Impact of COVID-19 on Retirement Benefits Schemes & Financial Markets
Elizabeth Nkukuu – Chief Investments Officer, Cytonn Investments
2www.cytonn.com
Table of Contents
TOPICS I. INTRODUCTION
II. IMPACT OF COVID-19 ON THE FINANCIAL MARKETS
III. OPPORTUNITIES THAT RBS CAN EXPLOIT
IV. STRATEGIES TO MINIMIZE EXPOSURE TO THE EFFECTS
V. STEPS TRUSTEES AND ADMINISTRATORS SHOULD TAKE
VI.RESTRUCTURING THE CURRENT OPERATING ENVIRONMENT
VII. EFFECT OF PROPOSED TAX CHANGES ON RETIREMENT SCHEMES
3
II. Impact of Covid-19 on the
Financial Markets
4
(a) Impact on Kenyan Economy
5
Impact Of COVID-19 On Kenyan Macros
Indicators Impact Effect
GDP Growth
• The key sectors of the economy affected by the Coronavirus pandemic include the Manufacturing, Tourism, Agricultural, and the
wholesale and retail trade sectors which have been the hardest hit due to shutdowns in major markets and the disruption of the global
supply chain. Combined, the 4 sectors account for more than 50.0% of Kenya’s GDP. The decline in business activity can be evidenced by
the sharp decline in March’s headline PMI to 37.5 from 49.0 in February, the second-worst recorded in the survey's history
Negative
Inflation• Cost-Push Inflationary pressure is expected to emanate from supply-side shortages owing to major lockdowns across the globe which
have disrupted supply chains.Neutral
Currency
• The Kenyan Shilling has experienced a lot of volatilitydue to some merchandise importers and retailers buying dollars to meet their
obligations amid lacklustre inflows due to the coronavirus-related disruptions. We expect the shilling to remain under pressure due to
the supply chain disruptions, coupled with subdued hard currency dollar inflows
Negative
Government
Borrowing
• We foresee increased pressure on Government borrowing from both the domestic and foreign front. As the business environment
becomes more challenging, we expect a dip in tax revenues, despite the Government being in dire need of raising finances to offer the
requisite financial stimulus. This might require the deficit to be plugged in by debt, which might be hard and expensive in the current
market conditions due to investors attaching a higher risk premium
Negative
Interest rates
• Despite the MPC having cut the CBR rate by 125 bps cumulatively to 7.25% in the 2 MPC meetings held so far in 2020, we expect Banks
to take a cautious stance in lending due to the heightened likelihood of default and as such we do not foresee a decline in lending
interest rates.
Negative
Investor Sentiments
• We expect investor sentiments to be hit as well due to the dampened economic growth sentiments for the country. This has seen
Eurobond yields rise significantly in Q1’2020 due to investors attaching a higher risk premium on the country. A similar trend has been
observed on Equities investments as turnover declined by 49.4% during the quarter to USD 438.6 mn in Q1’2020,
Neutral
Security • We do not anticipate any negative impact on security, and there has been no terrorism / violent event to speak of Positive
6
(b) Impact on Equities
7
Impact on Global Equities Market
Market Performance was on a decline globally, with SEMDEX being the largest loser YTD
(33.2%)
(33.0%)
(31.7%)
(30.0%)
(29.1%)
(25.9%)
(24.4%)
(23.7%)
(23.6%)
(17.5%)
(9.0%)
(4.9%)
(35.0%) (30.0%) (25.0%) (20.0%) (15.0%) (10.0%) (5.0%) 0.0%
Semdex
NSE 20
FTSE 100
NGSE ASI
NASI
FTSE EURO 300
MSCI EM
MSCI World
S&P 500
Nikkei 225
Shanghai Comp
GGSECI
8
Impact on the Equity Market Performance
The pandemic has also adversely affected the FTSE indices as seen in the YTD losses of FTSE 100 and FTSE
Euro 300 of 27.6% and 24.7% respectively
10,000.6
7,236.1
1,820.5 1,370.5
44.9 36.0 -
2,000.0
4,000.0
6,000.0
8,000.0
10,000.0
12,000.0
Year Open 31-Mar-20 3-Apr-20 9-Apr-20
FTSE Indices and MSCI EM Performance
FTSE 100
FTSE Euro 300
MSCI EM
Index Year Open 31-Mar-20 9-Apr-20 Quarter 1 Change YTD Change
FTSE 100 10,000.6 7,043.5 7,236.1 (29.6%) (27.6%)
FTSE Euro 300 1,820.5 1,340.5 1,370.5 (26.4%) (24.7%)
MSCI EM 44.9 34.1 36.0 (23.9%) (19.8%)
*The data for the indices are dollarized for ease of comparison
9
Impact on Nairobi Securities Exchange…The equities market was on a downward trajectory in Q1’2020, with NASI & NSE 20 losing 20.7% and 25.9%, respectively, which is indication of a bear market
1966.1
171.4
133.3
0.0
50.0
100.0
150.0
200.0
250.0
0.0
1000.0
2000.0
3000.0
4000.0
5000.0
6000.0
NA
SI
NS
E 2
0
NASI/NSE 20 Price Movements
NSE20 NASI
10
Impact on Nairobi Securities Exchange
The equities performance year to date was driven by losses recorded by large caps such as Bamburi,
Equity, KCB, BAT Kenya, EABL and ABSA of 39.8%, 38.7%, 36.1%, 28.0%, 27.0% and 26.4%, respectively
0.00
10.00
20.00
30.00
40.00
50.00
60.00
Performance of Select Large Cap Stocks since the beginning
of 2020
(KCB) (SCOM) (EQTY) (COOP) (ABSA)
Equities Security 31 Dec 2019 9 April 2020 YTD Change
Bamburi Cement Ltd 80.00 48.15 (39.8%)
Equity Group Holdings Ltd 53.50 32.80 (38.7%)
KCB Group Plc 54.00 34.50 (36.1%)
BAT Kenya Plc 500.00 360.00 (28.0%)
East African Breweries Ltd (EABL) 198.50 145.00 (27.0%)
ABSA Bank Kenya Plc 13.40 9.86 (26.4%)
Co-operative Bank of Kenya Ltd 16.40 12.45 (24.1%)
Safaricom Plc 31.50 26.35 (16.3%)
Diamond Trust Bank Kenya 202.50 182.25 (10.0%)
Standard Chartered Bank Kenya 109.00 85.50 (21.6%)
NCBA 36.85 27.95 (24.2%)
11
Impact of COVID-19 On Kenyan Equities Markets
The market is currently trading at a price to earnings ratio (P/E) of 8.9x, 32.3% below the historical average
of 13.2x.
8.9x
8.0x
9.0x
10.0x
11.0x
12.0x
13.0x
14.0x
15.0x
16.0x
17.0x
18.0x
19.0x
20.0x
Jan
-14
Ap
r-1
4
Jul-
14
Oct
-14
Jan
-15
Ap
r-1
5
Jul-
15
Oct
-15
Jan
-16
Ap
r-1
6
Jul-
16
Oct
-16
Jan
-17
Ap
r-1
7
Jul-
17
Oct
-17
Jan
-18
Ap
r-1
8
Jul-
18
Oct
-18
Jan
-19
Ap
r-1
9
Jul-
19
Oct
-19
Jan
-20
NASI P/E
Historical average of 13.2x
12
(c) Impact on Fixed Income &
Money Market Funds
13
Impact on African Eurobond Yields
The yield on the 10-year Kenyan Eurobond issued in 2014, increased by 3.5% points to close at 8.3%, in
Q1’2020, an indication that investors are now attaching a higher risk premium on the country due to the
anticipation of slower economic growth; they are doing the same with other African Countries
7.7%
35.6%
8.3%
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
35.0%
40.0%
45.0%
01
-Ma
y-2
01
5
01
-Ju
l-2
01
5
01
-Se
p-2
01
5
01
-No
v-2
01
5
01
-Ja
n-2
01
6
01
-Ma
r-2
01
6
01
-Ma
y-2
01
6
01
-Ju
l-2
01
6
01
-Se
p-2
01
6
01
-No
v-2
01
6
01
-Ja
n-2
01
7
01
-Ma
r-2
01
7
01
-Ma
y-2
01
7
01
-Ju
l-2
01
7
01
-Se
p-2
01
7
01
-No
v-2
01
7
01
-Ja
n-2
01
8
01
-Ma
r-2
01
8
01
-Ma
y-2
01
8
01
-Ju
l-2
01
8
01
-Se
p-2
01
8
01
-No
v-2
01
8
01
-Ja
n-2
01
9
01
-Ma
r-2
01
9
01
-Ma
y-2
01
9
01
-Ju
l-2
01
9
01
-Se
p-2
01
9
01
-No
v-2
01
9
01
-Ja
n-2
02
0
01
-Ma
r-2
02
0
Select SSA Eurobonds
Senegal Zambia Kenya
14
Impact on Yields in Kenyan Bond Market
There was an increase in yields towards the long-end of the yield curve in Q1’2020, mainly attributable to
pent up demand for the short term securities as investors maintained the duration play owing to the
current uncertainties in the financial markets
7.2
13.1
7.3
13.8
6.5
7.0
7.5
8.0
8.5
9.0
9.5
10.0
10.5
11.0
11.5
12.0
12.5
13.0
13.5
14.0
91 182 1Y 2Y 3Y 4Y 5Y 6Y 7Y 8Y 9Y 10Y 11Y 12Y 13Y 14Y 15Y 16Y 17Y 18Y 19Y 20Y 21Y 22Y 23Y 24Y
Yield Curve (%)
27-Dec-19 20-Mar-20
15
(d) Impact on Alternatives Market
16
Impact Of COVID-19 On Kenyan Real Estate Market
Key Sectors Impact Level of Impact
Tourism
Sector
• The tourism sector which contributed approximately 1.3% to Kenya’s GDP in Q3’2019, is
facing hard times due to lockdowns in major economies where tourists originate from such
as Italy,
• The lockdowns have seen a reduction in revenues to the aviation industry which also greatly
contributes to the tourism sector,
• The hospitality industry specifically the Meetings, incentives, conferences and exhibitions
(MICE) is also expected to take a hit because of travel cancellation, ban on all international
passenger flights, as well as the 30-day ban on public gatherings,
High
Wholesale
and Retail
Sector
• Imports from China account for 21.0% of total imports. The supply chain disruption and
uncertainty may also affect this sector due to delays in importation, reducing customer
confidence
Moderate
Construction
Sector
• The industry is facing delays in equipment delivery from the main import market China may
cause a slowdown in the growth of this sector
• Closure of sites due to social distancing
• Postponement of projects impacting on revenues in the industry
• Delays in payments from clients and businesses that are affected by the slowdown in
economic activity, and as well reduced funding from financial institutions
High
17
III. Opportunities that
Retirement Schemes can Exploit
18
What investors should do
1. Equities
• There exist huge opportunities in the equities market for those looking to purchase stocks at low valuations, especially in
the financial services sector
• However, investors must be willing to play a long waiting game to realize value as the current environment will see
equities prices remain low as capital flees to safe havens such as fixed income. This is in line with the pensions industry
long term stance
2. Money Markets – Government Securities
• We believe that for Money Market Funds;
i. Returns will remain stable with a bias to a slight upwards readjustment should rates on government securities
increase, and,
ii. They will remain the most liquid of all mutual funds providing a short-term parking bay that earns higher income
yields compared to deposits and savings accounts.
Returns for equities will be negative in the short term, with long-term value in the market
19
Q&A / AOB