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Market summary for week 2 of Feb 09

NAIROBI, Kenya, Feb 7 – The NSE 20-share index sank to new lows closing below the previous low of 3106.10 in October 2008, hitting 2950 with turnover remaining below the 200 Million mark through the week.

The market’s woes were largely fuelled by the negative publicity generated in the press by coverage of fraud allegations involving an investment bank, and the Kenya Airways (KQ) profit warning which sent more panic signals to already worried investors.

The market fundamentals remain very strong and the CMA was quick to step in and reassure investors that all is well, and that the opportunities are calling for renewed vigour in the market investment activity.

The profit warning by KQ, which pegged reduction in earnings to the tune of 26 percent, put pressure on the already depleted stock price to lows of Sh22.75, but it later recovered marginally to close at Sh23, largely because the stock had already adjusted to expectations even before the profit warning that came only as a confirmation of the Airline sector’s forecasted slump of 3 percent – the first since 2001.

Local investors with an average of 76.04 percent over the period have been the main source of market activity and for once the foreign investors were seen to buy more (average 14.27percent) into the market against the average 9.69 percent selling, a reduction in the heavy selling that has in the recent past been the main catalyst of market decline.

Mumias Sugar also saw some heavy trading after their half-year results showed a decline in profits of 71.18 percent, which saw the stock price tumble from around Sh6 to a low of Sh3.29 on Wednesday but regained marginally to close the week at Sh4.25 per share.

Safaricom and EABL were also very active over the week. The bond market saw reduced activity with 625 million traded by the end of Thursday compared to over 1.2 billion traded during the previous week.

T-bills on the other hand continued to be oversubscribed with the week’s issue at 239 percent, an increased performance rate from the previous issue of 229.37percent.

The government upped its quest to raise the required funds to develop infrastructure from the public through the issue of a Sh18.5 billion infrastructure bond with an attractive coupon rate of 12.5 percent payable semi annually.

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The bond, which will be listed on the Nairobi Stock Exchange, will be the first public bond offer in Kenya and is geared to attract renewed interest in the Bond Market. The minimum of Sh100,000 is also expected to increase its attraction for investors.

Outlook: The market is still in a state of anticipation as results should begin to come in next week. The KQ profit warning and the Mumias profit reduction are signals that there is a major slowdown in the growth rates, which have been revised to between 3-4 percent this year.

The positive is that the companies are still expected to be in the profit judging by third quarter results, which were mainly in the double digit region, especially in the financial sector. There are strong signals that the year will be more inclined towards debt if the government infrastructure bond for Sh18.5 billion and the Kengen infrastructure bond to raise Sh15 billion are anything to go by.

Investors are more likely to put their funds in guaranteed securities offered by the debt market rather than risk their investments in a largely uncertain stock exchange. 

The liquidity and depth of the debt markets will be the biggest gainers from the economic slowdown and market crunch, and may well open new investment avenues to the public especially after the government reduced the minimum investment in T-Bills from Sh1 million to Sh100,000.

The shilling is expected to stay under pressure from high dollar demand as importers seek dollars to buy 50 million bags of fertilizer for the local market, and fuel shortages caused by the Somali pirate situation may hinder positive steps that have led to reduced inflation pegged at 21 percent.

We still hold that the market is a buyer’s market and investors should consider averaging out their losses by buying lower; this as a strategy to lower their point of return to profit once the market turns around.

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