Columnists
Opting to bet against policy experts seems more advisable now
Friday August 18 2023
Nairobi Securities Exchange chief executive officer Geoffrey Odundo on February 8, 2022. PHOTO | DIANA NGILA | NMG
Companies are increasingly turning their attention to a single line on the balance sheet: Cash.
This year, some of the blue chips such as East African Breweries, KCB Group, Safaricom and Bamburi Cement have cut dividends. Such cuts can be largely attributed to the quest for cash.
Understandably, some of these businesses are in expansion mode, some are in survivor mode trying to navigate a harsh operating environment while some had an unprofitable run in the previous year, etc.
So, all these moves are strategic decisions for the conservation of cash. Interesting, no cut backs on perks for corporate executives (or just yet).
That notwithstanding, the absence of cheap credit in the markets means companies are best served turning inward.
Judged against the current economic backdrop, these cuts make sense. Latest Stanbic Bank Kenya purchasing managers index (PMI) shows that the business outlook remains below average.
To quote, “the 12-month outlook for activity improved in April and May, but remained weak in the context of historical survey data.”
Survey also cited usual concerns around declining new orders, inflationary pressures (mostly affecting purchasing power among customers) and the depreciating local currency.
Above view outweighs (in my view) the bullish outlook given by the Monetary Policy Committee last week. My take is that companies preferring cash will likely feed through to broader economic weakness.
In any case, choosing to bet against policy experts seems more advisable now. I recall Stan Drunkenmiller’s one-time advice on making directional calls: “ignore signals from economists and learn to look inside the stock market for its prescient message about future economic activity.”
That said, cash will remain king for the foreseeable future. Increasingly, executives who used to focus on growing sales are now looking for pockets of cash in their companies to build “internal liquidity.” For investors, the same thing applies.
More equity exits are likely. Those with cash may head to Treasuries as storing it is clearly a counter-intuitive call when inflation is still dancing on the edge of CBK’s inflation highest range.
However, looking more closely at individual corners of the market, possibly banks may be one of the few sectors that would do well given that they benefit from higher Treasury yields. The rest (again) may likely struggle.
Unlucky ones may be forced to cut off investment projects, sell real estate or draw down credit lines at their bank just in case they need the cash.
To end, dividends paid by companies in the benchmark NSE’s 20 Share index are expected to decline this year.
Equity markets have taken the cue – down more than 18.3 percent so far this year. Of course, early sideliners are feeling vindicated in deserting risky stock markets where dividends and capital gains have looked less attractive compared to fast-rising government treasury yields.
Yields on the 364-day Treasuries have risen nearly 24 basis points to 13.3 percent while the 91-day Treasuries closed at 13.1 percent, up 43 basis points.
Overall, the rush for cash is sending a negative signal. For companies, it’s the much-needed lifeline.
Mwanyasi is the MD Canaan Capital.
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