According to the World Bank, Kenya’s 2013 GDP is expected to hover around 5 percent driven by a rapidly expanding consumer sector and the discovery of sizable oil and gas deposits. This optimism is reflected at the Nairobi Securities Exchange (NSE) where the barometer NSE 20-Share Index has been on a surge. Indications are that Kenya’s economy could make modest recovery in 2013.
After a peaceful March 2013 poll, Kenya’s economy is back on the saddle on a full steam ahead.
“Interest in frontier markets with stable regulatory environment and attractive returns are what are attracting foreign investors to this market,” Eric Musau, a research analyst at Standard Investment Bank (SIB), told AFK Insider.
Foreigners are also looking at diversification propelled by the fact that African funds have very few liquid markets on the continent to look at.
“Foreigners still view Kenya attractively and are likely to remain active participants. However, the market still lacks alternatives in terms of asset classes and listed companies,” said Musau.
Currently, the most attractive counters are firms that have large capitalization levels and are also highly liquid. They include the region’s largest alcohol beverage company, East African Breweries Limited (EABL); telecommunications giant, Safaricom Limited; and Kenya Commercial Bank and Equity Group.
According to Standard Investment Bank statistics, over 60 percent of activity at the NSE is driven by foreign investors.
The NSE 20-Share Index, which measures the performance of 20 blue-chip companies, maintains its upward trend. This index, updated at the end of each day, is a price weight index. Members making up the index are selected based on a weighted market performance for a 12 month period as follows: market capitalization 40 percent, shares traded 30 percent, number of deals 20 percent, and turnover 10 percent.
At present, an increasing number of foreign investors are setting funds with a view of tapping into opportunities offered by emerging markets. The criteria used by many foreign players include picking on large companies that are also actively traded and liquid to enable quick entry and exit.
As the NSE is the most advanced in the region, foreign investors consider this bourse a platform for entry into the wider East Africa region. Kenya falls into the frontier markets asset class. Foreign investors have been increasing exposure to this asset class on a continuous and consistent basis for about 24 months.
“There has been a rising tide for frontier equity markets and in particular for Sub-Sahara Africa Equity markets. Foreign investors are also valuation driven and therefore have been remarkably successful investors at the NSE,” Aly-Khan Satchu, an independent analyst told AFK Insider.
In this estimation, foreign Investors tend to focus on the biggest companies by market capitalization, especially EABL, Safaricom and the big cap banks.
“Foreign investors tend to have a number of mechanical criteria such as market cap and daily trading volumes. The bifurcation in performance at the NSE is entirely a consequence of foreign investor participation in the big cap counters,” said Satchu.
A pipeline of new products introduced at the NSE is poised to attract foreign interest, including real estate investment trusts. Plans are underway to set up a futures and derivatives market, giving the NSE higher international standing and by extension making investing at the bourse very lucrative.
“What we need at the bourse is more listings to increase options for local and foreign investors,” Musau added.
For a long period, the number of listed companies has not risen, stagnating at 58 for months.
“Foreigners are doing two things, diversifying their risks and taking advantage of high returns in emerging markets. The NSE must have a presence in such magazines as the Wall Street journal to attract more investors,” said Kariithi Murimi, a risk consultant.
In its 2013 program, the NSE has already introduced REITS as an alternative which will provide investors the opportunity to invest in the real estate sector without requiring large sums of money.
The bourse plans to establish a real estate investment trust market and trading platform.
NSE views these initiatives as being crucial to the development of the Kenyan Capital Markets and meeting the objectives of Vision 2030, to transform Kenya into a middle income country. Since the bourse entered a bull run in May 2012, it has been on a rally, driven largely by foreign investors who have been at the driver’s seat since. Local investors are beginning to capitulate and will also be lifting this market higher, in coming months.
Banking stocks remain attractive, especially now when most ones listed are releasing their half year numbers.
“Banks are enjoying wide net interest margins and for the most part have embraced a regional profile,” said Satchu. “With the East African Community, the second fastest growing region after ASEAN, investors are keen on the exposure. Forward PE Ratios are in single digits, price to book in many cases compelling as well.”