NSE grapples with investor jitters as Covid-19 resurgence hits gains

The stock market may stick in the woods for some time, despite stocks prices beginning to react positively with the reopening of the economy.

Trading of equities at the Nairobi Securities Exchange (NSE) has been bumpy since the strike of the coronavirus in the country in March, as the period has been characterised by huge foreign investor sell-off while local investors remained hesitant to buy.

Analysts argue that the recovery of the markets is still unpredictable. However, any vaccine would help prop up the activities.

“The outlook remains patchy as the resolution of the pandemic has not been fully hammered out,” says Churchill Ogutu, head of research at Genghis Capital Limited.

“Granted there is positive news of a first successful vaccine discovery that should propel positive sentiment in the markets. But that said, investors, will continue looking at the individual counters to see how they are positioning themselves.”

The onset of coronavirus in global markets saw NSE drop to an 18-year low in late March as foreign investors rushed to withdraw their capital due to unrest in their home.

This was followed by a halt in trading at the local bourse on March 13 after a fall by five per cent on the NSE 20 Share Index, triggered by the first reported Covid-19 case.

The last time there was such a halt was after the Supreme Court nullification of the presidential results in August 2017.

“Outside that initial shock, the market activity has been driven by broad-based weak sentiment and deteriorated fundamentals,” added Mr Ogutu.

Since the beginning of the year, foreign investors’ outflows were recorded at Sh27.30 billion in the nine months to September, according to data by Capital Markets Authority (CMA).

Most of the months in the troubled year saw net selling by the investors in contrast from January, August and September where net buying of Sh530 million, Sh10 million and Sh802 million was recorded respectively.

The CMA data also showed the net outflows were six times more than Sh4.33 billion outflows recorded in the same period last year.

The sell-off affected some blue-chip stocks like telco giant Safaricom and banking sector stocks such as KCB Group, Equity Bank, Cooperative Bank of Kenya as well as East African Breweries Limited.

This saw market capitalisation at the bourse hit lowest levels below Sh2 trillion mark to Sh1.945 trillion in August as investors lost their wealth following share price erosion.

Most firms dropped dividend payments due to expected declined revenues and restructured loans by most banks running into billions.

Others chose to cut their dividend payout to substitute with a bonus share issue to maintain a strong capital ratio amid the uncertainty of the Covid-19 crisis.

Mr Ogutu says despite shareholders being comfortable with the reinvestment move, the current low share prices still magnify the existing investor jitters over the pandemic.

The share prices are yet to hit pre-Covid-19 levels.

“To be sure, some of the blue-chip banks had flirted with mid-50 levels but are now trading at mid-30 levels. This dip in prices, across the board, represents the weak fundamentals that investors have priced in under Covid-19 environment,” Mr Ogutu added.

Depressed returns

The depressed returns in the equities and other investment classes such as properties have on the bright side made fixed-income increasingly attractive.

The CMA report showed that Sh227.86 billion worth of bonds — corporate and Treasury bonds — were traded in the three months to September in the secondary bonds market, representing a 66.75 per cent increase compared to Sh136.65 billion in the previous quarter.

This also indicated a 22.9 per cent increase from Sh185.44 billion recorded in the similar quarter in 2019.

Investors normally turn to the bonds market in times of uncertainty, seeking the security of ‘risk-free’ government paper that has more stable returns than the other volatile asset classes.

The pandemic and resulting investor uncertainty also led to sharp declines in real estate stocks, exacerbating pressures of oversupply that had pushed rentals on the downward.

Economy reopens

Home Afrika’s share price, for instance, closed at Sh0.41 in June, which was 97 per cent lower than the initial listing price of Sh12.

Stanlib Fahari I-REIT, on the East Africa Property Investment by Knight Frank, closed at Sh5.9 in June, the lowest share price recorded since its introduction into the NSE.

The effect also reduced returns on insurers’ stocks from real estate and falling share values.

AIB-AXYS Africa head of research Sarah Wanga, however, expects economic activity to increase as the economy reopens.

“This should be positive for listed companies, especially banks. We expect to see a decrease in non-performing loans as companies’ abilities to repay their loans are likely to increase.

“This will lower banks’ cost of risk and increase profitability,” she said.

Ms Wanga added that insurance companies would benefit as premiums and investment income increase.

Despite this, the market remains volatile blurring the performance over Covid-19 second wave concerns.

In September, the equity market began experiencing another rally of foreign investors and high-net-worth local individuals buying the shares in anticipation of higher capital gains when the stock market recovers.

This followed a growing local and foreign consumer demand following the gradual re-opening of the economy since July.

The Markit Stanbic Bank Kenya’s Purchasing Managers’ Index (PMI) showed monthly private sector activity had increased to 56.3 in September from to 53 a month earlier, the highest level since April 2018. A reading above 50 marks expansion.

This indicated improvement in business confidence and operating conditions in September, after the lifting of some domestic containment measures.

The level of optimism that has seen stock prices begin to pick up recently could be overturned by the increasing positive cases and fatalities threatening of a second wave.

Last month, recorded the highest number of deaths nearly 300, raising fears of the possibility of second market depression.

In October, foreign investors at the NSE turned net sellers withdrawing Sh1.13 billion on increased risk aversion due to a surge in Covid-19 infections, halting two previous months of net buying.

As a result, Mr Ogutu says the market is likely to see cost-cutting measures and revenue innovation strategies dominating the investment themes in the near-term horizon.