IT’S FEEDING TIME FOR CONTRARIAN INVESTORS AT THE NSE

Contrarian investors’ philosophy is that the market always overreacts to bad news. Therefore to them, the best time to invest is when the market has experienced a series of negative events which ultimately lead to falling of stock prices. This can be illustrated by Warren Buffet’s proverbial quote:  “Be fearful when others are greedy and greedy while others are fearful.” Contrarian investing can be applied in the Nairobi Securities Exchange (NSE). The NSE has been negatively affected by a series of bad news and events and many investors have responded to it in a herd mentality. This has been elaborated further below in this article.

Over the last half of the year 2015, the stock market has been hard hit by the negative economic outlook that the country and by extension the global economy has had to grapple with. 2015 has been one of the hardest years for the country’s economy with numerous challenges the economy has had to surmount. Among these challenges have been terrorism,  insecurity, runaway inflation, weak shilling and chronic levels of corruption in the government. These challenges have negatively affected the country’s economy which has led to a lot of offloading by foreign investors from the stock market. This has sent the stock indices tumbling down.

The prolonged bear market has further been worsened by a record high number profit warnings issued by public companies. The issuing of a profit warning is a requirement by the Capital Markets Authority (CMA) that a public company expecting a decline of more than 25% of its annual net profit must make that information public prior to the reporting date. A record 16 companies issued profit warnings in 2015 which are: Pan Africa Insurance, Britam, UAP, Standard Chartered, Mumias, Uchumi, Standard Group, TPS Eastern Africa, East African Cables, ARM Cement, BOC Gases, Car & General, Sameer Africa, Crown Berger, Express Kenya, Atlas Development. This has tainted the outlook of NSE which has led to even more investors exiting the stock market.

The high interest rates experienced over the last quarter of 2015 has also worsened the stock market. This is because the high interest rates have seen investors switch from the stock market to the more attractive bonds market as well as the treasury bills market. A good year for bonds is always a bad year for stocks.

All these factors have led to a massive selloff of stocks. This has seen the stock market lose over 21% in value over the year 2015. This is equivalent of a loss of Kes 270 billion of investors’ wealth. To put this into context, this tremendous loss of wealth has been amplified by loss of investor confidence in the stock market. This means that this loss may not be reflective of intrinsic values. 

For a contrarian investor, this is rare opportunity to dive into the stock market and make substantial gains. This is because the negative events experienced are cyclical and are bound to reverse in future. Different analysts agree that stock prices will rebound in 2016. This is the time to stop moving with the current and make a bold decision to walk the lone path. This will of course earn you the tag of a ‘stupid investor’, but you can guess who will have the last laugh.

DERIVATIVES TRADING AT THE NSE SET TO START IN JUNE

Derivatives trading

Finally, the long awaited derivatives trading at the Nairobi Securities Exchange (NSE) is set to kick off from June 2015. The Nairobi Securities Exchange (NSE) was able to secure a derivatives trading licence late last year from the Capital Markets Authority (CMA). This will be another stride for the Nairobi bourse ahead of other players in the region. Nairobi Securities Exchange (NSE) is set to open up a globally competitive derivatives market where spot and futures trading of multi-asset classes including shares, bonds, currencies, interest rate products as well as agricultural products' contracts will be trading. This will be another great move ahead for Kenya in becoming a regional financial hub.

According to the Nairobi Securities Exchange (NSE) CEO Geoffrey Odundo, the derivatives trading system has been tested and is currently undergoing simulation. Various stakeholders including dealers, trading members and clearing banks are now undergoing training on the highly complex financial instruments. Nairobi Securities Exchange (NSE) used part of the proceeds it obtained from its IPO when it self-listed in 2014, to develop the derivatives trading system, while the other proceeds would be used for introduction of REITS and ETFs.

Basically, derivatives are financial instruments used to hedge against adverse movements in the prices of their underlying assets. They are primarily instruments for hedging against financial risks by corporations or individual investors. They are more flexible and diversified unlike insurance products. This means that they are able to hedge some extra risks that conventional insurance products cannot cover, for instance foreign exchange risk, interest rate risk, etc.

However, derivatives are highly complex and can lead to monumental losses if not properly understood. The core purpose of derivatives is to manage risk but greedy investors wanting to make a quick buck may end up incurring detrimental losses. This is why every market player in the derivatives market must understand the inherent risks associated with these securities. For instance, the 2008-2009 financial crisis was catalyzed by some 'toxic' derivatives. The scale of losses witnessed was unprecedented. Investors lost billions of dollars, investment bank Lehman Brothers collapsed, American Investment Group (AIG) faced a possible meltdown and had to be bailed out by the US government to a tune of US $15 billion, not to mention the devastating effects on the global financial markets.

As the Nairobi Securities Exchange (NSE) braces itself to launch the trading of derivatives, it is currently in the process process of recruiting a derivatives market oversight board, whereby it advertised for applications at the end of January. The board will oversee the activities of the various market players and impose regulations to protect investors from manipulation.

The Nairobi bourse is cautiously optimistic that derivatives trading will be a great move for the Kenya's capital market. Personally, I think the introduction of derivatives is long overdue and will help the Kenya's economy in the sense that entrepreneurs will be able to uptake more risks and hence more new businesses will open up and existing businesses will expand and the overall effect is that the economy will grow.

AGRIBUSINESS AND COUNTY GOVERNMENTS

Agribusiness

I firmly believe that the agricultural sector in Kenya has a huge potential to impact the lives of a wide section of Kenyans who are farmers and continue to live in dire poverty. We grew up being taught that agriculture is the backbone of our economy, but the irony is that majority of farmers continue to languish in poverty. This is because the previous governments have failed to build structures that will prevent farmers from exploitation by middle men and more importantly they ignored the issue of value addition. For instance, farmers export raw coffee abroad, where it is processed and later the coffee is imported back to Kenya and most of the farmers can't afford it.

The market for agricultural products in Kenya is also poorly developed. At some point, there was 'shortage' of maize in the country which was making flour prices to skyrocket but ironically, some farmers in various parts of the country had maize rotting in their farms since there was 'no market' for the maize.

In my opinion, devolution is a big stride in addressing this issue. unfortunately for us, we have a shortage of transformative and visionary leadership. Majority of our leaders are political shenanigans with mediocre management skills and are using strategic plans they probably downloaded from the internet. Having said so, we still have a few leaders who are working round the clock to develop their counties.

First of all, let me laud the efforts of Muranga's governor Mwangi wa Iria for his transformational leadership in Muranga county.Key in his manifesto was his pledge to refurbish the agricultural sector in Muranga county. He sought the expertise of the international firm Deloitte & Touche who helped him draft his master-plan.  Currently, some of his developments are Kes 50 million fertilizer and seed subsidy targeting about 6500 farmers, Kes 200 million irrigation scheme covering 1000 acres of land and benefiting 10000 farmers, Kes 500 million in purchase of 35 milk coolers for every ward and the formation of Muranga Investment Cooperative Sacco. The governor has also successfully facilitated the acquisition of a ready market of agricultural produce for farmers who are affiliated to cooperative societies, for instance  members of Muranga County Horticulture Growers Cooperative have been offered a ready market in the UK and will be receiving Kes 60 per kg of french beans as compared to Kes 35 they previously received from middlemen.

Mwangi wa Iria has demonstrated a people oriented leadership and has given other political shenanigans a wide berth. He is a good example of how agri-marketing and cooperative development should be a priority for all counties so as to uplift the livelihoods of Kenyans. If other governors of other counties could emulate him and adopt such agribusiness models, Kenya's economy would realize unprecedented growth.

There is a dire need to create robust cooperative societies that are professionally managed and regulated to ensure they benefit the farmers. The governors should also work in revamping the existing cooperative societies to ensure they are better managed. They should employ professional marketing practices both inside and out of the country to tap more markets for agricultural products. The cooperative societies should also conduct civic education to farmers on best practices and also inculcate value addition for various agricultural products. This will help to reduce the middlemen headache and increase the returns for farmers.

THIS IS WHY THE GOVERNMENT SHOULD RETHINK CAPITAL GAINS TAX

illustration of the fall in trading volumes

In January 2015, the Kenya Association of Stockbrokers and Investment Bankers (KASIB) filed a suit against the taxman asking a court order to stop the implementation of Capital Gains Tax (CGT) by the Kenya Revenue Authority citing difficulties in implementation of the levy. The brokers whose revenue is largely determined by trading volumes of financial securities also argue that Capital Gains Tax (CGT) will stall activity in the bourse.

The weight of these allegations is now being felt in the Nairobi Securities Exchange as trading volumes on the month of January 2015 went down 35% as compared to the same period in 2014. Market activity level is a key tenet of technical analysis and hence depressed activity paints a grim picture of the capital market. This negatively affects both the NSE 20-share Index (NSE20) and the NSE All Share Index (NASI).

In the same period, foreign investor inflows have plummeted by about 50% as compared to a similar period in 2014.  This is an indication of slowing foreign investor activity in the bourse. Capital gains tax deters investments by foreigners which is a blow to the economy.

Due to several of these modalities, brokers had threatened to suspend the trading of securities for a whole month beginning on 20th February 2015 to 18th March 2015 when the High Court will announce its decision on a petition filed  KASIB against KRA on its proposed implementation of CGT. Such an action could have been severely detrimental to the East Africa's leading bourse.

This is the reason why the government really needs to rethink its decision to re-introduce Capital Gains Tax (CGT) after it was dropped in the mid 1980s as a way of encouraging local and international investors. I am of the opinion that tax naturally has the effect of scaring people and the government could still achieve its planned capital markets tax revenue targets through other means other than CGT. 

THE REASONS BEHIND FALLING OIL PRICES

crude oil extraction

We have been experiencing a dramatic drop in oil prices. This is a much welcome relief to a country like Kenya, which is largely an oil consumer that has been struggling with high energy costs for decades. To a large extent, this is favorable to the Kenyan economy. Lower energy prices reduces cost push inflation since production costs by local manufacturers goes down. Ultimately the prices of commodities goes down too. Other winners are the transport sector and airlines like the Kenya Airways whose fuel accounts to nearly 40% of its direct costs.

To fully understand the dynamics behind the plummeting oil prices, it's important to look beyond the Kenyan scene - the global oil market. Global markets have been transfixed by an oil price free fall. In 2014, the prices of crude oil surged to a high of about $115 per barrel. Crude oil prices have since been plummeting dramatically to a low of $49 per barrel on 23rd Jan, 2015.

Crude oil prices have been hovering around $100 per barrel since 2010. This is because of the soaring oil consumption globally especially in much active economies like China. This huge demand has kept oil prices high.

In addition key oil regions have been facing geopolitical conflicts. For instance the civil war in Libya, ISIS threats in Iraq, and the US and EU slapping sanctions on Iran has pinched oil exports. Collectively, this has taken about 3 million barrels a day of crude oil from the global oil market. These issues have constrained oil supply in the global market which has contributed in maintaining the oil prices up.

However, since mid 2014, these outages and conflicts are not so much significant. The dynamics have now shifted and the supply has been growing and has outdone the demand.

Oil prices have been falling for two main reasons.

• The supply has exceeded the demand.

The persistent high oil prices spurred companies in the US and Canada to start drilling for new hard to extract crude in North Dakota's shale formation and Alberta's oil sands. America started producing oil since 2008 and has since become the the largest oil producer. Though it does not export oil, it has since been importing much less. This has led to a boom in "unconventional" oil production (oil production by non-OPEC countries). Also, the demand is low because of weak economic activity, increased efficiency and a growing switch away from oil to other energy sources.

• In its big meeting, OPEC did nothing.

OPEC members met in Vienna on 27th Nov, 2014. Observers were watching whether the biggest oil cartel (OPEC states) would agree to cut on their production. Saudi Arabia didn't want to give up its market share, so it refused to cut on its production. It hoped that the lower prices would throttle the US shale boom. OPEC maintained that production by members would continue as usual at 30 million barrels per day. So the prices went on a free fall.

Low oil prices are excellent news for consumers like Kenya, Japan, China etc.

However, pressure is mounting on oil producers, especially oil reliant economies. Russia's economy is now facing a potential meltdown. Venezuela is facing unrest and may default on its debts.

INTRA-DAY TRADING OF SHARES AT NSE COULD SOON BE A REALITY.

trading at the NSE

 

Intra-day trading of stocks in the Nairobi bourse is set to become operational by the end of September 2015. The Central Depository and Settlement Corporation (CDSC) is currently installing a new system than will allow investors to purchase and sell shares in the same day. This will be a move away from the current system whereby transactions regarding purchasing/selling of shares are settled in four working days.

According to the CDSC chief executive Rose Mambo, the transactions on stocks will be moved to the Central Bank of Kenya (CBK) and will now be conducted through its Real-time Gross Settlement (RTGS) system. Currently, the CDSC uses four commercial banks to settle share transactions. The four banks are: CFC Stanbic, Equity, Barclays and Cooperative.

Once implemented, the move will reinforce the dominance of Nairobi Securities Exchange (NSE) in the region by making the shares traded in the bourse more attractive. This is because investors will be able to trade on margins gained during the day improving liquidity of shares traded in the market. This is particularly attractive for international investors who emphasize on the ease of entering and exiting a counter.

The new system will be much welcomed by brokers since this will push the volumes of trade up which means they will now be able to fetch more commissions on share trading.

The use of Real-time Gross Settlement (RTGS) system will help to address settlement risk. This is because the system will eliminate the chances of default that may be caused by a system failure in any of the four settlement banks. The Central Bank of Kenya (CBK) will settle with brokers' banks who will in turn settle with clients.

"This moves Kenya a step closer to attaining the status of a regional and international financial center as envisaged in Vision 2030." Said Paul Muthaura - the acting chief executive of Capital Markets Authority (CMA).

This is why you could soon be able to invest in the lucrative REAL ESTATE sector

a real estate project

 Investing in the real estate market has over the decades been reserved for wealthy individuals and corporate entities but thanks to the planned roll-out of REITS by the Capital Markets Authority (CMA), you too could soon be able to own a piece of real estate property.

REITS - Real Estate Investment Trust Scheme is basically a collective investment vehicle which allows investors to own rights or interests in a property in form of units and earn returns in form of rental incomes or capital gains. Once introduced, REITS will start trading in the Nairobi Securities Exchange(NSE) under the management of licensed REIT managers and licensed trustees who will offer safe custody of the assets of the REIT and oversee the activities of REIT managers.

Kenya will be the third African country to introduce the trading of REITS in its capital markets after South Africa and Nigeria. In Kenya, REITS are divided into two: Income REITS (I-REITS) and Development REITS (D-REITS). I-REITS derive their income from property rentals while D-REITS derive their income from construction of property for sale.

The commitment of the Capital Markets Authority (CMA) in introducing of these securities is affirmed by the recent approval of the REITS trustee license to KCB Group making it the third trustee to be licensed after the Housing Finance and Cooperative Bank. The licenses are approved after the Capital Markets Authority (CMA) establishes the compliance of the entities with the requirements of regulation 125 of the Capital Markets (Real Estate Investment Trusts) (collective investment schemes) regulations 2013. CMA has also granted licences to six REITS managers among them: Stanlib Kenya Ltd, Nabo Capital, Fusion Investment Management Ltd, CIC Asset Management, UAP Investments Ltd.

REITS will play a vital role in Kenya's economy by deepening the capital markets as Kenya embarks on its initiative to make Nairobi an international financial center. This will provide capital markets funds to developers that will help to re-energize the housing sector that has seen a constrained supply of housing units which currently stands at 50,000 units p.a against an annual demand of 200,000 housing units.

The investors (both retail and institutional) will also be salivating as they wait for CMA to officially roll out the REITS.