This week, business news in Kenya have been dominated by the news of the high levels of trade in Safaricom shares. Analysts and reporters have characterised the events of the week differently, with quite a bit of the attention being on the company itself. In my view, however, we should be looking at the bigger picture; the market itself.
That Safaricom is the biggest actor in the Nairobi Stock Exchange (NSE) is not in doubt. This means that any movement in the stock will shake up the market. I am sure that comes as no surprise to any investor or anyone that watches the market. However, what we fail to see as we are looking at Safaricom is how dull the market is, that any move in its primary stock engulfs the business cycle.
Part of the challenge here lies in the failure of the market to innovate and offer investors more exciting options. The fundamental role of the NSE is to act as the primary space for capital allocation. However, despite the talk for many years, there has been little action to enable many of the enterprises in the country to access capital through it.
For instance, with all the innovation that is happening in the country, there is little opportunity to access capital through the NSE. Much of this is happening through the private equity market. While other countries, such a Canada, have set up infrastructure to allow start-ups to access capital through their stock markets, we are yet to see any meaningful progress on this front in Kenya. This makes for an incredibly dull formal market while a lot of exciting things are happening outside of it.
This has led to a consolidation of the market in ways that, we are told, worry the regulator, the Capital Markets Authority (CMA). The top five firms – Safaricom, Equity Group, KCB, EABL and Co-operative Bank – account for between 70 and 80 per cent of the daily trading volumes. This obviously signals a market risk that we should do more about that merely observe or be concerned about. Not only should there be deliberate action to resolve the issues with most of the listed companies, the stakeholders also have to bring other interesting businesses on to the market.
Kenyans who have been following the market for a while will remember the excitement that emanated from the listing of companies like KenGen and Safaricom. Kenyans got the opportunity to own a piece of their own creations. We need more such opportunities to excite the market.
In this regard, it is promising that amongst the very first things that President William Ruto did upon his assumption of office was to challenge the Privatisation Commission to demonstrate that they are doing their work. As the president said, it is hard to justify the investment that the public has been making in this institution when there is not much to show for it.
With his commitment that the government will list between six to 10 companies at the NSE, the president is right on the money. It shows that the government understands the need for a robust trading environment, and the role it plays in the economy. Still, a lot of policy work needs to be done to resolve some of the bottlenecks.
On Safaricom, analysts have noted many things, some more important than others, in their explanations of the price changes in the stock. The most important, in my view, is that it is mostly foreign investors who are offloading the stock. What is missing in much of this analysis is the fact that foreign investors had exited most of the other counters last year, mainly due to the uncertainty occasioned by the general election. That they held on to the Safaricom stock throughout the election period, says way more about their confidence in the company than most analysts are willing to admit.
Another thing that some analysts have got right is that the exit of the foreign investors is a reflection of what is happening in the global markets. Investors look to allocate their capital in the most efficient way. As US dollar fixed income instruments have become more attractive, these international investors are reducing their risk appetite. Thus, exiting markets like ours in favour of instruments issues in the more established markets. Again, this analysis is incomplete because it fails to examine the other side of the equation: Who is buying this stock?
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If we step away from the fanfare and look a bit more deeply, we will see that the stock is being taken up by Kenyan institutional investors who are taking long-term positions on it. They are betting big on the company which tells us that they are confident that the fundamentals of the company remain intact and also that they are looking to benefit from the big investments the company is making, especially with its entry into Ethiopia.
To me, this signals what some observers have already noted: That the telco’s share price is undervalued, and there are much better days ahead.
In the popular 2013 film ‘Now You See Me’, we learnt of the spectacle of magic that ‘the closer you look, the less you see.’ This is an apt example, the spectacle and noise is preventing many from seeing what is really happening. Don’t be fooled.