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17 - 24 January 2007 
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Finance and Banking


The Bull Run Still on the Rise

As critics talk politics, punters to the stock mart carry their gunny bags to the bank.  How long can this last?

What has changed too soon?  The January effect is most popular for major surges in stock prices, low capitalization, declining earnings and low index marks.  This impacts both efficient and inefficient markets. Domestically, January is characterized by declining market activity as most people switch from the December holiday spending back to school costs.      

As witnessed recently however, that is not the case.  If you were to go by these basic statistics, then the current market level is not what any investor would have anticipated. 

The stock market continued robust performance in the week ending January 11, 2007. Shares traded increased from 19.1 million in the previous week to 35.3 million during the week under review, an 84 percent increase from the previous week. Equity turnover increased from Ksh.1.6 billion to Ksh.2.9 billion following improved share price in most counters. The NSE 20 share index increased by 305.8 points from 5812 on January 4, 2007 to 6117 on January 11, 2007. Market capitalization increased by 3.1 percent from Ksh. 820.4 billion to Ksh. 845.9 billion (CBK weekly bulletin, Week Ending January 12, 2007). 

Going by the current growth momentum, the index could reach a double mark while capitalization hits over Ksh.2 billion by September 2007.   

What explains the sudden rise in market activity?  Some analysts warn that it is a profit taking ploy by high net worth investors who have manipulated prices on every counter to reap short term gains.  In doing so, they will be able to exit the mart before the election fever begins to bite.  Recent comments put a Kenyan politician on the spot after he alleged that the NSE was a ‘cleansing ground’ for drug trafficking money.  Do any of these views and allegations hold water? 

I would approach this in two ways; first as an analyst and second, as an investor.   

A conversation with one of the market’s billionaires recently, got me wondering how long the Bull Run could last.  According to him, the wise shall take profits while the wanna- be’s shall keep buying into the highly priced ‘shell’.  It goes more like, starting the rumor, building it up, buying on it then selling on the news (‘greater fool theory’).  The point is, take profits at the slightest instance you can and make sure that you are out of the market when the time is right.  An investor would ask: When is the right time to exit? 

Recent rise of the power supplier, Kenya Power and Lighting Company (KPLC), is a good example.  The company which is trading on a PE of 14.34 currently has its share price at Ksh. 328.00 (US$.4.75).  With the rumor that the company’s shares could be headed for a split at a ratio of 1:20, the price can’t get any lower and speculators still project the price to hit Ksh. 800.00 (US$.11.60) by the end of February 2007. 

I partly agree with him by the mere fact that our market is highly inefficient and most stocks are over priced.  However, I would be right to say that at least every market in the world shares in this imperfection.  There is no single market in the world that is even 75 percent efficient.  Warren Buffet (the richest equity investor in the world) admitted that he ‘would be a bum in the street with a beggars bowl’ if the markets were efficient.

I however disagree with him from an analyst’s point of view. A market is meant to advance; this occurs through diffusion of knowledge and information.   

Activity at the bourse has increased tremendously as more companies have been listed and more people have developed interest in the equity market. In my small boutique for example, only around 10 people would be keen to open an account for trading in equities in a whole week.  Out of the 10, one or none at all would be keen in knowing how the fixed income securities work. However, the situation has changed. Current statistics show that there are more than 100 people opening accounts every week and 10 percent of them are keen on knowing the other asset class- Fixed Income Securities. 

This is an indication that the realized gains have seen more and more people interested in the equity market. And by far, the returns still make it the highest yielding asset class.  Additionally, increased investor awareness has contributed to increased activity. More agents are sprouting up to give personalized services to the yearning public.  I take pride in all those young Finance graduates who have become independent analysts, giving the public up to date investment information and tips.  Their word always makes investors smile as the uninformed keep yelling about the inefficiencies of the Stock brokers who have now turned high and deaf. 

Recently, young enterprising Kenyans set up an investment academy that aims at teaching the public the fundamentals and art of investing in shares. Statistics show that in 2006, newly registered businesses particularly investment clubs, topped over 50,000. These businesses have brought in huge sums of money and doubled their wealth. Eventually, everyone benefits: the government through the Registrar of Companies, the investing public, the CMA, the NSE, the CDSC, the Brokers, and… the list is endless.     

All these changes and revelations are a testimony that our market is emerging and with time, the law of demand and supply as well as improved economic conditions will push the market to higher levels.  Very soon, our index will hit new targets and as more and more market makers move into the scene, the Bull Run shall go on and on and on, unless a politician’s threat to de-list a listed entity works to his liking.

By Michael Musau
CEO Emerging Africa Capital
Licensed by The Capital Markets Authority as Investment Advisers

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