What went wrong at the bourse?

By Odhiambo Ocholla

Two years ago, Nairobi Stock Exchange market was a very nice place to be. Whichever of the main financial assets you bought; equities or bonds you were going to make quite a lot of money.

A simple "buy to hold" strategy worked rather well. At the time, of course, every investor was too sure that capital gains would be quite as strong as they subsequently proved to be.

But two years ago it became increasingly apparent that investing your money in the stock market or more cautiously, in the bond market, was a very wise move.

During that period out stock market and capital market were hugely performing well.

But the first quarter of this year have seen the NSE 20-share index – an index widely used to measure the market strength and plot its direction declining to an all time low.

From 2002 to the second quarter of last year, NSE 20-share index has risen in excess of 20 per centannually.

These were periods of both strong asset gains and a very good time for capital gains. But this year, having already lost over 31 per cent by the end of close of the business last week, the 20-share index seems destined to 2000 mark.

Why the jitters then?

All of which begs the obvious question: where are we now and what went wrong?

Towards the end of last year, hopes were raised once more that we were returning to the bull market conditions of the 2007s, the conditions that many of us had grown accustomed to.

Equity gains in the second quarter of last year were enormous and there was at least some justification for thinking that last year's equity gains were based on good fundamental drivers i.e. our economy showed clear signs of sustained growth.

So why it that last year’s euphoric gains in equities have been followed by this year's market slump?

More precisely, why is it that, in the year to date, you would have been better off holding cash than either equities or bonds, and that bond has outperformed equities?

So why the jitters? Part of the problem is the market facing a crisis of confidence.

This has been confirmed by extremely low turnover currently witnessed at the bourse where the market is transacting an average turnover of Sh100 million compared to a billion shillings it transacted immediately post Safaricom IPO.

Investors’ worries

I can think of a number of key reasons why life has been so difficult for investors.

The slow down in economy, collapse of the two brokerage firms, Safaricom IPO disappointment, new doubts on the delivery of pledges by the coalition government, worries about renewed high inflation now topping 25.1 per cent for the month of February, declining Diaspora remittance and high energy cost.

Meanwhile, with the slowing economy it would become a lot more difficult for companies to produce results that can stir up the markets.

Notably, the following companies have seen their earnings dip; Mumias Sugar Company, KenGen, Bamburi Cement and Standard Chartered Bank.

Moreover, with some companies returning money to its shareholders in form of dividend or bonus, it might just be that some of most successful companies of recent years are running out of expansion ideas. Not many of these arguments, though, help to answer the big question.

Are we in a structural bull market for assets or are we in a structural bear market?

Is life going to be easy for investors in coming years, or is it going to be difficult?

Sadly, I suspect we are heading into one of those difficult phases. Here's why.

First, I do not see a recovery in equities market any time soon and the slow down in the Diaspora remittance is making the situation worse off.

Secondly, if we are entering another period of sustained market weakness, there's less reason to be optimistic about equities than there was two years ago.

All in all, I would treat last year's impressive equity gains as a typical bear market rally. Investors will continue to struggle for returns.

The writer is an investment banker based in Nairobi and can be reached at [email protected]