Commentary: IPOs and Kenyan Politicians

Kenyan politicians must root for the small investor. It is in their best interest. There are now over 500,000 such investors. By election time later this year, their number will probably have reached 750,000, particularly with the expected Safaricom IPO. Most of these are young Kenyans, and there is a growing number of women among them -- who refuse to be left behind. Their recent involvement in the stock market will be one potent reason for them to vote one way or another at the next general elections. They will at last have something very tangible to protect, something directly and personally beneficial to them. That’s a lot of votes to lose, for those who rub them the wrong way!

The small investor is a very determined and perceptive lot. Determined because the poverty line gives them nightmares, and they are driven to stay above it – well above. Perceptive in that they have discovered two things. First, that a well managed stock market offers them the most promising opportunity for asset-building, on a scale which no politician has offered them since the heyday (some decades ago now) of land-buying groups; and for staying above the poverty line despite neglect by politicians. And they know that group land-buying, part of the old ethnicity, was essentially a kitchen cabinet project which politicians in many parts of the country did not have the motivation to emulate or counter -- and no discernible inclination to match for the benefit of their own constituents, as opposed to their own personal gain!

Second, that there is real “magic of compounding” in the stock market which politicians, themselves a perceptive lot, have all along known about and quietly enjoyed but which, left to their own devices, would rather not share with wananchi. We say: Keep this gate open! Share the planet!

It is one thing to fault the 2006 IPOs on the grounds that, starting with the “book building”scam attempted during the KenGen IPO, efforts were made to favour institutional investors (and some efforts succeeded, particularly in subsequent IPOs); or to query the mystery and illegal 5% holding by a third party in Safaricom; or to take measures to ensure that CMA and NSE do not “even think about it” in 2007 and beyond. But it is quite another and dangerous thing to make blanket statements of intention to repossess for the state, presumably by executive order or through a parliamentary vote, the shares which investors bought in 2006. Repossess and then do what? This would clearly be a case of repossess and dispossess. Dispossess for whose benefit?

In an election year, in which the margin of victory is unlikely to be larger than that witnessed during the 2005 referendum, it is highly risky and probably political suicide to make 750,000 individual investors highly nervous about the future of their hard-won, and now compounded, assets; or about the future of IPOs in general. Individual (or “small-holder”) shareholding is beginning to acquire the characteristics and passions of a new ethnicity, politician beware. It is a passion, indeed, that is sweeping the whole world – including the ex-communist states of China and Russia.

NSE Chairman's Statement on the Growth of Kenya's Stock Market

By Mr. Jimnah Mbaru

In the recent past, there have been political statements reported in the media questioning the source of the phenomenal growth of the Nairobi Stock Exchange (NSE) in the past three years.

These statements are misleading and do not reflect the economic and other dynamics that underpin the growth of the Nairobi stock market and the rest of the Kenyan economy.

The stock market and its index are the mirror of what is happening in the rest of the economy. In the past three years, Kenya has achieved substantial economic recovery, recording a growth rate of 5.8 percent and the growth rate this year is expected to be much higher. During the same period, share prices have appreciated to the extent that the NSE market index has increased from around 2,000 to over 5,500 points.

The factors driving the economy include renewed business confidence by domestic and regional investors, resulting from improvements in the domestic and regional environment. The international investors have also been attracted by the good rating of Kenya by Standard and Poor’s, the internationally acclaimed rating agency. Standard and Poor’s has rated Kenya’s foreign debt as investment grade B+, and domestic debt as BB-, which means that foreign pension funds can confidently invest in Kenyan equities and bonds.

The funds being invested in the stock market are a product of improved surplus incomes and prospects of economic recovery and rehabilitation of infrastructure such as roads, airports, water and railways to facilitate intra and regional trade.

Specifically, the main sources of funds for investment in shares and stocks include:

1) Increased individual domestic savings arising from increased incomes from the milk sector, sugar, maize and horticulture, among others. We must also bear in mind that many parents are no longer paying school fees for primary school education since the government implemented Free Primary Education, hence, their disposable incomes are higher.

2) Expansion in the size of funds held by pension funds following reforms that have been carried out by the Retirement Benefits Authority (RBA) since 1998. Previously, most pension funds were overweight in property investments and underweight in equities. Many of these pension funds are rebalancing their portfolios in line with RBA’s regulations, hence, their push into equities market. It should be noted that the size of the pension funds in now in excess of KShs 200 billion and continues to grow annually.

3) Increased in investments in securities by the National Social Security Fund (NSSF) as it tries to balance its portfolio as per the RBA guidelines. NSSF holds over KShs 50 billion mostly in real estate and Treasury bonds

4) Increased insurance premiums as the sector has become more aggressive in marketing innovative life assurance products such as funeral policies, travel insurance, education plans and mortgage protection policies among others. Insurance companies have also expanded with the neighbouring countries and continue to tap new premiums.

5) Increased retained earnings by the corporate sector following improved profitability. This is evident from the many companies that have achieved substantial recovery after years of depressed growth including Kenya Airways, Kenya Commercial Bank, Barclays Bank of Kenya, East African Cables and Mumias Sugar Company, just to mention a few.

6) Increased profitability of small and micro enterprises due to improved market conditions including competition and greater transparency in the award of government tenders.

7) Rapid growth in mutual funds and unit trusts, giving small investors an opportunity to invest their small savings in large, profitable firms. Some of these mutual funds include Old Mutual and British American unit trusts. Currently, these unit trusts hold over KShs 10 billion.

8) Substantial remittances by Kenyans in the Diaspora, who are remitting back to Kenya an estimated US$ 750 million – US$ 1 billion (KShs 50-75 billion) annually through Western Union and commercial banks. Most of these funds find their way into the stock market and the real estate, among others.

9) Increased inflows from international investors, including speculators, dedicated emerging market funds and hedge funds. Presently, international investors contribute about 15 percent of the stock market turnover. Most of these funds are remitted to Kenya through commercial banks who act as custodians for these investors. The Central Bank of Kenya keeps track of where these funds are coming from.

10) Availability of low interest rate and unsecured personal loans to individual investors and similar business loans to small and medium enterprises. The impact of this lending was demonstrated during the recent KenGen primary share issue.

11) First time investors in the stock market. The KenGen issue, for example, attracted 240,000 investors, of which majority were first time participants in the equities market. These new investors include the youth and students who are at home with financial assets, as well as trading on the internet.

These sources of funds have not just developed by accident. They have expanded because of the attractiveness of the Kenyan economy due to economic recovery arising from better macro-economic management, which is demonstrated by low fiscal budget deficit, low inflation, low interest rates and a competitive exchange rate. The Kenya Revenue Authority has also increased its tax collections from about KShs 200 billion in 2003 to KShs 375 billion in 2006. This increased tax revenue has contributed to less borrowing by Government from the money market, hence, the low interest rate environment.

Investors have also been attracted by the substantial profit growth of the companies listed on the Stock Exchange, which have benefited from the improved economic environment, expansion of regional markets and better business prospects in new markets such Rwanda, Eastern DR Congo and Southern Sudan. Indeed, the substantial price rise of shares of firms such as Kenya Airways, East African Breweries, Kenya Commercial Bank, East African Cables, Mumias Sugar Company and Bamburi Cement Company, among others, has been as a result of increased domestic and regional business growth.

The growth of the stock market has also benefited from a considerable shift in the business strategy of individual and institutional investors. There is a shift from less liquid assets like plots and land to more liquid investments such as equities, Treasury bills and bonds, both Treasury and Corporate.

The NSE has made its contribution in increasing investor confidence by modernizing its infrastructure. In 2004, it launched the Central Depository and Settlement Corporation (CDSC), which has significantly improved the settlement cycle. In 2006, the NSE installed the Automated Trading System (ATS), which was recently launched by H.E. President Mwai Kibaki. The ATS has eliminated inefficiencies in allocation of shares and delays in transfer of shares, hence, better price discovery on the stock market.

The dynamics being experienced by the NSE are not unique to the Kenyan economy. Other sectors of the economy including tourism, housing, agriculture and exports have experienced higher growth and future prospects remain high. Assets in these sectors have seen tremendous increase in prices and values.

As the economy continues to expand, and as the Government continues to privatize its parastatals through the NSE, the new investors both from Kenya and the Diaspora continue to patronize our market. This will lead to a deeper capital market which will enable profitable companies and Government to raise funds cheaply. Investors will also have a good opportunity to diversify their portfolios.

The NSE will continue to play its role to assist Kenya achieve its Vision 2030. I call upon all well wishers to join us and be partners on this journey to greater prosperity.





JIMNAH MBARU
CHAIRMAN
NAIROBI STOCK EXCHANGE
21st November, 2006

Commentary: Safaricom IPO

Everyone is waiting with great anticipation for the Safaricom IPO, expected sooner or later this year. Watu wanajitayarisha!

We at SharePlanet are going to be saying a lot in the coming days and weeks about the IPO, and others to follow.

For now, we wish to add our voice to the view that the offer must be large enough to satisfy the huge, even pent-up, demand for good, affordable stock among ordinary Kenyans.

Let us be bold about one thing: The Safaricom IPO must involve at least 3,000,000,000 ordinary shares, and preferably up to 5 billion shares. Only such a volume has the potential to mop up all the liquid cash flowing around from one small IPO to the next, as we all witnessed in 2006. The offer price must be pocket-friendly as far as the retail investor is concerned.

Let us be bold about another thing: priority must be given to retail investors -- to individuals applying for shares on their own, or even jointly. In reality, Safaricom is their creation. Safaricom cannot thrive simply on the goodwill of corporate entities.

Corporate entities claim to be legal persons, and to demand their own rights. Fair enough. In that case, however, let them be treated the same way as individual investors, in all respects -- not more, certainly, and not less.

The recent attempts, subtle and crude, to tilt allocations in favour of institutional investors have not escaped attention. The public will not stand for their continuation in 2007! After all, many of the so called "institutional" investors are little more that "a fistful of 'incorporated' individuals." Others, such as mutual funds, are essentially companies, typically controlled by a few, which have proceeded to attract into their fold, and to hide behind, "bundles" of elite individuals who can afford to open accounts with Kshs. 200,000 to Kshs. 500,000/-.

New Microsoft Link to Consumer Electronics, Content

By Andrew Simons (January 7, 2007)

LAS VEGAS -(Dow Jones)- Microsoft Corp. (MSFT) Chairman Bill Gates unveiled a cadre of new products and services Sunday night that he says will allow consumers to integrate their electronic products.

The new offerings are mostly connected with Vista, the software maker's latest version of its Windows operating system.

"This is by far the most important release of Windows," Gates said in his keynote. "It's also the highest quality."

During a speech kicking off the Consumer Electronics Show, the industry's annual confab in Las Vegas, Gates said consumers will have more connected experiences from their gadgets. The speech marks Gate's 11th appearance at the show.

Microsoft, which has aggressively pursued the consumer market with products such as its Zune digital music player and Xbox 360 game console, aims to play a big part in a wave of consumer dollars going towards electronics.

The company provided an update on sales of the Xbox 360. Microsoft said it has sold 10.4 million Xbox 360 consoles to date, and expects to sell 1 million Zune music players by June.

The show is expected to draw 140,000 people over four days.

Attendees received a peek at Windows Vista, which included more bells and whistles than the current version of Windows.

Among the products Gates presented is a line of new personal computers running Microsoft Vista, which will be available this month. Gates showed computers from Sony Corp. (SNE), Hewlett-Packard Co. (HPQ), Toshiba Corp. (6502.TO) and Medion AG (MDN.XE). The PCs have various new features, including touch screens and improved wireless connections.

Gates also showed progress on a new device the software maker is working on with HP CP called Windows Home Server. The device acts as a hub for a home with multiple electronic devices.

"This is for homes with multiple PC's or Xboxes," said Gates.

The device is due from HP in the second half of the year.

Gates also introduced a slate of services including a variety of Internet portals and features designed onto Vista, which he said will allow easier connections to entertainment content.

The services include what the company calls Windows Media Center Sports Lounge, a venture with Fox Sports, a division of News Corp. (NWS). It will allow viewers to check sports news, scores, statistics, and video coverage.

The services also include what the company calls MSN Soapbox, which allows users to upload and share personal videos. The idea could be similar to YouTube, which swept the Internet last year.

Other services include a NASCAR Motorsports content portal, which the company said will allow fans of auto racing to browse, sample, and purchase content; TurboNick on Windows Vista, allowing users to see content from the Nickelodeon channel on a personal computer or television; Showtime Interactive, which allows users to browse and view Showtime programming; and Vongo, a service that allows unlimited access for $9.99 a month to more than 1,000 movies and 2,200 total video selections, including concerts, television shows and live streaming programs.

Gates also unveiled Sync, a product which allows users to connect personal electronics - including mobile phones, portable storage devices and portable music players - to an automobile.

Sync will be included as an option in 12 cars from Ford Motor Co. (F) in the 2008 model year, including cars from Lincoln and Mercury, starting this fall. Under the deal, the option will expand to all Ford models by 2009.

"Our ambition is for you to have connected experiences 24 hours a day," Gates said.

This address had been rumored to be Gate's final speech at the trade show, but Microsoft confirmed that it won't be the last. Gates said last June that he will move to a part-time role at the company in July 2008.

Copyright (c) 2007 Dow Jones & Company, Inc.