• `Refugee capital' boosting inflows into regional hub
  • Commercial lenders' problems `overblown,' sector attractive

Kenya equity valuations that declined over the past year are now among the most attractive in sub-Saharan African frontier markets, supported by the lowest political risk in a decade and favorable global conditions, analysts from Exotix Partners LLP said.

Lower oil prices, which benefit net crude importers like Kenya, and the prospect that the timing of U.S. interest-rate increases have been pushed out are expected to foster a “relatively benign environment for capital inflows into Kenya,” Hasnain Malik, head of frontier markets strategy, said in an interview Tuesday in the capital, Nairobi. Kenya also continues to attract “refugee capital” from investors in neighboring countries facing civil unrest, such as Somalia and South Sudan, that are seeking a safe haven, he said.

The Nairobi Securities Exchange’s All Share Index fell 11 percent in 2015 amid a sell-off in developing-nation stocks on concern that a slowdown in China, the world’s second-biggest economy, and a collapse in commodity prices would stem growth. The index is down almost 1 percent so far this year.

‘Significant Derating’

“Over the past three to four years, we’ve been looking at a Kenyan market that has perpetually hit new highs in terms of its valuation multiple,” he said. “Over the past year, we’ve seen quite a significant derating.”

Exotix favors “all of the big stocks” in the Kenyan index, including East African Breweries Ltd., the region’s biggest brewer, Safaricom Ltd., the country’s largest mobile-phone company, and lenders including Equity Group and KCB Group, Head of Equities Ali Khalpey said. It’s avoiding companies in distress, such as Kenya Airways Ltd., which last year reported the country’s biggest-ever loss, and retailer Uchumi Ltd., he said.

Kenyan banking stocks remain enticing to investors even after the closure by the central bank of three small lenders including Chase Bank Kenya Ltd. and Imperial Bank Ltd. because of governance concerns. On April 10, the central bank announced it would provide liquidity support to banks facing constraints because of “anxiety” about the banking system.

Kenyan police on April 8 ordered the arrest of Chase Bank Chairman Zafrullah Khan and Group Managing Director Duncan Kabui. It’s also asked for the detention of six other directors from state-owned National Bank Ltd. who were placed on forced leave last month pending an internal audit.

“It’s cases of rot at the top and abuse of privilege,” Kato Mukuru, head of equity research at Exotix. “It’s not a crisis, it’s a governance issue.”

Political Stability

Exotix’s positive outlook for Kenya is buttressed by what it sees as relative political stability in an election year, Malik said. The country is scheduled to hold a presidential vote in August 2017.

The ruling Jubilee coalition appears to be more united than at any time since it came to power in March 2013, helped by the failure of war-crimes cases against President Uhuru Kenyatta and Deputy President William Ruto at the International Criminal Court, Malik said. Kenyatta and Ruto faced charges of instigating violence after a disputed 2007 election that left at least 1,100 people dead. The two, who were in rival parties in 2007, joined forces to win the 2013 vote.

With the political opposition looking “incoherent, divided, fragmented and disorganized,” conditions for investors are “a lot lower risk,” Malik said. “Political risk is in Kenya’s favor at the moment.”

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