Kenya Stocks, Shilling Rally on Violence-Free Vote Hopes

Kenya’s currency is trading at its highest level in 10 weeks and stocks are rallying as investors bet the East African nation will avoid a repeat of the prolonged violence that followed 2007 elections in today’s vote.

The Nairobi All Share index has advanced 13 percent this year, the third-best performance in sub-Saharan Africa after Nigeria and Ghana for dollar investors. The gauge trades at 11.9 times profit, compared with 11.7 times for the MSCI Frontier Markets Index, which is up 7 percent. The shilling appreciated

1.8 percent against the dollar last week, its strongest week in more than 14 months and the best-performing African currency.

Today’s presidential election was the first since more than 1,100 people were killed in clashes after the last ballot, which caused economic growth to slump by two-thirds in 2008, the shilling to fall 8.5 percent and the benchmark stock index to drop 11 percent. East Africa’s biggest economy may grow as much as 6 percent this year from about 5 percent in 2012, according to the International Monetary Fund.

“People are pricing in a free and fair election,” Sven Richter, managing director of frontier markets at Renaissance Asset Management in Johannesburg, which has more than $150 million in African funds, said by phone on March 1. “We’re not concerned. If there are any issues of violence, they will probably be sporadic and short-lived.”

Police Reinforcements

Police reinforcements were deployed in Kenya’s Coast province today after at least 14 people died in a series of separatist attacks.

The Mombasa Republican Council, which seeks autonomy for the coastal region and has called for a boycott of the vote, carried out at least three attacks last night that left eight policemen dead, Samuel Kilele, the provincial commissioner, said in a phone interview. Six of the group’s members died and four were arrested, Police Inspector-General David Kimaiyo said.

Reforms under a constitution enacted in 2010 have strengthened the judiciary’s independence and built safeguards into the electoral process. Candidates have said they are prepared to concede defeat and settle disputes in court.

The IMF growth forecast for Kenya outpaces the average estimate for emerging and developing markets at 5.5 percent and the 3.5 percent expansion seen for the global economy.

Stock Rally

The All Share index advanced 38 percent last year, the top performer in sub-Saharan Africa after Nigeria. Gains on the Kenyan bourse this year have been led by AccessKenya Ltd., the country’s only publicly traded Internet company, which has surged 48 percent. Other leading stocks include Kenya Electricity Generating Co., ARM Cement Ltd., Kenya Commercial Bank Ltd. and Housing Finance Ltd. Foreign investment represented 49 percent of all trading in Kenyan equities in 2012, up from 10 percent in 2007, according to data from the Nairobi Securities Exchange.

“We’re always cautious in an election year,” Joseph Rohm, a portfolio manager who helps manage more than $1.5 billion for Investec Asset Management’s African funds, said by phone from Cape Town on March 1. “There is always a degree of uncertainty so we wait and see.”

Investec, which runs the largest African-focused funds excluding South Africa, will add to holdings of Kenyan equities should the elections be followed by violence and spur investors to dump the nation’s stocks.

The money manager prefers companies that have regional operations across the East African Community, a $79.2 billion economy whose members include Tanzania, Rwanda, Uganda and Burundi. Some of the industries it is looking at include those exposed to consumers, cement and civil engineering and banks, Rohm said.

‘Liquidity Spectrum’

“We will not necessarily only look at large-cap stocks, it would be across the liquidity spectrum,” he said, declining to identify potential investments. “You can access the economic growth of the entire East African region through the Kenyan exchange.”

The Nairobi Securities Exchange’s 20-Share Index may rise as much as 30 percent by the end of this year, Aly-Khan Satchu, chief executive officer of Nairobi-based investment company Rich Management Ltd., said by phone last month. His biggest holdings include Kenya Commercial Bank, Standard Chartered Bank Kenya Ltd. and Williamson Tea Kenya Ltd., he said.

“There is considerable headroom for the market to rise,” Satchu said. “We’re still below levels seen in the fourth quarter of 2007.”

Trading Levels

While share prices are rising, trading levels are thin relative to South Africa, Africa’s largest stock market, making it difficult for investors to exit their investments. An average

19.1 million shares traded on the All Share index last week compared with 245.4 million on the Johannesburg Stock Exchange’s FTSE/JSE Africa All Share. The equity market is closed for today’s vote.

The shilling may weaken to 91 per dollar in the next three months because of “lingering political risk” before “recouping some ground” in the second half of this year, Michael Keenan, a Sub-Saharan Africa strategist at Barclays Plc’s Absa Capital in Johannesburg, said by phone March 1. Companies had accumulated dollars in the months before the election, while the central bank helped to stem a decline in the currency by draining excess liquidity, he said.

Central Bank

The central bank has removed 191 billion shillings from the market this year, according to data compiled by Bloomberg. The bank also sold dollars between Jan. 18 through Jan 29. The shilling was little changed at 85.90 per dollar as of 5:05 p.m. in Nairobi. The currency fell as low as 85.31 per dollar on Feb. 28, its best level since Dec. 21.

“If elections are peaceful and a clear winner emerges, we expect an increase in dollar demand as businesses pick up their operations” after holding off on investments in the run up to the vote, Keenan said.

The NSE-20 Index reached a record high of 6,161.46 on Jan. 12, 2007. It closed at 4,510. 47 on March 1, having finished last year at 4,133.02. The Nairobi Stock Exchange, which has a market value of 1.45 trillion shillings ($16.9 billion), is sub-Saharan Africa’s biggest bourse after South Africa, which has a market value of $509 billion, and Nigeria, according to data compiled by Bloomberg.

“If we don’t have any issue with the elections, we could see the index at 5,000 points by the end of the year,” Kuria Kamau, a research analyst at Nairobi-based Kestrel Capital (East Africa) Ltd., said in a phone interview last month.

Stock Picks

Kestrel Capital’s top stock picks for 2013 include Safaricom Ltd., the country’s biggest mobile-phone company, Kenya Commercial Bank Ltd., the largest lender by assets, Equity Bank Ltd., the biggest by customers, and Co-operative Bank of Kenya Ltd., the fourth-biggest by market value, the Nairobi-based brokerage said last month.

Renaissance Asset Management, which targets a 15 percent dollar return a year for its investments, owns stakes in Kenya Commercial Bank, Co-operative Bank of Kenya and Equity Bank. It also owns shares of East African Breweries Ltd., TPS Eastern Africa Ltd. and Kenya Power & Lighting Ltd. and may look to buy stocks in financial services and the fast-moving consumer goods and construction industries, Richter said, declining to be specific.

“You need to position yourself for the long term and look through any short-term risk,” he said. “The opportunity set in frontier markets like Kenya is so huge.”