NSE braves tide of referendum debate

By Jackson Okoth

Uncertainty over the outcome of the forthcoming referendum on the new constitution continues to cast a dreary shadow on the Nairobi Stock Exchange (NSE), but only just.

"In our view, the market outlook remains positive. However, we know that the outcome of the referendum on the new constitution remains key to the direction the stock market takes in the short run," said Peter Wachira, an analyst at PineBrigde Investments Ltd, formerly AIG Investments.

In recent weeks, the market has been oscillating on the Sh1 trillion market capitalisation level, raising expectations that the bourse could be entering a bull run.

The last time the NSE hit these levels in market capitalisation was in August 2008.

Sentiments at the NSE have also been lifted by positive earnings reported by a number of listed firms, especially on the financial counters.

Equity Bank and Kenya Commercial Bank (KCB), the largest players on the retail segment, have already released their first quarter earnings, a pointer that the economy is on the mend.

Steady growth

"In both the short and medium term, one can confidently predict that the stock market and the value of investments at the exchange will continue to grow, says Jane Nero, chief executive, Kenya Association of Stockbrokers and Investment Banks (KASIB).

"For those who can read the writing on the wall, the start of the long awaited bull run is finally here with us," she added.

Analysts contend that while the market has been on a recovery, after a two-year slump, its performance is yet to reach the 2007 peaks.

Even though there has been a strong rally over the past six months, it is notable that by the end of the first quarter, the market was still 29 per cent below its peak of January 2007, as measured by the NSE-20 share index.

"This recent upward movement is supported by less risk aversion among domestic and foreign investors, positive sentiment on economic recovery, relatively good valuations with better earning prospects, rising business confidence and lower interest rates driving investors toward the equity market," says Wachira.

A drop in returns in the bond market is also driving investors back to the equities market. Following collapse of several stockbrokerage firms, the latest being Ngenye

Kariuki, the NSE has suffered a significant confidence crisis.

However, surveillance from the Capital Markets Authority (CMA) as well as promotion of ethical practices by KASIB has reversed the damage somewhat.

Market shift

This can be seen in the NSE rankings compared to other exchanges in the African region.

Data from PineBridge shows in dollar terms, Mauritius, Zambia and Kenya are considered the best performing in sub-Sahara region.

In markets such as Ghana, investors have switched to the fixed income market, as interest rates here are relatively higher.

The NSE is currently ranked as the fifth largest equity market in Africa, based on market capitalisation, behind South Africa, Morocco, Egypt and Nigeria.

In comparison to the top 5 equity markets in Africa, for the first quarter of this year, the NSE has recorded the largest gains as measured by the respective indices.

Improved performance at the NSE is taking place when a plan to demutualise the bourse is running behind schedule.

The draft legal instruments that have been prepared are still to be approved by the cabinet. The next step involves publication of the demutualisation bill by the Attorney

General.

Parliament is then expected to discuss and enact a new law that will allow the exchange to change ownership.

At the time of the demutualisation and prior to listing of the bourse, its shareholding will be shared between the Government, investor compensation fund and the stockbrokers and investment banks.

There will be an 11-member board of directors.