Ideas & Debate

What CMA Q3 report tells about the market

Report shows that for much of this year, foreign investors were on the sell-side at the bourse.  FILE PHOTO | NMG
Report shows that for much of this year, foreign investors were on the sell-side at the bourse. FILE PHOTO | NMG 

The Capital Markets Authority third quarter report is out. A quick glance reveals some interesting developments – some good and some not so good. In this article, I share three observations that I believe are key.  

One, the report shows the asset management industry reaching an important milestone. As at the end of June this year, total assets under management were recorded at Sh55.5 billion (up 317 per cent from Sh13.3 billion in September 2009). There were 17 licensed fund managers.

What’s interesting, out of the total, money market funds accounted for 78.78 per cent or an equivalent of Sh43.7 billion with only 11 per cent controlled by equity funds.

This means a majority of the funds are yet to re-allocate back into equities. It also means that they largely missed out on the February-August rally.

What’s also interesting to note is that, the top-five investment houses controlled 73 per cent of the assets with the number one firm holding a quarter of the funds.

Well, thanks to deep distribution and the big-brand pull, these firms have won the trust of a majority of investors.

Ideally, most retail investors should invest via funds due to their efficient structure and the benefit they get from professional management.

Perhaps, the only challenge is the high management fees that keep eating into returns. Otherwise, the next leg of growth should easy come from lower management fees. On another point, it was good to see Shariah-compliant funds slowly inching upwards—they accounted for 0.01 per cent of the total.

Two, the report also showed that for much of this year, foreign investors were on the sell-side. By close of September, this group of investors had off-loaded about three per cent of their total holdings (Sh418 billion) or an equivalent of Sh11.8 billion. Though rush for the exits was expected from this group, the magnitude of their net sales was rather unexpected.

Remember, in the election of 2013, during the same period (January – September), foreign investors had cumulative net purchases worth Sh22.6 billion.

In fact, during the election month (March, 2013), foreigners were busy on the buy-side pumping in a total of Sh1.8 billion. But this time it was different. They sold-off a total of Sh3.2 billion in the month of August. Question is, what pushed them over the wall this time?

Three, our turnover rate (total shares traded against the total market capitalisation) is still low (7.4 per cent in 2016, down from 10 per cent in the previous year).

This means a majority of companies don’t trade at all. What’s worse, only ten companies account for over 80 per cent of equity turnover.

In fact, Safaricom often accounts for a third of the total market turnover a good deal of the time. This is why we need the short selling and market-making platforms ready.

The time is now. But then again, why do we have a company listed with just about 100,000 shares in circulation? 

All in all, the report shows the market coming of age in many ways. Only the sky is the limit.