NSE turnover hits Sh1.6bn after capital gains tax war

The volume of trading at the Nairobi Securities Exchange (NSE) has doubled since the Treasury stopped the capital gains tax (CGT) controversy that nearly led to a market shutdown two weeks ago.

Average daily turnover has risen to Sh1.16 billion since February 20 compared to Sh567.7 million in the preceding seven weeks when the taxman fought a vicious war with brokers over the law requiring them to collect and remit the tax.

The change in the market’s fortunes reveals the extent to which fear of the tax had impeded activity at the bourse and may perhaps take the Treasury back to the drawing board. The return to normal trading activity must have come as a relief to stockbrokers, the Capital Markets Authority, the Central Depository and Settlement Corporation (CDSC) and the Treasury, who all earn commissions on traded equity.

“There has been positive development on CGT side, and one of the things we are hoping for is that the tax will not apply on foreign investors,” said Kestrel Capital chief executive officer Andre DeSimone.

“There are also expectations of good company results so investors are coming in.”

February 20 marked the lowest point in the CGT dispute when stockbrokers threatened to cease trading for a month, citing fears of litigation from clients if they deducted tax from their gains.

The issue has since taken a back seat in the market following the subsequent talks between the intermediaries and the CMA.

Treasury secretary Henry Rotich has since announced that the burden of calculating and remitting the taxes will henceforth fall on the investor.

READ: Treasury shifts the capital gains tax burden to investors

Mr DeSimone said the Kenyan markets have been supported by inflows from Nigeria where concerns over the political and security situation have led to reallocation of assets. 

“The Nigeria market has remained under immense pressure owing to the prevailing economic climate that has left investors jittery over high risk assets such as equities,” said risk and research firm Stratlink Africa in their March analysis of African markets.

Data from the NSE shows that monthly equity turnover for February stood at Sh16.1 billion, boosted by the upturn of activity in the second half of the month. January turnover was the lowest in two years at Sh9.7 billion.

Stockbrokers recorded mixed performances in January and February, unlike the past when market share numbers have remained largely static.

In January, for instance, SBG Securities led the market with a traded turnover of Sh2.99 billion, representing a 15.4 per cent of the total, followed by Kestrel with Sh2.91 billion (15 per cent share).

Renaissance Capital (Rencap) was third with Sh1.9 billion (9.8 per cent) while Equity Investment Bank (EIB) upstaged some of last year’s performers with Sh1.74 billion for a nine per cent market share.

In February, Kestrel led with trades worth Sh4.45 billion although the monthly market share slipped to 13.8 per cent as more brokers grew their trading volumes.

Standard Investment Bank (SIB) and Rencap  both had trades shares worth Sh3.89 billion for a 12.1 per cent share of the market each while SBG was fourth with Sh3.21 billion.

Stockbrokers closed 2014 with record turnovers and the lower volumes that characterised trading in at the start of the year only bred fears of a possible slip back into loss-making.

SBG Securities released its full-year 2014 results on February 26, showing that net earnings rose 26 per cent to Sh237.8 million and setting the trend for higher industry profits.

The stockbrokers with strong foreign trading desks have recently tended to outperform their local counterparts in profits and turnover.

Prospects for higher foreign inflows into Kenya’s equities market are boosted by higher dollar returns from the NSE compared to peer stock exchanges in Africa.

“When we consider funds allocated to investments in frontier markets, the NSE is still very attractive in risk versus return, having come in at 19.2 per cent in 2014,” said Genghis Capital analyst Silha Rasugu.

Foreigners have to exchange their dollars into shillings when entering the market, and upon leaving they convert back the currency, hence any gains have to take into account the prevailing exchange rates at both times.

Data from African Alliance shows that the dollarised returns for the NSE so far this year stand at 3.7 per cent, compared to 2.3 per cent in the Zimbabwe stock exchange, 1.1 per cent in the Morocco exchange.

Tunisia and Nigeria have a negative return in dollar terms, at -0.3 per cent and -19.7 per cent respectively, making them unattractive to inflows.