Bullish equities restore bourse's lost glory

Portfolio investors at East Africa's oldest bourse are counting on another year of huge capital gains with interest rates, as benchmarked by Treasury borrowing, were forecast to remain depressed. It has all been attributed to the optimism factor following the change of government-which is unlikely to wear out as the new potentates are broadly on course of expectations. Last year, the NSE 20 share Index more than doubled from 1317 to 2738 points. While this barometer has traditionally not been unanimously accepted as a measure of practical change at the bourse, market capitalization, which provides a good indicator of wealth extent, has been swelling. In the past year, it rose from Sh108.4 billion to Sh317.7 billion. This represents a hefty 192 per cent increase. Robust activity has been maintained in the bonds market, although unlike in the past, falling interest rates on government bonds have tended to tilt activity more in favour of the once under priced equities. Apart from growing confidence levels and falling yields on government paper, there are other factors that have been fuelling the market. The capital flight tide appears to by and large been stemmed. Central Bank of Kenya reported that in the first quarter of 2003 alone, some Sh30 billion ($394 million) returned to the country. Some of the cash had fled just before the polling but other monies were returning following the departure of President Moi and his gang of plunderers. Then in June, the government in its budget slashed the cash ratio requirement for banking institutions from 10 to 6 per cent. It is estimated that the measure released some Sh60 billion (US$792 million) in the already liquid-flush money markets, pushing more cash into equity trading. With the economy yet to recover sufficiently to absorb the surplus resources, the bourse remained the only source of succor for fund managers. The latter group, which has for weeks on end been talking up the interest rates with limited success, are forced by the Retirement Benefits Authority to invest a portion of their pension cache into stocks while cutting on their over-investment in property. Effort to shift funds from the Kenya Treasury bill which has been yielding well below 2 per cent to the Ugandan one, rated at double digit, have proved ill-advised as the appreciation of the Kenya shilling has tended to wipe out the gains on repatriation. As the New Year wears out, there are a number of factors that will again favour the NSE. For one, it is not lost on analysts that it is yet to rebound into the 5000 points zone of 1995. In addition, the return of donor funding effective this month is a huge plus as funding government deficit will grow a less attractive alternative. Another godsend for speculators is the collapse of the property market. This has been precipitated by dramatic demolition of houses standing on planned road development land and other illegally acquired tracts. During the Kanu Era, government land was fraudulently appropriated by the politically correct. What has collapsed the market is that there is no knowing exactly which land was legally acquired especially in towns. It is widely believed that foreign investors targeting the emerging markets would return to the Kenyan market after IMF gave the country a clean bill of health last year. With Zimbabwe Stock Exchange likely to reflect the evil fortunes wrought by poor governance in the country, NSE could be a beneficiary - the Harare bourse though has so far proved quite resilient thus far. As the government pursues the more than Sh300 billion (US$4 billion) believed to be stashed in dark holes abroad, there is a rumored likelihood of a compromise being struck for voluntary repatriation; to more cheer for the bourse. In the early 1990s when the Goldenberg Scam was pumping money into the markets, a good chunk of it ended at the NSE. Thus all new initial public offerings (IPOs) were over-subscribed and the market swelled to dizzying levels. It is over and above thought that with the economy expected to grow in the region of three per cent - up from 1.8 per cent last year - company earnings and thus dividend issuance ability should start rising again. Most companies have sufficiently restructured over the years and are in an excellent position to take advantage of the changes. So far, the ruling market stock price to earnings ratio has been a matter of concern to stock analysts, raising fears that blue chips could already be overpriced. East Africa Breweries, a 50 per cent Diageo-owned clear-beer and spirits-maker, has a price-to-earnings ration of 31.83. Transnational Barclays and Standard Chartered banks are at 21 and 28 P/E ratios respectively. It is clear that at one point, investors will start looking at earnings more seriously, which may burst the bubble. But in the short-term, that prospect remains remote with bank deposits yielding sub-inflation returns and the property market in a tailspin. Overall, it is believed that fortunes of the equities market are closely tied to continued reforms by government, which is crucial to foreign inflows and confidence. The NSE, celebrating its half-century anniversary this year, is eagerly awaiting new issues to quench the biting thirst for shares. That can only happen with continued stability: Political reforms and sorting out of differences in the ruling coalition should thus be critical in determining the direction for the markets.