Following a projected growth of 1% in 2020, Cytonn Investments, an investments management firm, are projecting the economy to register a growth of within the range of 3.9% – 4.1% in 2021 supported by improved business sentiment following the easing of restrictions meant to curb the spread of Covid-19. The key downside to this growth shall be, the firm says in a monthly report, any delays in the procurement, distribution and administration of the vaccine.
According to the firm, muted inflationary pressures and the inflation rate will remain within the government’s target of 2.5-7.5% and come in at 5.2% as there will be not much demand push inflation.
On the currency, the firm projects that the shilling will trade within between Sh107and Sh110against the USD in 2021, supported by the improving current account position which narrowed to 4.9% of GDP in the 12 months to October 2020 compared to 5.3% of GDP during a similar period in 2019,
As far as the interest rates are concerned, the investment projects the Monetary Policy Committee to maintain the accommodative policy stance taken in 2020 to support the economy from the adverse effects of the pandemic. However, they also project some upward pressure on interest rates due to increased pressure by the government to meet possible increased borrowing target to plug in the fiscal deficit due to the decline in tax collection during the pandemic
The firm sees an upward pressure on interest rates as the government seeks to borrow more to fund infrastructural projects, pay domestic maturities which stand at Sh531.6bfor H1’2021 and bridge the fiscal deficit that has averaged 7.7% of GDP since 2012 and is now projected to increase fur to the tax collections shortfall. Investors should be biased towards short term fixed income instruments to reduce duration risk.
Equities Outlook
“We have a ‘neutral’ outlook on the Kenyan Equities market in the short term but ‘bullish’ in the medium to long term, they say adding that they expect a gradual upward recovery in earnings growth in 2021, supported by a relatively stable business operating environment, coupled with the improving investor sentiment to support the performance in the equities market in 2021.
For the residential sector in the real estate out, Cytonn also has a neutral outlook, expecting the tough economic environment to continue affecting transaction volumes. For detached units, they say, investment opportunity lies in areas such as Rosslyn, Ridgeways and Ruiru while for apartments, the investment opportunity lies in satellite towns such as Thindigua and Syokimau, as well as the upper mid-end segment in areas such as Kilimani, adding that their outlook for the commercial sector is negative owing to the sector’s performance continuing to be constrained by the oversupply of 6.3million SQFT of space as at 2020. The sector is also facing reduced demand as some firms downsize due to financial constraints while others embrace the working from home strategy amid the Covid-19 pandemic. The asking prices and rents are also expected to decline as landlords continue giving discounts and concessions to attract and retain clients.
It is a neutral outlook for the retail sector with performance being constrained by the existing oversupply of space estimated at 2 million SQFT, dwindling demand for physical space due to shifting focus to e-commerce, reduced purchasing power among consumers amid a tough economic environment, and reduced rental rates. However, there’s optimistic that the sector’s performance will be cushioned by the continued expansion of local and international retail chains.
The hospitality sector also shares a neutral outlook. Despite the sector being the hardest hit by the Covid-19 pandemic, it has begun to gradually recover supported by financial aid from the government through the Post Corona Hospitality Sector Recovery Stimulus by the Ministry of Tourism through the Tourism Finance Corporation (TFC) and other international agencies, repackaging of the tourism sector to appeal to domestic tourists and relaxation of travel advisories. It is expected that this will fuel resumption of activities and resultant improved performance in the medium term.
The land sector is looked at positively. Cytonn expects annual capital appreciation of 1.7% in 2021, with the performance being cushioned by the growing demand for development land especially in the satellite, improving infrastructure, and demand for development land by the growing middle-income population.
Infrastructure has a neutral outlook. Despite the reduced budget allocation for the infrastructure sector with funds being redirected to dealing with the Covid-19 pandemic, the government continues to implement select projects. This will open up areas for developments upon their completion thus boosting the real estate sector
The firm’s outlook for the REIT market is negative due to the continued poor performance. However, they are of the view that for the REIT market to pick, a supportive framework needs to be put in place to increase investor appetite in the instrument.
