Dream of NSE riches turns into nightmare

Five years ago, at the height of Kenya’s stock market boom, an army of over two million new investors, retail and institutional, descended on the Nairobi Stock Exchange (NSE).

There was confidence with all the indicators of a market on a roll. This was manifested in a price rally with all companies that listed during the period – ScanGroup, Equity Bank, KenGen, Eveready, AccessKenya and Safaricom – being oversubscribed by huge margins.

With the sky-high hopes of owning a piece of the blue-chip companies, although some of them may not be necessarily holding the same status in the public eye, many investors generously poured their money into the bourse.

The KenGen initial public offering (IPO) in 2006, for instance, opened the floodgate of retail investors to the NSE with their numbers hitting the then historical record of half a million from less 100,000 before the issue.

The firm’s share price jumped to Sh49 from the listing value of Sh11.50 on the first day of trading, generating a massive interest in the stock market that literally pulled small un-sophisticated investors to the trading floor, and made IPO common talk in villages.

Following a series of collapses of a number of stock brokers, however, investor confidence, especially at the retail level, was badly battered.

Since then, things have not been the same and, if anything, a number of stocks are heading south as jittery investors bale out.

“That supreme conviction, which brought two million new shareholders to the market was a valuable thing.

But the conviction was impaired for a variety of reasons, many of which have now been reversed,” said Mr Aly Khan Satchu, an investment analyst based in Nairobi.

“Uchumi (Supermarket) is the most symbolic example of that - it was in ICU for more than five years.”

A combination of factors, unethical behaviour, fraud, theft and mismanagement, have unleashed untold suffering particularly on the small investors who had entrusted their investments to these firms.

Consequently, in the past three years, there has been an exodus of retail investors. Data from the Capital Markets Authority (CMA), the regulator, shows that small investors cut back their investments in equities from a peak of 27 per cent of the market capitalisation in 2007 to 14 per cent, or Sh152 billion, last year.

The exit, market analysts say, is the direct result of eroded confidence that came with the collapse of four stockbrokers, a bear run that has persisted since 2007 and a movement to alternative investments such as real estate where prices have been on the rise.

“The outlook for the year is not very promising due to underlying factors, with rising inflation, depreciating shilling, volatile interest rates and political uncertainty,” said Mr Einstein Kihanda, the chief investment officer at ICEA Asset Management.

With a number of stocks trading below their IPO prices, analysts reckon this year the stock market graph will be trending downwards and most counters will close the year in the red.

“The NSE 20-share index has retreated about 10.6 per cent in 2011 and when you factor in the currency depreciation, then it is a 20 per cent downdraft,” says Mr Satchu of Rich Management.

Kenya National Bureau of Statistics latest data show that the country’s year-on-year inflation rate increased for the eighth straight month in June to 14.49 per cent from 12.95 per cent in May, driven by higher food and fuel prices.

An analysis by African Alliance Kenya Securities raises the red flag too, saying year-to-date the local stock market performance went down 21.9 per cent compared to North African countries, which have faced uprisings.

“We believe equities in Kenya will continue to under-perform generally for the rest of the year especially for foreign investors who will take a hit on the exchange rate,” said Mr Eric Musau, an analyst at African Alliance Kenya Securities. “We do not expect the currency to strengthen in the short-term.”

Fund managers say as stock prices continue to fall, many investors are shifting to the fixed income market in a bid to lock in yields in a rising interest rate environment. Analysts warn that this is likely to continue as long as volatility in the market prevails.

“It has not been a good year compared to last year. Share prices have been on the decline,” says Mr Isaac Njuguna, head of investments at Zimele Asset Management.

“For sure it is not going to be a good year as share prices point down. Many investors are uncertain of when the market will rebound,” he added, “With 2012 being an election year, it will cloud prospects more.”

Mr Satchu has a different take, however: “All things being equal, and if the political risk remains in its box, I see the NSE-20 Share Index rallying about 10-15 per cent from these levels. On a Price Earnings Basis the Bourse looks good value.”

Prior to the financial crisis, many investors were not as captivated by vehicles such as Treasuries, government bonds and agency securities.

They were perceived as boring and had seemingly become out of date. However, currently interest in many of these staid fixed-income schemes have rebounded among investors and managers alike, and riskier investing has dropped off.

Mr Njuguna says the sweet-deal now seems to lie in short-term bonds of less than two years and government securities such as the 91-day Treasury bill since there is uncertainty as to which direction inflation and interest rates will go, making it safer not to commit funds for too long.

In the past few months, data from the Central Bank of Kenya show that demand for Treasury bills has been on the increase.

The bank’s weekly bulletin shows that the government offered for sale Treasury bills and Treasury bonds in last week’s auctions to raise a total of Sh20 billion.

During the 91-day treasury bills auction of June 23, 2011 the government offered Sh2 billion which attracted bids amounting to Sh11.5 billion, a 574.0 per cent performance.

Bids amounting to Sh5.8 billion were accepted. In another auction held on June 22, the government offered for sale two-year, five-year and 20-year Treasury bonds to raise Sh18 billion.

The auction attracted bids amounting to Sh19.0 billion, a 105.0 percent performance. The government accepted bids amounting to Sh9.0 billion of which Sh6.7 billion were in two-year treasury bonds.

The average yield for the 91-day Treasury bill was 2.18 per cent in November last year but the latest rate is 8.995 per cent making it an attractive bet.

Even those companies paying the highest dividends, the yields are not able to offer a higher return than the 12.95 rate of inflation.

A weakening shilling and investor caution as the 2012 elections expected to take place in August 2012 approaches make fixed deposits and government securities more attractive.

“There are growing indications that the secondary bond market will perform just as well as 2010 this year, with Sh109 billion already traded during the first quarter of 2011, representing 23 per cent of the total bond turnover for the previous year,” says the CMA in its Monthly Bulletin.

“Kenyans in post-KenGen issue fell in love with the bond market and it was largely a one way bet until this year. Bonds were in a sweet spot as inflation crashed to a cycle low of 3.1 per cent last year,” Mr Satchu says.

However, the bond market is a cruel and fickle mistress, as investors have found this year. Inflation was last at 14.5 per cent and the bond market has fallen out of bed. Investors are nursing some brutal and violent losses.

Another area that continues to attract capital, Mr Satchu says, is property. “I see it as in a solid medium term uptrend with low beta,” he say. “Kenyans are like the British - they have a supreme faith in bricks and mortar and with good reason.”

He says an optimised low beta portfolio needs to hold property and shares – which are trading on a low PE (price-earnings) basis.

And as long as interest rates for Treasury bills and bonds remains high compared to returns from the stock market, the bear run will continue to erode investor confidence at the stock market.

Since January the Nairobi Stock Exchange Index has lost 524.81 points to 3969.03 points as at the end of last week from 4,495.41.

Central Bank’s weekly bulletin showed that the performance at the equities market declined during the week ending June 23, 2011.

The NSE 20 share index lost 21.7 points to settle at 3,970.6 from 3,992.3 points on June 16, 2011.

Equity turnover shed 34.2 per cent while the number of shares transacted decreased by 59.4 million during the period under review.

New listings coming up

Market capitalisation as a measure of total shareholders’ wealth decreased to Sh1.115 trillion from the previous week’s Sh1.122 trillion.

Likewise, the Nairobi All Share Index dropped to 90.85 from 91.45 points.

Although analysts point to reduced activity for the remaining part of this year, new listings of British American and Trans-Century will likely jolt the market.

“Not sure if British American IPO will trigger market recovery due to underlying fundamentals. Investors are likely to view the IPO on its own merits,” said Mr Kihanda.

“It is all about pricing and I think Britak have erred on the side of caution on that front and therefore whilst it might not ignite the market it will stir it.”