Banks as inflation busters
Inflation is like a sharp-eyed hawk swooping down on your earnings chick after chick, picking out your ability to use the same amount of salary to buy the same shopping each month.
My people believe that if you paint the chicks, somehow the hawk will miss them and you stand a chance at more frequent protein-packed meals.
Investing can be a way of beating inflation – if the returns on putting money into the stock market – are higher than the rate of inflation.
If you had money in cash it will be worth less than if you bought a bank stock, earned dividends, and held a unit whose value is estimated to be twice its current price.
EFG Hermes says Cooperative, Equity, KCB and Stanbic Banks had average earnings compounded annual growth rate of 15.8 percent, above the country’s inflation.
I asked my teammates why they were not buying shares given they are the typical middle class, a journalist, a banker, an insurance guy, and one who works for a multinational.
“It is information,” Elanga says, “It is not something we were exposed to so we do not have enough information on which stocks to buy, I bought Kenya Power because at the time they had reported good results,” he says.
I have often asked myself this pertinent question, how do we get ordinary people interested in the Kenyan stock market? Kenya’s stock market is mainly owned and operated by foreigners, about 54.8 percent in the last quarter of last year.
Read also: Why is it easier to gamble than to buy stocks?
Over the past couple of years, some investment managers who know Nairobi only as figures on their balance sheets have decided to pull out their investments in a collective sea of countries collectively known as emerging markets.
No nuance, just hard numbers with the Capital Markets Authority statistical bulleting indicating in quarter four of 2022 the NSE recorded a net foreign portfolio outflow of Kes4.870 billion as compared to an outflow of Kes6.965 billion in Q3 2022.
This has lowered the prices of stock prices, to record lows which ideally should have presented one of the greatest opportunities for the true transfer of wealth in a generation. But we are a country on the margins we have very little saved away for anything leave alone money to invest in stocks.
“Yenyewe watu hawana dough, but watu wanaweka maybe kwa bonds,” Pino says.
He is right, Kenyan corporate and pension are have fixed their mind and are legally bound to trust in the government paper. It is the gold standard of investment products because, like a Lanister, the exchequer will always pay.
But will they, we have seen what has happened in Ghana, our switch bonds and recent auction numbers.
“Despite the attractive valuation, we think a re-rating is unlikely in the short term, due to foreign investors remaining weary of the country’s FX challenges; and local institutional investors’ preference for government securities due to attractive dividend yields,” EFG Hermes said.
The Egypt-based stock broker says it maintains a buy position as valuations are at historical lows.
“Despite the positive earnings outlook for Kenyan banks, valuations have drifted to historical lows; FY23e P/B of 0.7x and P/E of 3.4x is significantly lower than the historical average of 1.6x and 14.2x, respectively, between FY08-21. We think the current valuation represents an extremely attractive entry point,” EFG Hermes said.
The brokers say the banks’ investment thesis is further supported by an attractive average dividend yield of 7.7 percent.
“We think the attractive valuation and positive earnings outlook presents an entry point for local retail investors to build positions in the banks as other investors adopt a “wait and see” approach,” EFG Hermes said.
But for retail investors sometimes it is information, sometimes it is fear of fraud as well as misconceptions even among the more informed sections. What makes the coloured chicks invisible to the hawk, might as well make them invisible to the old man’s foot, so here too cash is still king despite its fragility to inflation.
“You know with so much fraud that people have seen, it is hard for people to think stocks, pia unlike cash which is there, how long will it take to sell the shares, sio liquid,” Pino says.