Equities market loses steam over new laws debate

Fears of a political fallout over the proposed Constitution depressed activity in the equities market last month, bolstering bonds to a record performance.

Equities turnover dropped 34 per cent from Sh10.3 billion in May to Sh6.8 billion in June, while bond turnover grew by 103.7 per cent over a similar period to stand at Sh93.7 billion, according to data from the Nairobi Stock Exchange.

Analysts attribute the drop in the equities market to political risks associated with the August 4 referendum to decide the fate of the proposed Constitution and low demand from retail investors, leaving the market to rely on the risk-averse institutional investors.

“Corporates and foreign investors have a strict policy guiding what level of risk they can tolerate,” said Fred Opondo, a fund manager at Standard Investment Bank.

“The expected economic resurgence is yet to trickle down to retail investors while institutional investors are still showing a strong interest in government papers despite the falling interest rates.”

George Waweru, an analyst at Kestrel Capital, said local institutional investors pulled out of the equities market in the first two weeks of June but returned by the end of the month.

Excess liquidity is also propping up the bonds market, he said.

At Sh274.4 billion, the bond turnover for the first half of this year is almost triple the performance of 2008 and beats the 2009 figure by Sh164 billion.

The interest on the latest 91-day Treasury Bill dropped by 43 percentage points below the June inflation rate to stand at 1.8 per cent while interest on five-year tenor bonds averaged five per cent.

Analysts, however, expect a reversal of the trends in months.

“Investors are holding back their participation in equities, waiting to see what will happen after the referendum. If the proposed Constitution passes, there is likely to be an improvement in several counters,” said Solomon Omundo, an equities trader at Dyer & Blair Investment Bank.

Foreign investor-driven equities turnover, for instance, dropped to Sh3 billion in June compared to Sh3.9 billion the previous month, a fall that analysts link to anxieties over the Constitution debate.

Last month, a grenade attack at Uhuru Park, killed seven people and injured over 100 at a weekend prayer rally organised by groups opposing the proposed Constitution.

The stock market has recorded a rebound and seen more retail investors buying shares after a ear run that started in 2008.

The economy is expected to grow at the rate of 4.5 per cent this year up from 2.6 per cent in 2009 on the back of the ongoing economic stimulus packages, policy responses, and a healing global economy that has, for instance, elevated tourism earnings to near benchmark 2007 levels.