January Blues at the NSE

We are probably just now beginning to see a glimmer of hope that the January blues at the NSE are coming to an end. The bear-hug is at last loosening.

Two main explanations have been given for the dramatic decline in the NSE index in the last few weeks. One, that this is the usual January down-slide, following the extravagance of the end-of-year holidays and compounded by January's school-fees obligations. Two, that, besides, investors are holding on to their money in readiness for the expected series of IPOs in 2007. This second explanation is not all that persuasive.

A more persuasive second explanation seems to be the "Stanbic-Bank-Uganda-Effect." Clearly, the Stanbic Bank Uganda IPO swept a lot of liquid cash off the table. Most retail investors did not receive a refund -- having been fully allotted the number of shares they had applied for -- and so did not have the wherewithal to invest in other counters in January. Even more money was 'vacuumed" away by Mumias Sugar and Diamond Trust. Moreover, the continued low price of Stanbic bank Uganda (low in terms of Kshs) probably lured substantial cash to USE in January, to the chagrin of NSE mandarins. Who ever heard of the shares of the largest bank in a country selling at Kshs. 7.00 or less -- and that after a rise in market value of nearly 300% immediately following the IPO!

There are indications that savvy investors, with deep pockets, have continued to buy on the cheap, quietly, as the market has slid. These perhaps include the very same mandarins. And it has recently been noted that many of those who were allotted the full 109,500 shares of Stanbic -- and there seems to have been many more of these than first appeared -- went back to the market in January for more (for their corporate entities, if not for themselves individually, or both).

With time, all this mopping up of cheap supply has had the effect of slowing the index slide. And as end-of-January salaries and other income have become available to the retail investor, the makings of a new bull-run can begin to be discerned.

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

List of Constituent Companies of the Nairobi Stock Exchange (NSE) Index

As of January 3rd, 2007, constituent companies of the NSE 20-Share Index were as follows:

1. Bamburi
2. Barclays Bank Kenya
3. BAT (K)
4. BOC Limited
5. Diamond Trust
6. EABL
7. Kakuzi
8. Kenya Airways
9. KCB
10. KPLC
11. Nation MG
12. NIC
13. Sameer Tyres
14. Sasini Tea and Coffee
15. Standaed Chartered
16. Total Kenya
17. TPS-Serena
18. Uchumi
19. Unilever
20. Williamsons Tea

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

IPO Mlolongo in Iborian

What an earth-shaking year 2006 turned out to be to all of you Iborians, and all of you "Genyans"! Three cheers to each one of you who lined up for a piece of the planet, however small your IPO allocation. And happy holidays to you!

Here's wishing you an even more energized 2007! The planet's yours -- seize it!

And watch this patch of cyberspace.