Why the stock market hype has fizzled out

Stock markets executives from the Nairobi and Rwanda securities exchanges observe stock dealers work during the cross-listing of Bank of Kigali shares on the Nairobi Securities Exchange in November 2018. Participation of local investors at the NSE has fallen in the last three years according to a CBK survey. [File, Standard]

There was a time, not long ago, when investing in the stock market was the in-thing. With stocks absorbing billions of shillings from local and foreign investors, share prices went through the roof.

The combined share prices of some 20 blue-chip companies listed at the Nairobi Securities Exchange (NSE) hit an all-time high of 5,800 points at the beginning of 2007. The market, as they say, was bullish.

The NSE-20 share index - the weighted average share price of the 20 most valuable companies - briefly touched a low of 2,500 points in 2009 before it rallied back to a high of 5,491 points on February 23, 2015.

Then the securities market began to unravel. The NSE-20 began an uneasy descent, falling below the psychological mark of 2,500 points between August 20 and October 25, 2019.

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The 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. 

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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.

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Additionally, 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).

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This pales in comparison to that of South Africa, which is over 250 per cent of GDP.

And unlike in the US, for example, where 55 per cent of the population told a pollster that they own stock, almost half of Kenyans do not even understand how the securities market operates, according to the FinAccess Survey 2019 by the Central Bank of Kenya (CBK), Kenya National Bureau of Statistics and Financial Deepening Sector.  

Ideally, the performance of the original stock market - of maize, carrots, sorghum, tea, sugar, milk, houses, airtime - should be reflected at the NSE.

No effect

But no matter how many times the national statistician and CBK continue to list NSE-20 as a leading economic indicator, the performance of the bourse has never given Wanjiku sleepless nights.

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George 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.


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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