Why the stock market hype has fizzled out
SEE ALSO: Prelate thanks Pope for new jobThe market was bearish; there were more investors selling than buying. Business environment Financial analysts Weekend Business spoke to have varied reasons for the lukewarm activity. Gerald Muriuki, a researcher at investment firm Genghis Capital, attributes the under-performance to the decline in the fortunes - and subsequently market prices - of once strong listed companies such as Nation Media Group, Mumias Sugar, ARM Cement and Kenya Airways. “Additionally, company- and industry-unique factors and the general business environment have led to increasingly diminishing returns for companies,” he says, giving the collapse of large businesses such as ARM Cement as an example.
SEE ALSO: Fears over TZ wildlife corridorAdditionally, investors were spooked by the increasing cases of companies that were previously listed folding up after a few short years, leaving them holding worthless share certificates. Some of the companies that contributed to the erosion of confidence at the NSE include Atlas and Deacons. Analysts say the stock market has not simply been losing its appeal, it did not have it in the first place. It was all hype. Maturity of Kenya’s capital market might be the third in Africa behind South Africa and Mauritius, but it is far from ideal. The size of Kenya’s securities market, known as market capitalisation, is valued at Sh2.6 trillion, just a quarter of the country’s gross domestic product (GDP).
SEE ALSO: Listed firms hit by slowing economyGeorge Bodo, director at Callstreet Research and Analytics, says that while GDP, a measure of the country’s output, affects the stock market, the latter has no effect on GDP. “The stock market is not a pulse rate of the economy,” he says, noting that the stock market is at times affected by global events that have no bearing on the local economy. But the securities market, he added, might also have been affected by the low credit market which has also coincided with the poor performance of the NSE. Churchill Ogutu, another researcher at Genghis Capital, says that GDP has been driven by public investment as opposed to sectors which could lift the real economy. This infrastructure-driven growth has led to what economists have described as ‘jobless growth’, with the private sector taking a back-seat. “Thus, while GDP has averaged a growth of at least 5.5 per cent in the last five years, we have listed companies issuing profit warnings,” Mr Ogutu says. Most Kenyans go into the market to sell tea, maize, coffee, tomatoes, potatoes, rice, onions and other agricultural commodities. These are their stocks. Together, Kenyan farmers and pastoralists produced goods valued at Sh3 trillion, or 34 per cent of all the goods and services produced, in 2018. But at the NSE, stockbrokers, those selling and buying on behalf of investors, are dealing with different stocks. The market size for Safaricom (Sh1.26 trillion) and banks at Sh823.4 billion make up 81.85 per cent of the Sh2.548 trillion securities market. There are 62 firms listed at the NSE. Strip out Safaricom and the banks from the NSE and you are left with an empty bazaar. On the other hand, if you exclude the contribution of banks, insurance companies and all the telecommunications service providers such as Safaricom, Airtel and Telkom from the GDP, the national cake shrinks by only seven per cent. For most Kenyans, the stock market has largely remained a theatre for those with deep pockets and a big heart to sweat through the mood swings of the market. Otherwise, wananchi do not seem to care about the stock market anymore. Instead, they have decided to take their money elsewhere, increasingly to real estate. “The economy has continued growing but the index (NSE-20) has gone down. This means money has shifted from the securities exchange to other sectors, most likely real estate,” says University of Nairobi lecturer XN Iraki. Mr Muriuki also says that the NSE-specific that devastated the Nairobi bourse “coincided with the rise in alternative investment options, mostly real estate, which has been booming with offers of enticing returns.” Never mind that even in real estate, Kenyans have started burning their fingers. Innovations Also, an increasing number of Kenyans, especially those who are working, have decided to just put money aside for their health. Realising that an admission into hospital is enough to push them back to poverty, most of them have taken up the National Health Insurance Fund, according to the FinAccess Survey 2019. “However, investments in securities, shares and mutual funds, despite innovations such as M-Akiba recorded a steep decline requiring a deeper analysis,” said the survey. M-Akiba is a retail bond (some kind of IOU) that seeks to enhance financial inclusion in the country by allowing ordinary people to lend money to the government via their mobile phones. The bond, like other government papers such as Treasury bills and bonds, is traded at the NSE. The survey showed that after rising to 11.6 per cent in 2013 and 10.3 per cent in 2016, the fraction of respondents who said they had invested in shares and securities plunged to 3.2 per cent in 2019. Besides M-Akiba, other products have been unveiled to make the securities market liquid. The latest is the green bond, with President Uhuru Kenyatta attending its listing at the London Stock Exchange last month. It will also be listed at the NSE. A green bond is meant to help raise money from investors who are conscious about sustainable growth with the funds going into climate and environment-friendly projects. It is still too early to tell how these securities will fare but the performance of the other new products unveiled earlier has been unimpressive. Seeing that there was a real estate craze, and that most Kenyans feared being left out, the NSE rushed to entice them into buying shares by coming up with a scheme that would allow them to partly own a large-scale commercial, residential and industrial property “without requiring large sums of money,” according to NSE Chief Executive Geoffrey Odundo. In 2015, NSE became the third stock exchange in Africa to launch real estate investment trusts. But these products have largely floundered, with analysts citing lack of understanding as the main reason for the failure of the novel securities. But it seems like NSE has a penchant for obfuscation. Even before ordinary Kenyans understood how the stock exchange market works, NSE with support of the Capital Markets Authority unveiled yet another cryptic product - the derivative market. While the intentions for the NSE Derivatives Market (NEXT) are noble, they only serve to confuse ordinary Kenyans even more. The Equity Index Futures and Single Stock Futures started trading at NSE Derivatives Market on July 4 last year. The derivative market is aimed at helping investors in the primary assets such as bonds, commodities, currencies, stock against market fluctuations. Exhaust the basics But it is all just Greek. Experts think that the NSE simply needs to exhaust the basics, and that should include fashioning its market to reflect that in the economy. “The biggest banks in Kenya are now locally owned. Why can’t this spirit of entrepreneurship in finance permeate to other sectors such as agriculture?” wondered Prof Iraki in a past article in The Standard. “Though it is the mainstay of the Kenyan economy, when did we last have an IPO of a firm anchored in agriculture?” Public listing, no doubt, has more advantages than disadvantages. It encourages transparency and professionalism as firms open up to scrutiny from the public. An IPO (initial public offering) could also help small enterprises raise funds and expand easily. But this cannot be actualised in an environment where close to half of Kenyans do not understand how the securities market works.
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