[2008-10-06]  NSE: Free fall market
In the past few weeks, the Nairobi Stock Exchange (NSE) has witnessed low volumes, with prices declining significantly on most counters.

The bourse has maintained this trend for the past nine months, as retail investors flee from the bearish conditions in the market.

Trouble for the bourse began before the Wall Street crisis. But post-election violence early in the year ignited trouble for the bourse disrupting commercial activity in the country and halting trading for a day.

Since then, it has been volatile and mostly on a free fall with the NSE 20 share index, the performance indicator at the Nairobi Stock Exchange (NSE), moving from more than 5,000 points in August to 4,174.84 by close of trading last week.

What most retail investors want to know is what led to massive decline in the market’s performance, with almost all the listed shares losing their value.

The bearish trend at the NSE is also partly blamed on speculative retail investors, who went for the panic button when Safaricom shares fell below the initial public offer (IPO) price.

The problem retail investors rushed in to buy new issues by Safaricom, the largest IPO to come to the market so far this year.

When Safaricom shares started trading, prices did not shoot up dramatically as was expected, trapping in speculators who went in for a kill.

Then news came about foreign investors selling their Safaricom shares in the market.

Further, the enthusiasm of the market was dampened by failure by banks to remit IPO refunds to retailers on time.

It was at this point that retail investors put their fingers on the panic sell button, having a domino effect on all the other counters and ushering in a bear run, investment bankers say.

Retail investors

With prices down at the bourse, it is cash-strapped retail investors who are feeling the pinch. This is more so for speculative retailers who rely on the bourse to meet their short-term cash requirements.

"To reap good returns, investors should invest long-term because stock markets are usually rocked by short turbulence," says Association of Stockbrokers and Investment Banks Chief Executive Jane Njeru.

When Safaricom shares begun trading the market index went down due to massive supply of the shares.

The NSE 20-share Index fell from 5,307.71 points in June to 5,057 on July 16.

During this period, the price of Safaricom rose from Sh5 to Sh6.50, a significant 30 per cent return to investors.

Then came volatility when Wall Street financial meltdown triggered the exit of foreign investors and fund managers from emerging markets, Kenya included.

Brokers have already reported reduced activity by foreign investors on such stocks as Access Kenya, East African Breweries, Mumias and Kenol.

There is a general decline by foreign investors on the industrial and Allied sector counters.

The bourse also appears to have been reacting to rising inflationary pressure, which has been high this year.

Overall inflation

Data indicates that Month-on-month overall inflation rate increased from 27.6 per cent in August to 28.2 per cent in September.

Monthly bulletins from the Central bank of Kenya indicate that underlying inflation, which captures increases in fuel and food prices, has been on the increase, racing past the target of five

per cent set by the monetary authorities.

Meanwhile, a recent survey conducted by the Nairobi Stock Exchange (NSE) shows that investors are disposing shares.

The survey shows rising inflation linked to cost of fuel and other basic necessities as a key factor that has led to investors selling shares to meet the high cost of living.

Stockbrokers also cite rising interest rates, which has made the debt (bond) market more attractive compared to the equity segment.

Some investors have been liquidating their stocks and shifting their portfolio to the debt market.

As a result, there has been increased activity in bonds as opposed to stocks.

Institutional investors, mainly fund managers, have also decided to hold their buying positions until when the market is stable.

A weekly bulletin by Suntra Investment Bank mentions that while there is some element of stability in trading activity, rising inflation could inflict pain in the market. The report adds that a weaker shilling is exacerbating the situation.

Fortunately, oil prices are coming under pressure from weaker demand as the global economy is facing weaker growth due to the Western economies showing weakness.

The report says the market is looking to third quarter announcements as well as the full year announcements to improve demand in order to help stabilise the bourse.

Best bet

The best bet, however, should come during the first quarter of next year when most firms are announcing their full year results and the prospects of dividends should lead to increased market participation by players.
Source: THE STANDARD