Fundamentals in place for the stock market to cross the 4,000 mark this year

Seated in his corner office in Westlands, the Nairobi Securities Exchange (NSE) Chief Executive Geoffrey Odundo beams and visualises lots of green shoots on the trading board.

His motivation comes from the charging bull sculpture on his desk, directly facing him. “Here, there are only bulls. Lots of them. No bears,” he says with a contagious smile.

It has been three months since the bourse opened this year’s trading.

The volumes on both equities and bond markets are looking up and Mr Odundo reckons nothing could stand in the way as the second quarter begins.

“We have now dealt with political issues which made investors anxious last year. We see now see resolution among leading politicians. This provides a good vibe for the market,” Mr Odundo said.

In the first three months of the year, a good run by banks and Safaricom stocks helped lift the market capitalisation to Sh2.82 trillion, being Sh320 billion higher than last year’s close.

Business front

Equity turnover during the quarter rose by 73 per cent to $600 million (about Sh61.2 billion) from 347.2 million (Sh35.4 billion) in the last quarter of last year, a run the NSE boss describes as a “pretty strong run.”

“Compared to last year, we are seeing a better run on the business front. This is more than we had expected and it speaks of some good tidings ahead of us,” said Odundo.

In the last three months, the NSE All Share Index (NASI) gained 11.7 per cent to close the month at 191.23.

The index had hit an all-time high of 192.17 points during the close of the third week of last month.

The NSE 20 Share Index gained by 3.6 per cent while NSE 25 Index gained by 9.6 per cent. The highest the NSE 20 has ever reached was in February 2015 when it hit 5,491.37 points.

As at December last year, it was at 3,711 points but it has hit a high of 3,845 points already.

“Hitting 4,000 this year will be an understatement. I am certain we will cross that,” he said. According to Odundo, the political stability is beginning to attract investors’ interest in sectors such as real estate supported by direct foreign investments.

Externally, there is increased interest in emerging markets from global funds, he told Financial Standard. With Kenya being a bigger market within the region, he sees big investors making it a priority.

Foreign investors had turned net sellers for the better part of last year, with the volume of sales being highest in the period between May and October.

However, the NSE boss downplayed this, saying the foreign investors were mainly changing portfolio in their books as opposed to exiting entirely.

Their participation on the bourse remained within 60 and 70 per cent of daily turnover even as the value of shares went down.

But the NSE boss said some increased level of local participation is now being witnessed this year.

“We are seeing some level of rebalancing. Our domestic institutions and banks are very active right now. They are back to the market due to the general good feel across different financial groups,” he said.

Last year, the market went against all odds to create Sh567.2 billion in the 12 months that saw politics dominate the airwaves.

In addition, bank stocks were dragging in their performance as investors recorded mixed reactions to the interest rate cap law.

The stocks for 10 out of 11 bank stocks have recorded price gains since January with counters like Kenya Commercial Bank and Equity bank even touching 12-month highs.

According to Odundo, the excitement on the banking stocks has been supported by bank’s strong returns which are more than what investors expected.

The 11 listed banks only lost Sh3.75 billion or four per cent of their net earnings. While in 2016 the combined net profit for the listed banks was Sh93.3 billion, the figure dropped marginally to Sh89.6 billion in 2017.

Mr Odundo said that bank stocks had to a large extent lost footing because there was an expectation that banks would take a big hit given that a significant proportion of their money comes from interest income.

“But banks have been able to remodel their businesses. Rather than focus on interest income, they are diversifying in other products that are fee-based and also launching digital products to increase efficiency,” he explained.

The State has committed to repeal or reform the interest rate caps in the near future, and this has seen most stocks rebound, supported by strong performance in the full year earnings and declaration of dividends. Mr Odundo said the conversation on repealing the rate is positive, noting that investors are taking certain positions depending on their anticipated outcome.

“People are buying into that remodelling strategy which has reduced concentration risk. The rate cap review will come as an added benefit,” said Odundo.

The market has been introducing new products such as Real Estate Investment Trusts and Gold Exchange Traded Fund and the NSE boss believes that with more awareness, they will pick up.

He reckoned the environment is now ripe for the bourse to break the ‘listing drought.’ According to Odundo, the last three years were dogged by regulation issues such as capital gains tax and international commodities challenges as well as political issues.

The NSE chief executive exuded confidence that the market may have turned the corner and new issuers may see 2018 as the perfect time to join the bourse.

“All the components are in place now. The environment is right and the markets are headed in the right direction. The timing for new listing is right,” said Mr Odundo.

“We have conversations with many large issuers and I think we may see a big issuer in the market.”