Foreign investors prop up bourse

Prime Minister Raila Odinga signs the KenGen public infrastructure bond offer as the power producer’s managing director Eddy Njoroge looks on during its official launch held at the Intercontinental Hotel last month. Many local investors are opting for the bond market due to attractive returns and security. Photo/FILE

Foreign investors are propping up the stock market after local investors opted to ship out and invest in the bond market where returns are more attractive.

But as the share prices sea-saw, market experts say the expected third quarter financial performance announcement is what will firm the price movement to either pick an upward trend or meltdown.

In the week ending October 9, the NSE 20 share index, which tracks share price movements at the bourse, lost 54 points to settle at 2,987.2 points; the first time the index closed the week below the 3,000 mark since mid June.

In June, optimism stirred by the budget saved the index from crashing below the 2,000 points which would have sent it to a seven-year low.

This time though, the return by foreign investors to a market they abandoned at the height of global financial crisis is what is supporting it.

Doing the buying

“On average between 60 to 70 per cent trading is dominated by foreign investors mostly doing the buying,” says Mr Eric Musua, an equity research analyst at Renaissance Capital (Kenya).

While foreigners are making a return to NSE, locals are shifting some of their investment to fixed income market as they try to make up for the losses incurred during the stock market price fall. Since January 2, the index has fallen 16 per cent.

“More and more, we are seeing investors go to the bond market as they try to make a positive return to the year end,” said Old Mutual investment division head of portfolio management Fred Mburu.

“The returns the fixed income investments are offering are decent almost matching long term average return on investment.”

The recently concluded 15-year Kenya Electricity Generating Company infrastructure bond is offering a tax-free interest rate of 12.5 return effectively translating to 14.7 per cent.

Safaricom’s five-year corporate bond is offering 12 per cent while the government offering is equally attractive at between 7 per cent and 14.62 per cent.

The exodus and the fact that the period coincided with time local institutional investors were on a lull is what drove the index down.

“The local fund managers have been staying away as they prepare performance report for the third quarter,” said CFC Stanbic Financial Services head of research Judd Murigi.

The trend reversed last week with the index gaining 48 points, though not good enough to overturn previous week loss, to close the week at 3031 points.

“We have seen improved momentum,” said Mr Murigi arguing that whether the momentum will be sustained depends largely on the third quarter performance.

Gloomy outlook

“People have remained cautious broadly due to performance rather than anything else,” says Mr Musua.

Already some of the listed companies have released their third quarter performances that point to a gloomy outlook.

Oil marketer Total Kenya Ltd released its results showing a 74 per cent decline in its pre-tax profit, 44 per cent in turnover and 57 per cent fall in operating profit compared to the same period last year.

In their notes accompanying the results, the management said the poor performance was largely due to reduced sales volumes.

Also attributing its poor results to reduced sales was East African Cables, which reported a 14 per cent fall in pre-tax profit from Sh583 million to Sh500 million for the nine months to September 30, 2009.

The management attributed the fall to low sales pointing out that slower aluminium uptake depressed turnover from Sh2.9 billion to Sh2.4 billion posted within the same period last year.

Increase in tariff rather than sales saw KenGen record a 48 per cent rise in pre-tax profit.

“Earnings in 2009 were impacted favourably by the implementing of a new power purchase agreement with KPLC,” the management says in its notes to the results.

The agreement brokered by the government saw KenGen earn 60 cents more per kilowatt.

Reduced sales means consumption levels in the economy are yet to pick and drive production, casting doubt over the expected economic recovery.

Be any better

In the banking sector, which has outperformed other sectors, the performance is not expected to be any better with results for the half year showing that profit rose by a marginal 2.7 per cent.

With such an outlook African Alliance, an investment bank with interest in the Africa market, has advised its clients to hold on to their banking sector portfolio pending any change of outlook.

“While Kenyan bank valuations are now more attractive, these are still not at a level where we feel comfortable in changing our current hold recommendation,” its Kenya Banking Sector Report Update released on Friday says.

The shift in the banking industry is now more on managing cost rather than growing business.