The following analysis by George Bodo was first published in the Business Daily
The stock market hasn’t been impressive in the first half of 2015. The NSE 20 Share Index lost 4 per cent while the All-Share Index returned just a mere 70 basis points. Additionally, market capitalisation, which represents the market value of all listed companies’ outstanding shares, declined by 10 basis points.
A key driver of this bear run was the outflow of foreign positions in the market. Foreign sales in the first six months of the year amounted to Sh64 billion, which was a 25 per cent year-on-year growth compared to a similar period of 2014.
However, despite the exits, foreign investor participation levels was still robust, accounting for an average 52 per cent of total market activity, which is significant enough to sway market performance anyway.
From where I sit, there were four drivers of the market’s bear run. One, Nigeria’s peaceful general elections in March and the subsequent smooth political transition two months later brought optimism back into the country’s stock market (and Naira-denominated assets).
Consequently, anecdotal evidence suggests foreign investors holding other sub-Saharan African assets, Kenya included, were selling off and trooping back to Nigeria.
Second, the perpetual speculation over the possibility of US Federal Reserve abandoning its zero interest rate policy earlier than thought caused significant overhand in the global stock markets, especially in the first quarter, and partly contributed to the foreign investor flight out of Kenyan equities.
Third, there was general investor dissatisfaction with banks 2014 results, with the resultant negative sentiments being reflected in the valuations of bank stocks.
Listed banks shed off Sh42 billion during the period under review. And since banks account for nearly 25 per cent of market activity, any downdraft on bank stocks is bound to impact overall market performance.
Finally, the noise that surrounded the re-introduction of capital gains tax (CGT), which was pegged at 5 per cent.
Three out of these four factors may not be at play in the second half of the year. As Nigerian President Muhammadu Buhari marked his one month in office this week, the ‘Buhari euphoria’ seems to be fading.
The fact that he’s yet to offer economic policy direction and the premature infighting among APC members seems to be dampening the original optimism.
Consequently, foreign investors could look to window dress their Nigerian exposures (and Kenyan assets will be their next destination).
The Treasury has since scrapped the CGT all together and instead introduced a levy of 30 basis points, essentially a transactional tax.
Speculations surrounding possible mergers and acquisitions in the banking sector following the Treasury secretary’s proposal to increase core capital five-fold could alter investor sentiments on banks and trigger strategic positioning on banking stocks.
So, considering how all the above factors net-out each other and in view of the current valuations, I would say the stock market has opened a buy window.
However, there are three risks to my ‘buy’ call. First, the expectation of a rise in short-term interest rates (historically, short term interest rates have had an inverse relationship with stocks).
Secondly, due to the global interconnectedness, the possibility of an escalation in geo-political risks, specifically Greece’s default on IMF payments on Tuesday and the resultant uncertainties surrounding its membership in the eurozone could destabilise asset prices.
Lastly, the US Federal Reserve, at its June 16-17 meeting, pushed forward the possibility of ending the zero interest rate policy to the last quarter of the year.
And the resultant speculations over the timing of a possible rate increase will still cause some overhang in global markets.