Grim forecast for stock market as prices look down

By James Anyanzwa

Stock prices at the Nairobi Securities Exchange (NSE) are widely expected to maintain a downward trend this year, even as the bourse lost an immense 28 per cent of its value last year.

But the undervalued company shares present an opportunity to investors with long-term investment horizon.

This grim outlook for the 58-year-old exchange is attributed to instability in the macroeconomic environment and political fevers over the forthcoming general elections.

Market players also reckon that political uncertainty threatens to destabilise the investment mood as Kenyans await the decision by the International Criminal Court (ICC) on whether or not the six suspects of post-election violence should proceed to full trial.

"The ruling will certainly have an impact on the investors but because of the new Constitution, we don’t think the political set up will affect the performance of the economy," said James Wangunyu, Executive Chairman of Standard Investment Bank (SIB).

Wangunyu, however, pointed out that in-as-much as there may be little fear on the political front, it might not be drastic.

"We see a situation where the political and economic fundamentals are running parallel," he said.

He explained that the recovery of the local stock market largely hinges on the behaviour of interest rates and inflationary figures.

Inflation and interest rates

"I think it may be a flat market this year because of what is happening on inflation and interest rates. We don’t know to what extent interest rates and inflation will fall," said Wangunyu.

He said the dismal performance of the stock market has been compounded by investors taking a flight to the bond market, which are now offering stable and better returns than the volatile equity market.

"It is that optimal point we are looking at. Right now investors are still in fixed income securities," said Wangunyu.

According to data from the NSE, overall market performance last year as measured by the benchmark NSE 20 Share Index declined by 27.69 per cent to close at 3,205.02 points down from a high of 4,432.60 points posted at the close of year 2010.

Equity turnover declined by 13.28 per cent to Sh77 billion from Sh89 billion posted in 2010.

Annual trading volume also dropped to 5.7 billion shares or 3.34 per cent, down from 5.7 billion shares posted the previous year.

The Bonds market closed the year having declined by 7.80 per cent to Sh445 billion against Sh483 billion posted the same comparable period.

Market capitalisation stood at Sh868.24 billion against Sh1.166.99 trillion posted at close of year 2010.

According to George Bodo, an analyst at ApexAfrica Capital, foreign investors are expected to remain cautious because of the likely changes in the political landscape.

Investor worries

"In 2012, I still see an extension of investor worries boiling down to macro and financial fundamentals," he said adding that," Interest rates will still remain an issue this year since high rates present threats to credit money expansion."

Stocks held up to close the first trading week of this year above the ‘holiday band’ with the benchmark NSE 20-Share index returning a fractional 0.62 per cent week-on-week performance at 3,224.87 points.

Activity levels remained below ‘threshold’ with turnover closing below the Sh1billion mark although up 51.52 per cent week on week.

Foreign quantum remained cautious during the week with a 47.35 per cent performance rate on average terms compared to 27.44 per cent in the previous week.

"We still have political risk premium driving stocks," said Bodo.