Foreign investors alter stockbrokers’ fortunes

The growing presence of foreign investors at the Nairobi Stock Exchange is changing stockbrokers’ fortunes putting into top spots players with the most foreign contacts on their customers’ call lists.

Trading data from the Nairobi Stock Exchange (NSE) for up to December 2009 shows that as foreign investor activity surpassed local participation to hit 61 per cent of total turnover last year, two firms with extensive international footprints - African Alliance Kenya Securities and Renaissance Capital – grew their market shares by large margins to outsmart home-bound rivals.

African Alliance doubled its market share to 13.6 per cent having handled stocks worth Sh10.4 billion in 12 months while Renaissance Capital, a local subsidiary of the Russia-based investment bank, grew its share of the equity market trades to 4.3 per cent from about 0.9 per cent in 2008.

Kestrel Capital, which is reputed to have the biggest foreign investor database, maintained its top market share spot for the second year running having intermediated nearly one in every five deals (18.5 per cent) that were transacted at the NSE. Dyer and Blair which has been among the three top players closed the year with 13.5 per cent of the market, Standard Stocks (9.6 per cent) and ApexAfrica (8.9 per cent) to complete the NSE’s top five stockbrokers in 2009.

Total market turnover declined by three fifths to Sh76.3 billion as jitters triggered by the global financial crisis accelerated investor flight to the safety of Treasury securities.

“We have a good mix of foreign and local investors and this worked in our favour in what was a very tough year for the global stock markets,” says Lucas Otieno, the African Alliance Kenya Securities managing director.

Stockbrokers earn a maximum brokerage commission of 2.1 per cent of the value of shares traded; meaning that the 18 NSE licensed intermediaries split the Sh1.6 billion they earned in commissions amongst themselves.

And for the first time in the history of the NSE, the volume of fixed income securities traded exceeded the total equity turnover clocking Sh221.2 billion – a shift that also helped determine the brokers’ fortunes.

Commission chargeable on bond trades at NSE is capped at 0.125 per cent of sales valued at Sh5 million and below. That translates into a maximum commission income of Sh276.5 million from bond trades in the secondary market.

Institutional investors who dominate bond transactions are known to demand heavy brokerage commission discounts on any trades leaving the agents with even lower commissions. Only a third of the NSE market intermediaries reported positive earnings in the half-year financial statements they published in local newspapers for the first time in October last year.

Strong international investor presence at the NSE this month has fuelled a battle for dealers with good foreign connections causing major realignments in the marketplace.

“Every stockbroker who wants to compete is scheming for a stab in the foreign investor market,” says Bob Karina of Faida Investment Bank.

Buoyed by the highly publicised Safaricom initial public offering (IPO) that even had a special reserve allocation for international investors, foreign investor participation clocked Sh39 billion accounting for 40.14 per cent of total market turnover in 2008.

This figure more than doubled the previous year’s foreign investors’ turnover of Sh16.7 billion (18.81 per cent of market total) – an increase from the 2006 level of 10 per cent of market turnover.

African Alliance, which made the biggest market share leap overtaking three players to become the second biggest player in the stock market, was helped by a strong presence in other African countries. It has operations in more than 18 countries.

Though Renaissance Capital Kenya made a strong entry into the Kenyan market raking in Sh805 million in pre-tax profits in its first year of its operations in 2008, most of this money came from the dealing arm of the investment bank. The firm accounted for a paltry 0.9 per cent market share at the close of the year.

The firm which is barely two years old in the Kenyan market grew its market share to 4.3 per cent of total equity transactions, seen as the result of the leverage it enjoys from its international investment bank operations.

“There has been renewed interest in sub-Sahara Africa in general and East Africa in particular from private equity funds and other forms of long term capital,” says Renaissance Capital Kenya managing director, Patrick Mweheire.

Helios Investment Partners is raising a $600 million fund for Africa while Citadel Investment has allocated up to $400 million for investments in the East Africa. Market observers say the continued dominance by Kestrel Capital which has emerged as the market’s top dog for the second year running was a tribute to the strong international network that its chief executive Andre DeSimone has built.

Veteran stockbroker Jimnah Mbaru’s Dyer and Blair is said to be reaping the fruits of the firm’s lead transaction advisory role in the 2008 Safaricom initial public offering (IPO) especially in recent weeks that investor interest in the market has been building up with the mobile phone company’s share appreciation.

ApexAfrica Investment Bank, with a firm presence in the institutional investors end of the market, has set up an international dealing desk and employed traders with strong foreign investor connections to run it.

A sharp spike in the average cost of living in 2008 and 2009 characterised by double digit inflation and loss of investor confidence following improprieties by some stockbrokers reversed a growing interest in the stock market that saw the number of investor accounts rise by more than 1.5 million in just three years.

Mr Karina said that as locals pulled back from investing in shares, foreign investors stepped up their participation, cherry picking stocks they perceived to be grossly undervalued.

That move appears to have put overseas based investors in control of trading volumes at the bourse changing the fortunes of those who deal with them.

Blue chip stocks with high average daily turnovers such as KCB, Safaricom, Equity, KPLC, EABL and Kenya Airways have remained the foreign investors’ favourite picks. These counters are well spread across the different economic sectors making it easy for foreign investment managers to balance their portfolios.

Mr Karina says local intermediaries with established relationships with foreign investors have benefited most since mid last year when foreign investors increased their exposure in emerging and frontier economies after sensing signs of stabilisation of the global financial markets.

Market turnover shows that foreign investors pumped into the economy an estimated Sh8.3 billion between January and December (on a net basis), raising the profile of the NSE as an important source of foreign currency at a time when traditional sources of forex such as tourism and agricultural exports slowed down.

Although the NSE remained a playground for international investors available trading data shows their participation has not crossed the 50 per cent threshold since 2004.

Kenya’s position as Eastern Africa’s financial hub has however caught the eye of international investors, who are keen to cash in on the promise of much higher returns on average here than they can hope for in their mature markets.

Analysts say apathy by local investors towards the stock market after most burnt their fingers in the first major bear run since an unprecedented stock market rush-in that started with the KenGen IPO in 2006 has given international investors an upper hand at the bourse.

The collapse of three stockbrokers in quick succession is widely believed to have been the single biggest factor that scared away a majority of the estimated 1.8 million predominantly retail investors from the NSE.

“The rise in Safaricom’s share price above its IPO price has also generated a lot of positive sentiment and demonstrated that investors can make gains if they take a long term view of the market,” says Mr Karina.

Afrika Investment Bank managing director Peterson Mwangi says most local investors were un-sophisticated, first time punters who had never rode the cyclical tumbles of stock markets but are now likely to troop back to the market drawn by the rising share prices.