Saturday, October 2, 2010

African Frontier Market in the Spotlight: Kenya's Nairobi Stock Exchange


Equity Bank Kenya - 70 percent up Year-to-date

Please find attached a small piece that was published in he Business Daily Africa yesterday. So far this year, the Nairobi Stock Exchange (NSE) was one of the best performing stock markets in the world with a more than 40 percent increase year-to-date. Equity Bank even went up 70 percent with Barclays Bank Kenya and East Asian Breweries doing fine as well.


The NSE did still not reach its all time high of early 2007, but market observers are getting afraid that valuation levels are going up too fast. Current P/E levels are at 16. Only a handful of Frontier Markets report higher levels.



As such, high P/E levels do in-and-of-itself not indicate that markets are too expensive. It is also very well possible that - when leaving a crisis period behind - due to high expected growth rates for the economy in general and leading firms in particular expectations incorporated in the ratio indicate that investors believe that earnings levels will grow or recover quickly. And that is not impossible.

It could also be that things are related to the low interest rate scenario that the world is living in these days. Share prices are nothing more but the discounted value of expected future dividends. These dividends are related to expected future earnings and discounting is related to interest rate expectations. When the interest rates used are relatively low, share prices - and therefore also P/E ratios - can be higher than under regular circumstances. And not just that: when the future outlook is better, both economically and politically, it is also possible that risk premiums applied by investors are lower, which further depresses discount rates thereby increasing share prices and P/E ratios.




So in-and-of-itself one could say that for long-term investors in Africa Kenya is still a market that you should invest in. However: those who expect to score a quick buck should be more than careful. The data presented do also indicate that the influence of foreign investors on the Kenyan exchange is still large. They hold about one-third of all shares. Taking that into account they were responsible for 2/3thirds of trading volume last year. This year their trading activity is more in line with the amount of shares they hold. But it is a well-known phenomenon that foreign portfolio investors - normally using a top-down approach - can easily buy or sell shares within a country irrespective of specific firm fundamentals and more related to a general vision about the country or - even more top down - frontier markets in general.

Nairobi - Kenyan Stock Exchange: ST getting expensive, LT still a buy

Taking into account that liquidity levels in Frontier markets are still relatively low compared to international standards small changes in trading activity can translate into relatively large differences in share prices. This can of course work to the advantage of markets like the NSE when foreigners 'discover' them. But the other way round: as soon as something negative happens (either in Kenya itself and/or abroad) an opposite movement is also possible.




We do therefore advise people interested in African markets to translate this news into
a) a more careful, long-term buy/hold for Kenyan shares;
b) those that have to worry about shorter term developments to sit and wait a bit: let the firm's first show good, solid increases in earnings per share

The African continent will continue to be attractive for investors, but it will also continue to be a difficult continent for the non-specialist. We do therefore advise those of you who cannot follow market developments every day to find a good Africa fund.

Our asset manager selection team is still positive about the qualities of some of them and our due diligence indicates that products offered by some of these parties are of institutional quality. Their only problem remains that they are still relatively small, which is in-and-of-itself indicative of the liquidity issues that we referred to above.

Africa in general and Kenya in particular will definitely remain on our long-term road map, but those of you focusing on shorter-term speculation might have to look elsewhere. A hint? We believe that valuation levels in Eastern Europe (Russia plus selected markets) have come down to such an extent - that even when properly discounting for political and other risks - these markets might be very attractive for speculators willing to take on the extra risk.

Click here for the original piece from Business Daily Africa. 


Those of you who want to be updated about the Kenyan Stock Exchange are referred to our partner

And for more economic news about the country we refer to the CIA Factbook page about Kenya.



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