Rush for blue chips drives NSE to new high

The Nairobi Stock Exchange on Tuesday hit a 16-month high on increased buying from foreign traders and local institutional investors after an improved performance by corporate Kenya.

The benchmark NSE-20 index —which tracks the performance of blue chip firms — stood at 4096 points at the close of trading, a level last seen on October 7, 2008.

“Foreigners are particularly going into blue chip stocks where supply is limited leading to share price appreciation,” said Eric Musau, an analyst at Renaissance Capital, adding that the local high-net worth investors such as pension schemes and insurance companies have also upped their buy orders targeting the positive dividend outlook.

Chip stocks with high average daily turnovers such as Safaricom, East African Breweries, KCB, Equity Bank, Mumias Sugar and Kenya Airways have remained the favourite picks.

Price rally

Stockbrokers say demand for the stocks has been higher than supply for the past two weeks, leading to the price rally.

“We have had net buyers in the last two weeks. Demand for stocks at the current attractive price to earnings ratios is behind this,” said a dealer at Faida Investment Bank, adding that most of the shares were undervalued.

Data from the NSE indicates that foreign trades now account for over 60 per cent of the market’s monthly trading turnover, up from below 50 per cent last year.

Local institutional investors are also picking the cue, gradually returning to the Nairobi bourse after opting to put their money in fixed income securities and real estate egged on by falling returns from the bond market and improved profitability of listed firms.

“With interest rates on bonds coming down, equities are becoming more attractive and institutions are changing their strategies,” says Mr Musau.

Last March, the 15-year bond issued in 2008 traded at a yield of 12.95 per cent, compared to 9.95 per cent currently.

But retail investors have kept off the market in step with the trend set in 2009 on the gradual movement of share prices as they tend to prefer a speculative market with wild price swings.

Agricultural stocks have been a mirror of the buoyant sentiments at the bourse, recording impressive rallies over the past month.

Kakuzi Tea, Williamson Tea, Sasini Tea, Kenya Airways, and Mumias have been the top performers over the period, recording double digit growth.

Only six firms— AccessKenya, Housing Finance, Total Kenya, Athi River Mining, East African Cables, and Equity Bank — out of the 55 listed have in the past month failed to record a positive gain on the share price.

Expectation that the economic growth rate can accelerate to above four per cent from below two per cent last year is a major confidence boost to the outlook for corporate earnings.

Most listed firms recorded a drop and single digit growth in earnings in 2008, from an average of 20 per cent annually in the four years prior to 2008.

The effects of low economic growth worsened by high inflation eroded margins, especially for manufacturing companies.

The banking sector also suffered from slower growth in loans and higher loan loss provisions.

But as firms continue to unveil their 2009 results, it is becoming clear that corporate Kenya is stepping out from the era of flat profitability, which is translating into improved dividend payout.

“There is a feeling that the economy is getting better and this is translating into the improving performance of the market,” said Joshua Njiru, general manager at Madison Asset Management Ltd.
An upswing of sentiment seems to have generated its own momentum at the NSE.

Entry point

Still, market players are reluctant to rule out a possible correction in the market as investors take profits.

“The market seems to be over-bought. It is possible that it will correct itself as people start taking profits,” said Reginald Kadzutu, the head of fund management at Amana Capital.

At its lowest point last year, a number of investors seeking an attractive entry point into the stock market took advantage of the low prices at the bourse.

While analysts project a steady recovery of the market, there are also expectations that some profit-taking will lead to a dip in share prices at the bourse.