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.

How The Nairobi Stock Exchange Performed in 2006

The NSE closed year 2006 with a 42.10% gain on 2005. It rose from 3973.04 points at the start of the year to 5645.65 points at the end, based on the NSE 20-share index. Compared to the year's growth figures of a number of the more developed stock markets around the world, shown below, this was remarkable.

Even more noteworthy, however, was the growth in market capitalization in 2006. In local currency terms, this rose by 75.97%, from Kshs 448.1 billion to Kshs 788.4 billion. In US$ terms, the growth was even higher, from $6.2 billion to %11.4 billion -- meaning an 84.35% appreciation, or twice the rise in the NSE index! For the first time in its history, the NSE passed the US$ 10 billion threshhold in market capitalization in '06.

This performance in turn indicates that, with the steady appreciation of the Shilling against the Dollar in '06, there was in effect an 8.38 percentage-point premium for investors coming into the Kenyan market with Dollars. This should be icing on the cake for all non-resident investors, and in particular Overseas Kenyans. It should be more that sufficient incentive for those in the Diaspora to invest back home. For Kenyan investors at home, the message is clear: investing in the country is the real deal!

Clearly, however, there is a significant disconnect between the gains recorded in the NSE index (42.10%) and in NSE's market capitalization (75.97% in local currency and 84.35% in Dollar terms).

One inference from this is that an investment allocation strategy which had sought to track/mirror the NSE 20-share index would have achieved returns far below what was in fact possible. And this reinforces recent calls to overhaul the index, whose basis for calculation is the geometric mean, and to include more of the nearly 50 equities currently quoted on the exchange.

How Other Bourses/Indexes Performed in 2006:

1. India's Sensex Index: 46.0%
2. Hong Kong's Hang Seng Index: 34.20%
3. Australia's S&P/ASX 200 Index: 19.0%
4. Broad European Index of Leading Stocks: 18.0%
5. Paris Stock Exchange: 16.49%
6. Zurich Stock Exchnage: 16.0%
7. Milan Stock Exchange: 15.28%
8. London Stock Exchange: 10.50%
9. Nikkei 225 Index: 7.0%

Data Sources: nse.co.ke, news.bbc.co.uk, cnbc