NSE 20 Share Index below 5000 on capital gains tax fear

The indicative NSE 20 Share Index last week slipped below the 5000 mark for the first time since early August following exits from the market by investors said to fear the incoming capital gains tax.

This is down from a peak of 5406.39 in the third week of September.

The index lost 90 points on Thursday to close at 4957.52 before losing a further to 47.42 points on Friday to close at 4910.10. The NSE 20 Share Index tracks the performance of a select group of counters giving a general direction of stock prices. Its lowest point this year was 4764 in mid-June.

“There are exits in fear that the capital gains tax will have an effect on their investment,” said Elizabeth Ndung’u, a research analyst at Dyer & Blair. She added that it was also a notable trend for the market to head south during the festive period.

The five per cent tax is set to be effected on January 2 although uncertainty over modalities is likely to delay the process. Jitters though are palpable in the market with brokers pushing to delay implementation.

“With most counters on a downward momentum, both the NSE 20 Index and NASI (NSE All-Share Index) closed in the red for the seventh consecutive session,” said Standard Investment Bank in a market report for Thursday.

There has been increased activity in the market as investors harvest gains ahead of the tax. For three days in a row last week shares worth more than Sh1.5 billion were traded compared to daily averages of Sh680 million conducted in the first 10 months of the year.

Long-term investors are set to bear the largest liability on selling shares given the capital gains recorded over the years as the Kenyan market surged. Shareholders of some companies, such as Centum, have been foregoing dividend payments and banking on the capital gains.

READ: NSE turnover more than triples as capital gains tax nears

Some of the busy counters during the week included lenders KCB Group, Equity Bank and Co-operative Bank, investment firm Centum and telecoms giant Safaricom.

During the week KCB lost 9.43 per cent to close at Sh53.00 on Friday having started the week at Sh58. The counter had traded shares worth Sh1.9 billion during the first four days of the week.

In the same week Equity had lost 3.5 per cent while Safaricom had lost 3.2 per cent. Safaricom, which had touched an all-time high two weeks ago traded more than 100 million shares last week underlining heavy profit taking.

Analysts at Standard Investment Bank, however, said the government may not impose the tax on equities, an optimism pegged on equal investor treatment across the East African region and complexities involved in reintroducing the tax.

“We do not believe capital gains tax on listed securities will be introduced in line with other East African countries,” said the investment bank in a note to investors.

READ: Brokers want KRA to suspend capital gains tax on stocks

Stockbrokers have questioned how the investors will work out the gains without a base year to calculate the profit margin yet some of them may not have records on the price at which shares were acquired.

They have also pointed at the capital investment and staff requirements that will be required of them if they were to comply.

The tax will be charged at five per cent of the difference between selling price of the share and its acquisition price, less any transaction costs involved.

Capital gains tax is set at 20 per cent in Tanzania and 30 per cent in Uganda on property with equities investors exempted.

Brokers have also argued that reintroduction of tax which was suspended in 1985 was likely to make Kenya less attractive.