The value of shares traded on the Nairobi Securities Exchange (NSE) in the first-half of the year rose by five percent, even as investors continue to experience a tough year where the value of their holdings at the bourse has slumped by Sh436 billion in the six-month period.
Trade turnover rose to Sh83 billion for the six months to June 30, compared to Sh79.2 billion in the corresponding period last year, new data shows. While the higher trade volume bodes well for stockbrokers, who rely on commissions earned from facilitating trading, investors have been counting their losses as share prices fell in the same period.
The rise in turnover even as share prices fell also reflects the sustained selling activity of foreign investors, who have this year tended to seek safety in developed markets as the Covid-19 pandemic continues to ravage global economies.
They made net sales of about Sh22.8 billion from the NSE in the first half of the year, largely on the five largest stocks that account for three quarters of the NSE’s total market capitalisation of Sh2.1 trillion.
The coronavirus pandemic has negatively affected the performance of many listed companies, cutting profits and bringing job losses and pay cuts.
In the real economy, this has reduced the purchasing and investing power of individuals, which affects the stock market, and therefore analysts see the leaner times for the bourse persisting until the economy is fully reopened. “We expect the uncertainty-led slowdown in the equities market to persist with the extended duration of reopening of the economy expected to dim near-term prospects of recovery of business activity,” said analysts at investment bank Genghis Capital.
Most of the market activity in the period was concentrated on the large blue chip companies, including Safaricom, East African Breweries Limited (EABL), Equity Bank, KCB and Co-operative Bank.
While these firms saw more trading activity, mainly by foreign investors, their prices fell and due to their oversized influence on the market they dragged the indices and market capitalisation lower. The benchmark NSE-20 share index was down 27 percent in the six months to end June at 1,942 points, while the all-inclusive NSE All Share Index fell 17 percent to end the half-year at 137.7 points. Between January and June, the share price of Safaricom retreated by nine percent, EABL (18 percent) and Equity (35 percent). KCB and Co-operative Bank also saw their share prices fall by 33 and 26 percent respectively.
Together, these five stocks lost a combined Sh294 billion in market capitalisation during the first half of the year, accounting for 68 percent of the total wealth erosion at the NSE in the period.
Foreign investors, who account for 60 percent of the traded volumes at the bourse — even though they hold just 21 percent of the total issued shares — prefer to trade on these large counters because they are liquid and can support large volumes.
Meanwhile, local investors — notably pension funds — were also eyeing other investment classes as they sought returns. The funds reduced their average allocation to equities as a percentage of total assets to 19.1 percent at the end of March 2020 from 23.5 percent at the end of December 2019, while raising their allocation to fixed income investments from 64.9 percent to 68.4 percent.
Government securities continue to offer positive returns on the fixed income side. Treasury bonds are offering yields of between 10 and 13.2 percent, while the rates on short-term Treasury bills have stood between 6.7 and 9.9 percent this year.
Amid the depressed prices, however, analysts say that there is an opportunity to invest in the market, which is trading at attractive multiples.
“With the market trading at valuations below the historical average, we believe there are pockets of value in the market for investors with higher risk tolerance and are willing to wait out the pandemic,” said analysts at Cytonn Investments.
The NSE is currently trading at a price to earnings ratio (P/E) of 8.2 times, compared to its historical average of 13.1 times.
The market’s average dividend yield is currently at 5.1 percent compared to a historical average of four percent.
Eight companies have a dividend yield in the double digits at prevailing prices, offering an attractive alternative for those seeking returns from the market at a time when capital gains are limited.