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.

The sector earned Sh13.3 billion in the first two months of this year, doubling the performance recorded in similar period last year and is expected to rake in Sh70 billion by December.

High corporate earnings reported in the past few months are expected to excite investors to buy into listed company shares.

Telecoms operator Safaricom, for instance, reported a record pre-tax profit of Sh21 billion and announced a dividend payout of Sh8 billion for the year ended March, doubling the previous year’s payout to shareholders.

Reduce stake

National carrier Kenya Airways also rewarded its shareholders with a Sh462 million dividend payout after posting a Sh2.67 billion pre-tax profit — a major leap from the Sh5.66 billion loss it made in 2008.

The NSE 20 Share Index has risen to 4,309 points, the highest level since the third quarter of 2008.

The NSE All Share Index has rallied to break into 90 mark in April after dipping to a low of 50 in February last year.

Analysts say the ongoing sale of 887 million shares in KCB’s rights issue, together with other upcoming rights issues from TPS Serena and Standard Chartered Bank would boost liquidity and drive interest in the equities market.

There will be a total of one billion new shares valued at about Sh20 billion once the three companies are through with raising capital.

The government’s plan to reduce stake in listed companies, including KenGen and East African Portland Cement Company, and to sell State-owned firms such as Consolidated Bank, Kenya Pipeline Company, and sugar mills through initial public offerings are set to further improve activity in the equities market.