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AA-rated duo: why it’s time to short Kenya

AA-rated duo: why it’s time to short Kenya

Kenya has established itself as Africa's go-to destination for investors unable to get into and out of Nigeria. However, a crippling budget deficit and an unbalanced economy mean this play could easily come undone.

That's according to Charlemagne Capital’s Dominic Bokor-Ingram and Stefan Bottcher, who opened a short position in the country in October.

Speaking to Citywire Selector, the AA-rated duo, who run the Charlemagne OAKS Emerging and Frontier Opportunities fund, said they had opened the 1% short as they view Kenya's economy as potentially unstable.

'We've put in a short position on Kenya. It has huge current account and budget deficits, which make for a very risky economy.

‘The large agricultural sector of the economy is very dependent on rainfall. In an economy that has big twin deficits, you don't need much of a rainfall shock in order for the currency to come under substantial pressure.’

September’s factsheet shows a 1.2% long allocation to Kenya, an allocation the duo had made when the country brought in new rules for the banks that capped loan rates and subsequently put a floor on deposit rates.

'Kenyan banks had been making far too much money for too long, the new rule was a populist move to punish the banks whose profitability has been reduced substantially.

'Like most African countries, we are concerned about the macro situation in Kenya. Where you already have a high budget deficit partnered with an impending election next year, it's likely the budget deficit will only increase.’

Bokor-Ingram and Bottcher said investors have used Kenya as a placeholder in Africa, as many are unable to invest in other nations such as Egypt.

'Investors can't get into Nigeria and they can't get into Egypt because of capital controls. So what do you buy if you're an African fund? Kenya.'

'Some stocks are now overpriced, and that is something we have been taking advantage of.’

The Charlemagne OAKS Emerging and Frontier Opportunities fund returned 24.0% over the three years to the end of October 2016, in the Emerging Market Equity Including Asia category. This compares with a sector average of 3.3% over the same time period.

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