TBI MAGAZINE

NSE’S poor performance: What it means

Nairobi Security Exchange (NSE) ranked the worst in the world

BY Simon Munene

The Nairobi Securities Exchange (NSE) was off to a bad start in 2017, after it was ranked as the worst performing index in the world.

NASI, NSE 20 and NSE 25 lost 8.5 per cent, 21.1 per cent and 15.8 per cent respectively in 2016, thanks to declines in large cap stocks. In fact, according to Cytonn Investments, since the February 2015 peak, the market has lost 42.1 per cent and 24.9 per cent for NSE 20 and NASI, respectively.

The decline is said to have had a significant drag in valuations to the weakest since 2009, according to Bloomberg. The poor performance of the largest security market in East Africa by market capitalisation can be blamed on several factors.

The first one is investor apathy, occasioned by many adopting the wait-and-see approach to trading as the country gears towards the General Elections in August. NSE Chief Executive Officer Geoffrey Odundo was quoted by Bloomberg, saying that this is exacerbated by foreign investors, who are the net buyers, waiting for lower valuations while domestic investors continue to favour bonds to stocks.

While investor apathy is not unusual in an electioneering period, it appears that the market did not adequately insulate itself from the effects of the slowdown.

And with the interest rate caps law in force, it is unlikely that things will get better.

The law, which came into force in October last year to rein in runaway cost of borrowing, took a toll on banking stock prices. Analysts will be keenly watching the financial results by listed commercial banks for the first quarter of the year, expecting a partial, if not the full impact of the Banking (Amendment) Act 2015.

There are 11 banks listed at the NSE, making up at least a sixth of the total number of companies listed by the bourse, according to its website.

The year 2016 also saw several companies issuing profit warnings and this was seen as a mood dampener for investors. Usually, a company issues a profit warning if it expects its profits year over year to decline by 25 per cent and above.  Four listed companies issued profit warnings last year including the NSE itself.  Others are Sasini limited, Sameer Africa and Sanlam.

While NSE blamed a slowdown to reduced earnings, Sameer saw a direct relationship between its profit drop and the closure if it’s Yana tyre factory sometimes last year.  Sanlam’s profit woes were due to a combination of low income from its sale of properties and its growth strategy that it admits was rather expensive. Sasini attributed its drop in profit to the sale of land during the last financial year from which it obtained a significant one-off net gain.

However, it is important to point out that fewer companies issued profit warnings in 2016 compared to 15 companies the previous year.

The bottoming out in shares could, however, be a blessing in disguise as it offers an opportunity for investors to buy.

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