NSE AND RAILA

Sometimes, early this year, I blogged, on the effect of the coming general elections, on the NSE. A bloke has right to change his mind, because I have.

This week, Steadman, respected pollsters, have given Raila Odinga a commanding lead in the polls. Whereas I may have issues with the polls results but the emerging possibility that this man can actually run away with election is moving from the realms of imagination to reality

My concern is how the stock exchange has reacted to this polls. On Monday the NSE opened at an index of 5492 and a market capitalization of 830B KSH. By the time of writing this, Thursday has closed with the index being 5172 and a market capitalization of 797B Ksh. This means that investors at the stock exchange have been issued with a 33B KSh loss bill just by an impression of a Raila win created in them.

The reason for this crash is obvious to those who have been following Raila’s attitude to the bourse. For one he has termed the bourse as drug money cleaning forum and has said that he will reverse the IPO’s conducted by the current regime lately. These are not a confidence building statements and investors are voting with their feet, bolting before doom catches up.

Of course this is not the only effect to be experienced. Among others I expect foreign remittances to decline affecting the value of the Kenyan shilling leading to hikes in fuel bills, cost of essential imports etc.

As much as I had opined earlier that an ODM win or a Kibaki win would be the same eventually, Investors seem to have taken Raila’s threats a bit too seriously and it will take a lot of convincing to get this confidence back.

In the short term I advice a watch and see approach. If Raila win appears probable, so long as prices for your counters shall not have plummeted below cost, sell and dash off, but do not sell at a loss, if the prices will be below entry, hang on for a long haul as we watch the direction ODM takes us.

A kibaki win will ensure status quo maintenance and therefore prey on the stocks which shall provide an investing opportunity

KCB, Why did it go against the tide?

I am one dissapointed bloke. KCB announced a share split early in the year but did not release the added shares until June. The post split behaviour we have seen in other counters which went the same way was different in KCB. There was no hype; after the split the price remanined just there; a simple division of pre split by 10. Even when at this post split level, the stock should have, to investors perception, be trading at a "cheap" level, in the tens not in the hundreds previously, coupled with the fact that the supply was still in the "expensive" regime, it did not attract buyers as such. I expected that once the 90 percent extra shares created in the split were released for trading in June there would be an avalanche of supply leading to a drop in price. True enough, an avalanche of shares, started trading, sometimes upto six million a day, but the direction of the share price took a different direction.

I am sure I am not the only one dissappointed. I had laid strategies to enter at 18, the price I expected it to get to, in the short term, but hardly was it at 21 before it shot up beyond the 25 level it had hovered at for several months.It is today headed for the 30's region. Have I missed this boat.

What are the fundamental reasons which made this stock defy the well known economic principle of demand and supply, a principle which has been been tested and proven over centuries. Why this behavior?. Since it is not expected that the growth in KCB's numbers will be higher than the sectors average, may be within the 30-50% range, what is this that I did not account for?

EFFECT OF IPO’S AT THE NSE; NIL SUM?

I have been observing the NSE trend and especially in the run up to Kenya Re IPO, with a hawkish intent to pounce on counters encroaching to the red. I am have however reluctantly coming to the conclusion that the market might just shrug it off; like the IPO never happened. The IPO was announced in the last week of June in which, the NSE Index closed at 5146. In the last 3 weeks the Index has remained within the same range and has this week closed at 5137.

Within this time some of the counters which have shown signs of depression which can be explained away include,
• Equity; the negative allegations and credibility of its CEO made on the floor of parliament have caused it to fall from 146 to 133 within this time.
• BAT; this has dropped from 190 to 178 within this period. The profit warning the management issued to its share holders as well as the recent banning of smoking in major towns in the country could be the cause of this drop.
• HFCK; the interest this stock had generated on news of Equity buying major stakes in it seems to cooled down and has therefore oscillated between 35 and 39 in the same time span. The negatives on Equity could also have affected it.
Within the same period penny stocks which were expected to shed off as a result of investors dumping them in readiness to KenyaRe have defied all odds and have instead risen, include
• KCB
• Express
• Kengen
• Mumias
• CMC
We all know from the recent IPO’s since Kengen, that this IPO will be oversubscribed at a minimum of 300%. Why is it that this IPO is not affecting the bourse? Logically if investors were to sell to participate in the IPO, they should have done so in the preceding three weeks to the start of the IPO. Therefore I do not foresee a depression at the bourse whose cause can be attributed to the KenyaRe IPO. So how can we then explain the obvious over subscription which will occur?
• Have the Kenyan investors become so liquid that they will participate in the IPO’s without necessarily dumping some of what they already have?
• Are there so many investors entering into the game such that the net sum effect is nil?
• Could it be due to intense participation from the Diaspora.
If this IPO is not causing any ripple at the NSE, are we saying that even the Safaricom one will not have any effect?

These issues shall need serious consideration if proper investment strategies are to be formulated.

Jimmy

INVESTMENT GROUPS: ANOTHER KENYAN FIRST?

There is a very positive side of Kenyans which has made them shine over other nationalites. Maybe it's the uncertainaties in their living enviroments which have made them natural socialists. We are the only ones who embraced the harambee spirit in a major way. This has contributed a great deal in our country's development. Co-operative movement is another very successful Kenyan thing. After indepedence our fathers came together and formed land buying companies which enabled most of them to possess land. Not to be left behind, our generation, though thinking slightly different are still cooperating. Investments groups are being formed in big numbers by the day.

I wish to share with fellow bloggers a a sneak preview of a report I made to a group of friends with whom we started an investing company now 1 year old.

Month Investment Activity
During the month of June, HFCK was closing its books on a Rights issue they intend to undertake. A rights issue occurs when a Company in need of capital injection for expansion seeks this from its shareholders by offering shares at a discount to them. Once a share holder takes up his/her /its rights, the average price of the shares got will normally be lower than prevailing market prices and as such a capital gain is achieved. I therefore utilized all the funds available then to purchase HFCK shares with an intention of buying an equal amount during the rights issue. However due to some rumours that hit the market about Equity’s intention of acquiring HFCK, the price appreciated greatly. Since I did not intend to have a long term position on HFCK, and the capital gain had by far exceeded my projection I sold them a few days ago 35sh. We realised a capital gain of about 46% on this transaction.

YEAR OVERVIEW
As per our stated objective at formation we have made great strides in our journey to acquire a respectable position within the investing circles. However, in every journey there will be bumps and potholes
· We started off very successfully by participating in the Scan Group IPO which we made a handsome profit of 125,000sh
· We also participated in the Eveready IPO; but we were allocated only 1700 shares out of the 10,000 we had applied for. However we managed to make a profit on them since we bought at 9.50sh and sold at around 15.
· We have also been getting some handsome dividends from companies we have invested in and still expect more to flow in.
· On the flip side, KQ, a counter I had very high hopes and went into heavily had the misfortune of having one its plane crashing in Cameroon. Though there is no financial loss directly to KQ since their insurers will meet the bill, as is normal in stock trading, the price of this counter dropped but it has been recovering slowly
. On our other trading at the NSE, we had a disadvantage: We started trading when the bourse was at a bullish stage. Therefore many stocks we bought then were at a high price. The bear arrived in the 3rd week of January and camped at the bourse up to the end of March. The prices of all the counters at the NSE came tumbling down as it is reflected in our portfolio’s gain/loss. However from April there has been a stabilization of sorts and the prices of the stocks in our portfolio has gradually improved.
· From now to December. I expect the activity to slow down at the NSE due to the looming general elections, and also due to the expected IPOS. KenyaRE is expected to list very soon and as hinted by the Finance minister in his budget speech the mother of all IPO’s, Safaricom, is expected. In this IPO, if the government offloads all the 25% as required by the Capital Markets Authority and decides to list only at the NSE and not cross list in other exchanges like London’s LSE and US’s NYSE as is being rumoured, it will have a major effect on our own bourse. First of all the value of this IPO, at a fair estimate based on the company’s superb performance, will not be less than 35 Billion. This kind of money will cause a liquidity crisis at the NSE due to the fact that most people will crave to own the most profitable company in East and Central Africa. As a consequence, I expect the market to remain depressed until the refunds, for obviously there will be a massive oversubscription, hits the bourse again.
· My projection is that, during this crisis, it will be the time to make a kill at the bourse. Due to the liquidity issue, most counters will be depressed and will present very good bargains. Based on this I intend to immediately place sell orders on all of the non core stocks in our portfolio whether we have had a capital gain or not on them. This will release money in anticipation of the above crisis where we can then buy heavily. Come 2008, after the elections, we will have made a very handsome profit.
· We had a good beginning and if we continue this way, we have a bright future ahead of us.

BIG BANKS vs. OTHERS: THEN AND NOW

It amazes me when everywhere I turn, I am bombarded with adverts from banks on this or that loan and how easy it is to get them; Agents trying to sell loan from banks are nowadays more of pests than insurance agents who will never fail to turn for an appointment even though they know the said appointments were made to dismiss them at that time

In the not too distant past, it was pure agony for an ordinary Kenyan to get a loan from any of the mainstream banks. The myriad requirements one needed to qualify was clearly meant to deny him/she the loan. The banks were not bothered with the small loan seekers whom they considered as high risk. After all, with little effort, they made tidy amounts of money by collecting depositors cash at ridiculous interest rates and channeling the same to Government, which then, by virtue of not being in very cozy relationship with the bilateral donors, needed every coin it could borrow to fund it’s recurrent expenditure and also control a spiraling inflation. At the height of this crisis Banks earned 75% interest from T bills. With this source of easy money banks could hardly conceal their contempt for the small earners like teachers’, civil servants, farmers and other workers with no titles describing their jobs. Minimum deposits were hiked, new commissions like withdrawal and deposits were introduced. In the end, banking halls were getting emptier by the day as the small size account holders were being expelled from the banking halls. High net worth individuals, large companies and multinationals directors became the preferred visitors to the banks

Nature abhors a vacuum, so the saying goes. The so called small depositors who still had financial needs to educate their children, build houses for the family and generally grow had to get this need met by someone. In came Cooperative societies. Whereas the Big banks needed huge securities, impossible for many to have, to get advanced with money, all the Co-op’s needed was a pay slip and the confidence of fellow workers in the same co-op that he/she would pay a loan advanced. This was the channel which enabled millions of Kenyans within the low to middle income group to educate their kids and to generally develop themselves. You joined a co-operative, saved for a while and applied for loans from the co-op at between 2 and 3 times the amount saved so long as you could get four other members to guarantee you and life rolled on

Co-operatives too had their limitation in that one had to be employed within a specific organization to join it. As we progressed the informal sector was swelling up due to an underperforming economy which led to massive unemployment levels. However even people in this sector too had financial needs. This vacuum created Microfinance institutions. Finally the Mama mbogas of this world had someone to lend them some money no matter how small.

It is therefore a bit annoying for the big banks to start competing with institutions which developed from their arrogance and greed for fellows the bank had no value for while good times lasted. It is our responsibility to ensure that these institutions which took care of us in times of need are not crashed by the giants. By not deserting these institutions in droves for the bigger suitors, we might give them a much needed lifeline. After all, we are not sure how long we will remain attractive to the big boys. I hope the banks which have grown from this stable like Equity and Family Finance will remain committed to the small depositors which their multinational brothers like Barclays and Stanchart are only too willing to kick out when circumstances change

KQ507 CRASH: A National tragedy

Many things do not add up; and when they do happen, we are left with more unanswered questions than answers. For instance, why should almost a brand new aircraft come crashing down and why should an airline which hitherto had no accidents in in it's international routes have one so close to another[A 6 years gap between crashes in the same airline is considerd short]. Also, why should these crashes happen in routes considered as very important in the airlines balance sheet. But just like in issues we have no hand in directing like health and death we leave this matter to the almighty God whomever you perceive him to be. My heartfelt condolences to all affected families, relatives and friends

The Bear reigns

I like many of us, have been left stunned by the recent unrelenting slide at the NSE. We all expected a correction of sorts to occur sooner or later but not at the scale being witnessed. A quick analysis of stocks performance at the bourse shows that all of the 45 listed companies which traded within the last month with the exception of Limuru tea and Eaagads, though with a paltry 900 shares traded between them, the rest have shaven at least 18% of their value. Good results being announced by most of them has not been enough to even pause the slide leave alone cause a surge in demand. This means that all investors within the NSE have had to reckon with a massive decrease in portfolio value.

The silver linning in this very grim situation is that blue chip companies are becoming affordable by the day. PE ratios of most of them are starting to look very attractive. So other than bang our heads against the wall in frustration, we must take advantage of this bear by positioning ourselves ready for the bull which will sooner or late charge into the scene.

2007 Investments thoughts

As they say, in investments, the rear view mirror should be clearer than the front view screen. Looking back at 2006, I am able to view the future with some bit of clarity.

IPO’s
Though I made some little money in Kengen and Scan group IPO,s by and large, I feel that over involving myself in these IPO’s lost me opportunities by having my funds tied up only to end up being allocated paltry amounts of shares. Way forward would be to keep off the IPO’s and concentrate in counters being neglected by the crowds running for the IPO’s in the opening stages and after assessing the direction of the subscription levels to make my move in the closing days and apply for realistic amounts. This way I will avoid disappointments which were so rampant in 2006.

Fundamentals versus Speculation
Unbelievably I made more capital gains in counters with nothing to back them like Sameer, Express, Unga and HFCK than on those based on a solid rock foundation like EABL, BAT, Total, Kenol and KQ. However, in 2007, I will continue to make my money from the shells and hide it in the fundamentals backed companies even though their rise in prices is painfully slow.

Splits
I entered EA Cables at 220[22 post split] and hung on. It’s lowest post split price to date was 42 and it’s on it’s way up. Simply, this is a 100% + rise. I entered ICDCI at 180[18 post split], at the time of doing this post it is 39.25 and rapidly rising; another 100%+ rise. I missed the BBK boat because by the time I was noticing it, there was no supply in the market and in a short while it was too expensive. Point is, you must anticipate a split long before the crowds move in. Expecting to make a kill by buying into a stock at some crazy prices like the poor souls who bought ICDCI at 800 is being too optimistic and will unfortunately increase your chances to get strokes and such like conditions.

Elections
With the rise of political temperatures later in the year the bourse will definitely be affected. Towards the 3rd quarter I expect the activity to have slowed down. This is the time to grab that blue chip you have been craving for affordably because, either way elections shall be done any way and from past experience, other than politicians ego’s and their wallets which get bruised, Kenyans will always move on. 2008 will still see companies making their announcements and investors getting snapped back to the reality that elections were for a limited time and they must get on with their life. You will be greatly rewarded by selling them the stocks they neglected