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Looking to buy? Now is the time to snap up stocks for a song

FINANCIAL STANDARD
By Awal Mohammed and Peter Theuri | April 28th 2020

If you are looking to snap up a bargain at the stock market, you will be spoilt for choice.

After the recent shaky preference of the country’s securities market, you now have the opportunity to grab top blue-chip companies at a discounted price than what you would have paid in January 2020.

In a few rare cases, you can grab a yield worth 10 per cent a year or more at closer scrutiny of the mixed bag of opportunities presented by the bear market.

Some of the biggest gains in history, after all, have been made by savvy investors who bought stocks when everyone else was selling. 

Last year, the performance of the Nairobi bourse was not-so-encouraging. The Nairobi Stock Exchange experienced a tough trading period as the struggling economy affected listed companies massively, with share prices tanking greatly. 

The NSE-20 share index - the weighted average share price of the 20 most valuable companies - fell below 2,500 points between August 20 and October 25, 2019.

And 2020 was the year in which recovery was realistically expected. Close market followers were hoping for a bullish transformation that would stop investors from massively selling their stocks.

But the expected recovery never materialised. When coronavirus was confirmed in the country on March 13, 2020, the NSE halted trading for 30 minutes after the All-Share Index fell 15 per cent, wiping out Sh120 billion off investors’ portfolios attributable to panic selling.

“Kenya was no exception to the ensuing financial contagion, with the first announcement of Covid-19 cases resulting in the NSE 20-share index shedding over five per cent, prompting a market halt, sparked-off by panic selling in an already bearish market,” explained Luke Ombara, Director, Regulatory Policy and Strategy at Capital Markets Authority in a statement contained in the just-released statistical bulletin for the first quarter of 2020.

“The 20.7 per cent drop in the NSE-20-Share Index witnessed in the quarter mirrored the corresponding declines in MSCI World, Emerging Markets and Frontier Market Indices of 21.4 per cent, 23.9 per cent and 27.7 per cent, albeit at a lower rate,” said Mr Ombara.

The threat posed by the coronavirus outbreak has spooked global markets, sending stock prices reeling. Against such a backdrop of market worry, it’s little wonder that many investors feel panicked even though nobody likes to see the value of their portfolio fall significantly in such a short space of time.

Kenyan banks’ shares were the most sold stocks as foreign investors scrambled for the exit and in some cases, there was no one to buy even the most liquid stocks. Banks’ shares prices were down seven per cent on average and telecom company, Safaricom, was down five per cent.

Equity turnover for the first quarter of 2020 stood at Sh43.70 billion, compared to Sh45.01 billion registered in the last quarter of 2019, to reflect a 2.91 per cent decrease, which essentially confirmed a decrease in trading activity at the bourse during the quarter.

The bank’s turnover on bourse fell by 3 per cent to Sh778.82 million ($7.78 million), from Sh802.35 million ($8.02 million). 

Statistics show that a month after coronavirus docked in Kenya, with now 363 confirmed cases in the country as of yesterday and four counties put on lockdown, the NSE is struggling a lot as the recovery of the economy remains unclear, at least for the foreseeable future.

Out of the 58 listed companies trading in the market, 15 companies (as of Friday) were trading below Sh5.

The most hit by the pandemic is the national carrier, Kenya Airways, which by the close of business was trading at Sh0.93 after almost every nation affected by the Coronavirus imposed a travel ban. 

With planes grounded and all activity at a standstill, Kenya Airways, whose share price dropped by 61.25 per cent in the last three months, neared the lowest share price of its history. 

The company, whose resuscitation will be hinged on a major bailout, is one of the region’s biggest airlines but has been undergoing tempestuous moments in 2019. The current coronavirus crisis that resulted in the ban on international travel last month has complicated chances of survival of the national carrier. 

Many investors have dumped their shares, fearing the long-term impact of the virus on the travel sector. Now, at the price of chewing gum, you could be a shareholder at Kenya Airways.

But all is not doom and gloom.

According to Lisa Kimathi, a stockbroker at the Nairobi Securities Exchange, investing now in companies offering essentials services is prudent as their shares are expected to rise once the Covid-19 is over.

“There is an investment opportunity for companies providing critical services,” she said.

In the manufacturing and allied companies, of the eight largest companies listed in the market, only Mumias Sugar Limited and Flame Tree Group Holdings traded below Sh5 at Friday’s close of business. 

Mumias woes could be blamed on management wrangles in the recent past.

British American Tobacco share price maintained its steady decline, closing at Sh338.50, a drop of 30.92 per cent in the last three months. It was the second biggest loser in the week, after Kenya Airways, with a 26.25 per cent price drop recorded in that week alone.

East Africa Breweries Limited closed trading at Sh152, a 17.84 per cent drop from Sh185 it traded on March 13, the day the first Covid-19 case was confirmed in Kenya.

As prices of gold remained stable and relatively high, investors continued to find safety in the special commodity. On March 13, the share price of Barclays New Gold ETF stood at Sh1,565. At the close of business on Friday, the value had risen to Sh1,775. This is in spite of other shares falling drastically with uncertainty lurking.

Unga group limited closed the week at Sh29, well behind East Africa Breweries Limited, British Tobacco and BOC Kenya Limited.

While the rule of thumb in the equities market is to seek to buy small and sell big, the best place to place your bet is on the liquid shares. 

“Buying your shares in the banking and telecom sectors now will see you reap huge when the pandemic is over,” said Johnson Nderi of ABC Capital Investment. 

KCB, Safaricom, Absa Bank Kenya and Co-operative Bank among others faced heavy selling after the country recorded its first case of coronavirus. Investors sought shelter in asset classes that are considered safe such as fixed income securities, gold, dollars and yen.

Since the onset of the pandemic in Kenya, only I&M and Standard Chartered Banks, in the banking category, have recorded positive changes in share prices, at 10.69 per cent and 1.71 per cent respectively.

Absa Bank Kenya last week closed business trading at Sh10.60 while Co-operative bank was Sh12.35. Both of them have experienced an average of 20 per cent drop in share price since the onset of the year.

According to Nderi, asset classes may look stable but are subject to sudden price swings influenced by demand distractions occasioned by the pandemic. 

“We are certain that the banking and telecom sectors will rise plus if you quickly need to exist, you can do so on your liquid shares at that current market value,” explained Nderi.

Interestingly, the market saw a rush for bonds after the first case of Coronavirus was confirmed in the country. 

This saw the bond turnover increase by 46 per cent to Sh5.52 billion ($55.2 million), from Sh3.77 billion ($37.7 million) with the number of bond deals increasing to 98, from 91 at that time.

On March this year, the government announced measures to salvage the economy where the resident corporation tax rate would be reduced from 30 per cent to 25 per cent. 

The individual tax rate reduced from 30 per cent to 25 per cent for people earning above Sh24, 000 a month.

“The measures the government took were plausible, but it can look at both consumption and income taxes and ease of doing businesses by looking at the Fraser Freedom Index and the heritage index to safeguard the economy,” said Nderi. 

The NSE 20-Share Index continued to dip further and take a bearish form in the last one month from 2124.78 to 1967.84 points.  

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