Kenyan shares to gain in 2011, politics a worry

A man walks out of the Nairobi Stock Exchange in Kenya's capital Nairobi March 4, 2010.

NAIROBI (Reuters) - Domestic and regional economic growth will fuel more solid gains for Kenyan shares in 2011, with banks, cement and tourism companies seen in the spotlight.

The gains could be curbed, however, by rising energy costs and political uncertainty over the International Criminal Court's handling of cases related to a bloody post-election crisis in 2008.

The Nairobi Stock Exchange's benchmark NSE-20 index .NSE20 added 37 percent last year to close at 4432.40 points, outperforming the MSCI Frontier Markets index .dMI8600000P, which rose 19 percent in the same period.

Last year's rally in Kenyan shares was driven by increased foreign investment, economic recovery and a new constitution viewed as crucial for political stability.

The new charter replaced an independence-era document which was blamed for frequent political upheavals over the years, discouraging investors.

"It will still remain positive, a reasonable rise for the index will be 15-25 percent," said Francis Mwangi, an analyst at African Alliance.

He attributed the expectations to higher corporate earnings, typified by growth in firms' earnings for the first three quarters of last year. The growth momentum in earnings likely accelerated in the fourth quarter and is expected to continue into 2011 on the back of the economic rebound, Mwangi said.

"I remain constructive on Sub-Saharan Africa equity indices and on Kenya in particular where GDP is one powerful tailwind," said Aly Khan Satchu, an independent analyst.

East Africa's largest economy grew by 6.1 percent year-on-year in the third quarter of 2010. Officials expect growth to surpass 5 percent for the full year, before rising to about 6 percent in 2011.

WIDER SPREADS

Analysts said investors would be eyeing banks, whose performances are closely linked to gross domestic product.

Mwangi said the appeal of banks' stocks would be heightened by wider interest rate spreads as deposit rates tumble and lending rates stay constant.

The spread stands at 10 percent for the industry, up from an average of 8.5 percent in the last three years. Over the last 18 months, deposit rates have declined significantly, from an average 5 percent to slightly below 3 percent.

Lending rates, on the other hand, have been stuck at around 14 percent.

Banks, along with cement firms are likely to benefit from growing regional ties. Kenya Commercial Bank (KCB.NR), Diamond Trust Bank DTBK.NR, cement maker Athi River Mining (ARM.NR) and brewer East African Breweries (EABL.NR) have invested heavily in Uganda, Tanzania, Rwanda and South Sudan.

Vimal Parmar, analyst at Kestrel Capital, said marketing and tourism firms also should perform well in 2011, taking the spotlight from telecom firms, which lost investors' favour after stiff competition in the sector led to sharp price cuts last year.

"Advertising companies like Scangroup and tourism firms like TPS Eastern Africa will also be key drivers," he said.

He added the biggest risk to the bulls in this area would be an escalation in the sovereign debt crisis in the euro zone. Europe is a key source of tourists for Kenya, and the main buyer of Kenyan flower exports and other fresh produce.

"PRECARIOUS POSITION"

Some cited as concerns the cost of doing business as energy prices rise, and the threat of political risk reappearing after being reduced significantly by enactment of the new constitution.

"We still are sitting in a very precarious energy position and the only way we are going to see companies record good margins and growth for their earnings is if they can control costs and energy is one significant component," said Mwangi.

Some investors have also been unnerved by the split in the government over how to respond to the International Criminal Court's ICC.L naming of six prominent Kenyans, including Finance Minister Uhuru Kenyatta, as masterminds of post election political violence in 2008.

While angry parliamentarians voted to withdraw Kenya from the ICC last month, Prime Minister Raila Odinga said the country would remain a signatory of the Rome statute.

"Political risk is the key factor that can impede this (bourse) outlook. The government's response to the ICC is key. If investors see a back-sliding and heightened noise levels, then 2011 might just peter out ahead of the election in 2012," Khan said.

(Editing by Richard Lough and Hans Peters)