Spooked foreign investors scramble out of stock market

The Nairobi Stock Exchange is paying heavily for its close links with the international market, thanks to the participation of foreign investors at the bourse over the last three years.

An analysis done by CFC Financial Services, a local stockbrokerage firm, shows that the meltdown currently afflicting the NSE has a lot to do with foreign investors.

By the third week of October, NSE’s year-to-date return on the index had fallen below 40 per cent, leaving investors smarting due to losses incurred.

Simply put, investors at the NSE have seen about 40 per cent of their wealth dissipate compared to their holding in October 2007.

“The financial crisis in the global markets which has caused widespread liquidity crunch has led to foreigners exiting the local bourse in a bid to consolidate their cash positions,” CFC Financial Services notes in a research note titled, Effect of Foreign Trading on the NSE.

Over the three months to September 30, foreigners accounted for 37 per cent of the total market turnover with September recording the heaviest foreign turnover of 72 per cent; in comparison July and August had 24 per cent and 33 per cent of foreign turnover respectively.

Other than July, the other two months recorded a net sale meaning that foreign investors sold more than they bought.

Diverse

Until the report was released, debate and opinion as to how the global credit crisis will affect Kenya has been as diverse as the number of people voicing opinions.

While many analysts seem to agree that the overall economy could, at least in the short term, be shielded from the global credit effects, little consensus is arrived as to the expected effect on the Nairobi Stock Exchange.

Two things complicate analysis on the effect of the financial crisis at the NSE.

Long before the global meltdown peaked, the stock exchange was already experiencing a downturn attributed partly to the collapse of Nyaga Stockbrokers back in the first quarter of 2007.

And before recovery could set in, mobile service provider Safaricom’s initial public offering opened in April 2008 accompanied by the usual sell-off that precedes an IPO in Kenya, as investors dispose of existing counters to buy into a new issue.

By September when the financial crisis became apparent in the USA “it only came to aggravate an already losing local market, with significant foreign sell-offs being experienced as foreigners looked to consolidate their cash positions in the face of a looming credit crunch in their countries,” CFC Financial Services says in the market report.

This resulted in a marked decline at the NSE, with the market capitalisation or shareholder value falling by Sh196 billion between September 1 and October 9, 2008.

And for the first time since Safaricom’s listing the market value of the exchange went below one trillion shillings, settling at Sh881 billion.

“In my view I think far too many people in Kenya are suffering from the CNN effect – where overly negative news relayed on live news channels reinforces negative feelings about economic prospects and becomes reflected in confidence and financial market prices,” said Mr Robert Bunyi, a market analyst with Mavuno Capital of the NSE price meltdown.

Others saw a close link between Nairobi and Wall Street.

“Kenya is part of an increasingly integrated global economy and the effects of the financial system turmoil in the United States and Europe are bound to have effects, albeit a lagged one on emerging and frontier markets including ours,” NSE chairman Mr James Wangunyu said during last week’s launch of Co-operative Bank’s share sale.

CFC Financial Services did the math and came to the conclusion that the September sell-offs and the accompanying price fall was largely attributed to foreign investors fleeing to more “safer investments” mostly government securities denominated in US dollars.

“The ripple effects of the global financial mayhem were felt in the NSE with September recording a massive foreign sell-off which accounted for half the total sales posted at the market during the month,” CFC Financial Services says.

Inflict

The counters that were most affected by foreign exits in September were Barclays Bank, Mumias Sugar, Access Kenya, East Africa Breweries and Equity Bank.

Notable is fact that over the three months to September 30, 2008 the only gainers were Athi River Mining and Pan Africa Insurance, which rose by 2.8 per cent and 3.4 per cent respectively while Unga Group remained unchanged at Sh14.

In October, the foreign investors returned to inflict yet more pain to the already struggling Safaricom share, pulling its price to a new low of three shillings.

“Because of high levels of foreigner participation, this counter was the closest we got to the international market crisis,” Mr Aly-Khan Satchu, a stock market analyst and the author of Anyone Can Get Rich, wrote in his stock market blog.

“One would have thought that those who wanted to sell have now done so and that we could move up smartly but there are many shares in issue,” he said.

Nairobi was not alone in this. A research report released mid last month by Databank, an investment bank based in Ghana noted:

“Global markets remained volatile. Most markets closed in the red and this was replicated in trading on African markets.”

By then only Morocco, Egypt, and Tanzania’s stock exchanges had returned a positive performance. Uganda, South Africa, Namibia, and Kenya led in registering negative growth.

But the exit of the foreign investors is not all gloom, at least for investors preparing to invest at the market.

The price meltdown has presented investors with what NSE Chairman Wangunyu termed as a “bargain purchases across solid counters.”

The price fall has lowered the average market Price to Earnings (P/E) ratio, currently at 11.4 compared to 19.81 at the beginning of the year.

P/E , also known as multiples, shows how much investors are willing to pay per shilling earning of companies.

“The assets of the various listed companies in Kenya are heavily undervalued and it is therefore the right time to prepare to enter the market in a big way,” Mr Wangunyu says.

Calling investors to make the best use of the price fall. Dyer & Blair Co-chief Executive, Mohamed Hassan says that price “multiples are where they were around 2002 just before the market surge that brought us to the high levels of 2007 kicked off.”

As with the overall economy, the NSE’s performance picked pace in 2003 with the NSE 20-Share Index terminating at a historical best of 6,161.26 points on January 12, 2007 from a low 1,384.98 points in January 2003.

The overall economy expanded from 0.5 per cent in 2002 to a high of 7.1 per cent in 2007.

There is also a general feeling that, at the current pricing ,the market has hit its absolute rock bottom and hence presents the best chance for investors looking for long and medium term investment to make their entry into the market.

“It is our belief that the bear market has bottomed out and the feel good time arising from the US election will perhaps awaken the market,” Mr Wangunyu says.

But there those who still believe Kenya and the rest of Africa are not out of the woods yet.

Analysts say they expect African markets to closely move in tandem with the foreign financial markets mainly due to investor sentiments, rather than on fundamental reasons.

Optimistic

Others are a bit optimistic on the outlook and say it time for local investors to take advantage of the foreign investors’ exit. The market, they argue, can only move upwards.

“Basically the worst of the crisis is now behind us and some direction with regard to how it will be resolved is already with us.

“Already financial markets have adjusted to lower earnings prospects by businesses,” says Mr Bunyi.