market too expensive..….?

On a stand alone basis, the market is a bit more expensive compared to a few years

back, but strong earnings could be supportive of these forward valuations

31st December 2010 2011 2012 2013

Price to Earnings Ratio (x) 15.38 9.84 12.06 14.3

Price to Book Value (x) 3.85 2.74 4.02 5.17

Dividend Yield 3.22% 5.49% 4.43% 3.01%

18

Comparable Valuations

Valuations are comparable across most SSA markets; Emerging Markets are cheaper due to

structural issues.

Source: Bloomberg, December 2013

19

Comparable Valuations

Nicholas Malaki

On a stand alone basis this would appear so than a year ago.

But when you take a step back and compare with other markets – markets that attract a similar breed of

investors - the domestic equity market is fairly priced.

We are confident that growth in profitability and better global liquidity will support the market, place it in

a position to compete favorably with other markets.

One fact that cannot be ignored is that the flow of investment funds across the globe has increased.

Emerging and Frontier Markets continue to record substantial portfolio flows.

Therefore the domestic market can not be looked at it isolation, but rather on a relative basis. Trends in

these markets can indicate to us how our market is likely to fair on.

20

Is there support for equity markets into 2014?

Macro economic environment continues to remain supportive

Strong GDP Growth,

Manageable levels of inflation for the year

Lower interest rates

Stable currency

Earnings progression likely to be key support for equity market performance: some sectors

that are likely to do well

Banks, Construction, Media/Telecoms

External events also support attractiveness of Kenyan Equity market

Events in other Emerging and Frontier Markets.

Key risk factor – Potential introduction of Capital Gains Tax

21

Is there support for equity markets in 2014%

Nicholas Malaki

From the fundamentals and the macro perspective, there is support. GDP growth is projected to remain

strong, inflation is tamed although there could be some upside risk; and the currency is not expected to

fall out of bed.

Earnings are likely to be the key driver of markets; with some sectors expected to do well. These include

Banks – which could see accelerating loan growth as well as lower non-performing loans on account of

lower rates;

Construction that is projected to be supported by spending on infrastructure and growth in credit to

households, and

Media and telecom that should benefit from increased advertisement spend with that comes with a

better economic environment, this is in addition to lower commodity prices and stable currency that

should help , maintain margins.

Outside of the domestic scene, we see other events being supportive of the Kenya equity market. Key

emerging markets are undergoing structural reforms, and there is an election cycle across the

continent.

22

Cont’d ….

This is not without the usual risks to the markets.

Perhaps the greatest risk we see for the market at the moment is the potential introduction is capital

gains tax would be a major drawback for the market.

Whereas this could add something to the exchequer, the potential fall out could be significant over an

extended period of time

Most immediate would be a possible reversal in portfolio flows in both public and private markets that

could erode, dilute or even reverse the potential flows that have been very supportive of various sectors

in the economy.

We could even see slowdown in the savings sector, which makes it a bit more difficult to be able to raise

long term capital from public markets.

23

Summary

GDP growth - expectations remain high with our forecast ranging 5.6% - 5.8 %

Inflation trend could change materially in 2H 2014 moving above 10%.

Exchange rate likely to be range bound between 85 – 89 to the US dollar

Interest rates – Further decline in short-term rates over 1H 2014 – should lead to increased

bank lending and more corporate debt issuance

Equity Markets – Sustained momentum expected in the market barring any external

shocks. Likely to see further capital raising from the markets, including more M&A activity.

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Q & A

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26

What about Valuations….?

14.3 14.0 14.2 14.0

19.3

16.0

19.0

12.1

2.4 2.6 1.1 1.6 2.2

4.0 2.2 1.5

Kenya Nigeria Mauritius Zimbabwe Ghana South Africa MSCI World Index MSCI Emerging

Markets Index

P/E P/B

Valuations are comparable across most SSA markets; Emerging Markets cheap due to structural issues.

Key Risks to Positive Equities Outlook

QE tapering could lead to lower liquidity flows; However, appears to still be a lot of fund raising for frontier markets

Earnings quality and growth likely to come into focus into 2014; valuations will need to be justified

Macro economic fundamentals turnout to be less favorable than expected

Local politics, and policies could start impacting on investor/business sentiment

Better than expected outlook for SA and Egypt could see rotation of Pan African portfolios from SSA to these markets.

Source: Bloomberg, 31 December 2013

Strong fundamentals and earnings growth momentum should support

valuations in 2014

27

Where to from here….is there support for equity markets into 2014?

Macro economic environment continues to remain supportive;

Strong GDP Growth

Manageable levels of Inflation for the year

Lower Yields

Stable Currency

Earnings progression likely to be key support for equity market performance: some sectors that are likely to do well

Banks – accelerating credit growth into 2014 (improved confidence), lower non-performing loans should be

supportive of strong growth in the sector;

Construction - Increased infrastructure investment in the economy should increase sales for construction companies;

manageable inflation levels should help improve margins.

Media/Telecoms – Better economic environment should increase marketing/advertisement spend by companies,

low commodity price and stable currency should help maintain margins.

External events also support attractiveness of Kenyan Equity markets

Emerging markets - still looking weak; Brazil , India and South Africa going to face elections in 2014; Investors will

watch these keenly; and structural reforms will be key;

Nigeria – Economic outlook looking less appealing (2014 could become a pre-electioneering year);

CBN Governor’s term ends in June 2014, uncertainty could make Kenyan market look more favourable

However, weight in MSCI Frontier basket will mean allocations will increase both to Nigeria and Kenya

Egypt - Egypt equity market have rallied 56%; 2014 will be key for reforms – draft constitution, parliamentary and

presidential elections until June 2014; Egypt will need to translate investor confidence into growth and deal with

unemployment.

q4 2013 investment briefing - final with script (1)

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