Capital Markets

Investors lose Sh330bn as stock market hits 2 year low

PIX3

Most stocks at the NSE have lost a third of their value this year against a backdrop of soaring inflation, which hit 19.72 per cent in November and a shilling that has been depreciating for most of the year. Photo / file

Share prices at the Nairobi Securities Exchange (NSE) extended a month- long drop to hit a two- year low, pulled down by investor concerns over the possible impact of high interest rates on the market’s performance.

On Tuesday, the NSE 20 Share Index, which tracks the 20 most valued equities at the bourse, closed at 3,070.36 points, edging closer to levels last seen in September 2009.

The plummeting of share prices appears to have picked pace in the past four weeks in reaction to the Central Bank’s decision to aggressively tighten monetary policy to tame inflation and exchange rate volatility.

(READ: Time to stop uncalled for criticism of CBK)

The decline gained fresh impetus last Friday after the Central Bank’s decision on Thursday to raise benchmark rate by 1.5 percentage points to 18 per cent, the fourth rise in a row.

The NSE 20 Share Index last touched the 3,070 points mark in the last quarter of 2009 as the market felt the ripple effects of the global financial crisis that took place on the back of a downturn caused by the January 2008 post-election violence.

Most stocks have lost a third of their value this year against a backdrop of soaring inflation, which hit 19.72 per cent in November and a shilling that has been depreciating for most of the year.
Investor wealth, as measured by market capitalisation, was down Sh330.21 billion ($5.094 billion) at the close of business last Friday compared to the close of business on December 31 last year.

Over the past three months alone, investors have lost Sh98.06 billion ($704.37 million) of their wealth at the NSE as the central bank took extra measures to stabilize the shilling and tame inflation.

The price-to-earnings ratio, another measure of the value of the market, dropped to an average of eight at the close of business last Friday

compared to 17.8 times at the close of business last year.

Yesterday, fund managers said high interest rates had made investing in government securities – also considered less risker than equities -- more attractive and that increased cost of doing business would slow down economic growth affecting the profitability of listed firms.

“From where I sit it is a no brainer where I will put my money. We look at the trade-off and the risk and compare that with what one could get from the equity market,” said Fred Mburu, chief executive officer Apollo Asset Management Company.

Last week the CBK reopened a two -year bond that is paying interest at an annual fixed rate of 22.8 per cent every six months as it sought to raise Sh10 billion.

The bond, which also carries a similar yield is the highest fixed interest paying instrument that the CBK has issued in the past 10 years.

Mr Mburu said he does not expect equities to outperform government securities in the medium term especially taking into consideration the risk in each investment.

Stock analysts say the high rate of inflation has pushed up the cost of doing business for both listed and unlisted firms raising the expectation that the additional costs will eat into their profits.

“We are likely to see a margin squeeze as businesses navigate the difficult period,” said Mr Mburu even as he predicted a possible decline in the rate of inflation going forward.

The CBK’s decision last week to increase the benchmark lending rate for a third time is expected pile pressure on net incomes of commercial banks whose stocks constitute about 40 per cent of the markets activity at the NSE.

Other companies, especially those that have outstanding debt are also expected to incur more in interest payments, eating into their profits.

High cost of basic goods and services has also eroded the purchasing power of retail investors keeping them away from the bourse and cutting their spending power.

Since the second quarter of the year, a number of companies have put their capital expenditures and expansion plans aiming to hold onto cash.

“What we have done is postpone our capital expenditure and manage our cash a bit more tightly because of the high interest rates,” said Polycarp Igathe, the managing director of Haco Tiger Brands.

Mr Igathe said his company was positive of the underlying fundamentals of the Kenyan economy and that he expects the business environment to improve in the long term.

The steep rise in the Central Bank Rate has seen commercial banks adjust their base lending rates to between 20 and 35 per cent.

The higher interest rates are expected to slow down lending and ultimately impact on economic growth this year.

Kenya’s economy expanded by 4.1 per cent in second quarter of the year compared to 4.6 per cent in the same quarter of 2010.

“Companies will be affected and profits may decline.

The banks may put on a brave face but they are worried about defaults and their bond portfolios,” said Joshua Njiru, the general manager at Madison Asset Management.

Mr Njiru said that the alternatives available to institutional investors mean that demand for equities will continue to decline, adding that the equity market was also being affected by reduced participation of both foreign and retail investors.

Data from the NSE indicates that in the month of November, net foreign investor inflows - which is the difference between inflows and outflows - fell to Sh31 million from Sh719 million in October, the lowest in five months.

Between April and June this year, foreign investors were net sellers before purchases began exceeding sales between July and November.

Prices of banking stocks have declined the most over the past three months dragging down activity at the NSE as investors factored in the possibility of increased provisions for bad loans and reduced lending.

“With the current interest rate environment, investors are expecting significant non-performing loans come the first quarter of next year as borrowers struggle to service loans,” said NIC Securities in a research note.

Investors also expect that the cost of funds will significantly eat into banks interest margins thus affecting profitability adding that they expect the sell-off could continue resulting in lower valuations across the board.