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Harsh economy takes toll on NSE

NAIROBI, Kenya, Aug 10 – Last year, trading at the Nairobi Stock Exchange proved an ideal hunting ground for investors who were able reap returns off their investments.

The NSE 20 Share Index gained 35 percent in 2010 as trading at the bourse remained bullish.

Fast forward to 2011, and effects of inflation, drought, high oil prices and political uncertainty seem to be eroding those gains. Since January, the NSE 20 Share Index has dropped 16.39 percent from 4465 points to 3733 points as of June 2011.

Following a series of collapses of a number of stockbrokers, however, investor confidence especially at the retail level, has been waning.

However, is it all lost for investors?

Francis Drummond Associates General Manager Samuel Wachira believes it gives an opportunity for long-term investors to enter the market with share prices dropping. He believes what is happening at the stock market is a cyclical event that should correct itself.

“We always have a cycle of when the market is a bit unstable.  I would say, for investors and technically people who are keen on value this would be a very good opportunity for them to come in and take advantage of the opportunities that are there,” Mr Wachira told Capital Business.

Valuation of shares (measured by average price-to-earnings (P/E) ratio) dropped by 6.74 percent in June to 10.38 last month from 11.13 in June.

On Tuesday, market capitalisation, (which captures valuation of shares at the stock exchange) dropped below the Sh1 trillion mark, losing 3.76 percent to stand at Sh984.51 billion as some of the recently-listed stocks touched new lows.

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AccessKenya, KenGen, Safaricom, Olympia Capital, and National Bank of Kenya closed at their lowest levels in the past 12 months as investors pull out and adopt a wait and see approach.

Mr Wachira advised those coming into the market to spread their risk across different portfolios to avoid being burnt as they wait for the market to stabilise.

“The trend now is that people are selling and the volumes have come down significantly and the market is not as vibrant. But there is still hope for the market given what has happened in the past,” he said.

However, rising inflation has affected disposable income especially at the retail level, which could further offset their purchasing power that could further deter them from participating at the stock exchange.

And they are not alone, given the economic instability in the Eurozone and the recent downgrade of the US credit rating which has seen foreign investor participation dwindle.

Out of the total equity traded turnover for the month of July 2011, 47 percent and 63 percent represented foreign sales and purchases respectively. Overall, net foreign participation to total equity turnover fell to 55 percent from 61 percent of June 2011.

Heavily traded counters in this board were Safaricom, Equity Bank, Kenya Commercial Bank, KenolKobil, Kenya Power, Cooperative Bank, Barclays Bank and East Africa Breweries.

“The situation in the market is a signal of a flight-to-safety approach by foreign investors who are now taking up more short term positions as they wait to see the direction the market will take,” Stanbic Investments Senior Investment Manager Kenneth Kaniu said.

Last year’s bullish trading gave Nairobi Stock Exchange investors one of its biggest gains since 2007. The 20-share index rose 35 percent in 2010, with most counters adding value as economic recovery flirted with renewed confidence in the market to buoy equity traders.

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