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.