The prices of blue chip companies that make up the Nairobi Securities Exchange (NSE) 20-Share Index have dropped to a 10-year low, reflecting investors’ expectations of depressed earnings for the listed firms.
Insurance, commercial and banking sector stocks are the worst hit, pulling down the NSE 20-Share Index, which captures movement of select blue chip stocks, to 2,552.19 points-- a level last seen in March 2009.
Investor wealth as measured by market capitalisation had shrunk to Sh2.251 trillion as at yesterday, from Sh2.523 trillion as at early August last year, meaning investors have lost about Sh272.6 billion in paper wealth within the one year period.
Analysts said the sharp drop in share prices is driven by investors’ flight from “risk assets” and are flocking to safe investment havens including Treasuries. The market traders also say local institutional investors are concerned about the unpredictable swings in earnings posted by listed companies.
“Our investors here have been limited to a lot of speculative retail and heavily constrained institutional. When retail investors don’t get rapid jumps and rises, they lose interest. Patient, dividend focused investing is not a core habit we have,” said Deepak Dave, an analyst with Nairobi-based Riverside Capital.
Bank stocks, which account for 28 percent of the NSE’s total market valuation and a fifth of the market’s 96.2 billion total issued shares, have been on a decline partly attributed to the end of the dividend announcements season.
Foreign investors ordinarily take profits in June and offload stocks ahead of full-year dividend payments after which they take fresh positions based on their earnings projections for different stocks.
The May to June sell-off ordinarily coincides with the summer season in the West when most portfolio investors take a break.
Insurance stocks, which have been the worst hit, have fallen by 62 percent on average in the year to date. The sinking share prices are linked to poor performance by insurance firms.
Britam has dropped 48.59 percent in the past 52 weeks while Kenya Re has fallen 77.28 percent in the period. A third of insurance companies plunged to a combined pre-tax loss of Sh8.5 billion last year, hurt by high costs and a bearish NSE market and other factors that saw the sector record a 68 percent dip in profitability last year.
The sector’s overall profits dropped from Sh15.8 billion in 2017 to Sh5.1 billion last year.
“I think this is the worst year ever in (the insurance sector) history. We need to ask for how long. Another one similar year and half of these companies will go bust. Maybe consolidation is the answer,” Jubilee Holdings chairman Nizar Juma told the Business Daily earlier this year regarding the performance of the insurance industry. Half of the Sh13.2 billion pre-tax profit for the 24 insurers that closed the year in profits belong to just two insurers -- Jubilee (Sh5.41 billion) and GA Insurance Limited (Sh1.1 billion).
In the commercial sector, Kenya Airways’ share price has tumbled 71.3 percent in the year to date while Scangroup and Nation Media Group stocks have shed their value by 27.4 percent and 49.5 percent respectively in the period.
In the construction sector, Bamburi’s share price has shed its value by 38.63 percent in the year to date while in the energy sector Kenya Electricity Generating Company (KenGen) and Kenya Power stocks have shed their value by 2.3 percent and 36.33 percent respectively in the period.
The weaker performance of the Nairobi bourse is also linked to risk sentiment emanating from the US. Investors are said to be eyeing higher returns from Treasury bonds. “Our market remains constrained to a few major fund managers and only some liquid counters, so when they have to compete with excellent tax free government short and long-term yields, there is no incentive to invest in stocks,” said Mr Dave.
“Foreign institutional money sees some attractive yields in specific counters, but our overall economic performance is such that they do not see attraction in investing for future growth here.”
Investors will be watching as banks release their half-year results in the coming weeks to make decisions on whether to buy or sell their stocks and chase better yields elsewhere amid a gloomier outlook from some market watchers.
Equity Bank – the first lender to release its half-year performance – said its net profit increased nine percent to Sh12 billion as the lender cut back its loans to the Treasury in favour of the mass market.
DTB’s share price has fallen by the largest margin among bank stocks, by 42.1 percent, in the past 52 weeks.