|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.
WHEN ARE P/E's TOO HIGH?
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.
SHORT-TERM INVESTORS TAKE A BREAK
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|