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%

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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