Kenya 2007:THE STOCK MARKET

THE STOCK MARKET: Investing craze takes hold in a disorderly environment
By Barney Jopson

Published: June 13 2007 10:41 | Last updated: June 13 2007 10:41

Snatches of conversation float over the hum of a fan and across the dim auditorium. “The restructuring … What I’m saying is there is major staff discontent,” one man says into his mobile phone. And then another, impatiently: “If you’ve found someone to sell to at 90, then say so … Just tell me at what price you want to sell.”

Fifty or so others sit motionless, straining to concentrate on the numbers on a giant cinema-scale spreadsheet projected in front of them. But no one pleads for silence. On the contrary, ears are pricked in the hope of gleaning surreptitious tips from the gabblers. The flashing screen shows the latest trades on the Nairobi Stock Exchange (NSE) and audience members are watching – and listening – for ideas on what to trade next.

On the third row of benches sits Basit Vayani, who is gently kneading his own phone between his hands. “You get a feeling for the market here, and information,” he says, rolling his eyes toward the restructuring tipster. “People talk around.” He is a regular visitor to the NSE and so are most of the smartly-dressed young men in the room. Ordinary Kenyans are engaged in a love affair with the stock market and the daily spreadsheet show is the embodiment of it.

In a run that began after the 2002 election, the main NSE index soared 432 per cent in local currency terms to a peak of more than 6,000 in early January. The total capitalisation of the 48 companies listed in Nairobi climbed to about $12bn – tiny compared with the $16,000bn value of the 3,100 companies on the New York Stock Exchange – but the market was injected with a bull market fizz familiar everywhere.

Newspapers began devoting large spreads to the machinations of the market. Banks started offering “share loans” to novice punters. There were even reports of farmers selling cattle to raise a few thousand shillings to become involved. But the investing craze hit a rough patch: starting in mid-January the market nose-dived for 10 weeks and wiped 30 per cent off share prices. “We were expecting it, but not that soon and not that far,” says Bijal Gudka, an independent financial adviser.

The same cannot be said of novice investors for whom the tumble provided a painful lesson: contrary to what some had presumed, or been led to believe, share prices go down as well as up. The question now is whether Kenya’s share affair has survived the losses and can develop into something more serious.

It all began with the peaceful end of Daniel arap Moi’s 24-year regime. Post-election euphoria combined with a government- orchestrated cut in interest rates gave equities a new allure. That was enhanced in the months that followed when it became clear that economic growth and corporate earnings were picking up.

But the stock market only really opened up to the masses in April 2006 when KenGen, a state-controlled electricity generator, sold 30 per cent of its stock in an initial public offering. Until then, the NSE had been something of a private members’ club. But KenGen shares became available to everyone and the company’s familiar name helped to remove the trepidations of first-time investors.

The result: the $100m offering was more than three times oversubscribed and the share price multiplied almost three-fold on its first day of trading. A few months later, the flotations of Eveready East Africa, a battery maker, and Scangroup, a marketing services company, generated equal fervour.

The NSE estimates that 700,000 Kenyans now own shares. Jimnah Mbaru, the exchange’s chairman, says: “We have a new generation of young people. In the old days people used to invest in land. Now young people understand and want financial assets. It’s a paradigm shift.” One of those people is Robert Gichuru, a young bank worker, who puts about KSh5,000 into equities each month via an investment club run with seven friends. The market, he says, is not driven by rigorous analysis. “If you ask a person why he’s buying shares, it’s often because his neighbour is buying,” he says. “A number of people are entering the market on a gut feeling.”

Mr Mbaru is inclined to agree. “There are lots of people who are reasonably ignorant about the workings of the market so they invest on the basis of incomplete information.” As an example, he says the most popular shares are often those in the smallest denominations because people confuse low prices with good value. So it is not surprising that share prices became detached from the fundamentals during the rally: the constituents of an S&P/IFC Kenya stock index were averaging a flighty price-to-earnings ratio of 30 by last November.

For domestic institutional investors, which still control almost 60 per cent of the market, that presented an attractive opportunity to liquidate investments. Their profit-taking played a big part in recent falls, but retail investor confidence was also dented by the suspension of a small retail broker. By mid-April the market was back to a more level-headed price-to-earnings ratio of 22, compared with about 18 for the US S&P 500 index and 13 for the UK’s FTSE 100.

Nairobi investors must also reckon with the reputed weakness of market regulation and a desperate lack of transparency. “There’s a lot of manipulation and insider trading by the big boys,” says Ms Gudka. “The market’s not clean.”

Mr Mbaru disagrees and says the introduction of an automated trading system last September has cut out a lot of abuse. But suspicions of shady dealing go some way to explaining why many retail investors are trying to snatch quick profits, rather than make long-term investments.

Some are not even betting their disposable income, but money they need to cover living costs, say others. Prices dipped briefly last December, it is reckoned, because parents were selling to raise the cash for the next year’s secondary school fees. So the NSE is some way from being an orderly market where hard analysis tends to set the tone. But the hordes that thronged the offices of Nairobi brokers in late April to subscribe to the float of Access Kenya – which became the country’s first listed internet services provider earlier this month – indicated the passion of the masses had not dimmed.