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Bourse Black Hole

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You know times are tough when a star player exits the game. Those who play stocks agree that a move like this is not a good omen.

So when Centum, a listed investment company, announced in November last year that it had reduced its holdings at the Nairobi Securities Exchange (NSE), everyone stopped to listen.

In March 2011, Centum Investments, which invests in both listed and unlisted companies in the East African region, cut its exposure at the NSE from 23.6% to 9.1% of its total portfolio of $170 million and expanded its property investments by $11.8 million.

The move was to cushion its $170 million asset base as the stock market suffers from the jitters over a gloomy economic outlook in East Africa’s biggest economy and fears of political instability ahead of a general election later this year.

Centum’s investments at the NSE were punished with a 6.6% drop in half-year net profit for the six months, ending September 2011. In January this year, British American Investment Company began reallocating its assets to real estate to cut its reliance on the NSE.

2011 was a bad year for stock investors in Kenya, with the NSE dropping 31.4% by end of December, sending both institutional and retail investors scampering for safety. High inflation—which peaked at 19.72% in November but eased to 18.3% in January—along with severe drought, a weak shilling and turmoil in Western economies, resulted in the panic selling of stocks, which depressed the market.

Prices have remained low for the most part, while some have fallen to historic lows. The NSE was rated the second worst stock exchange performer in 2011, second only to the Egyptian bourse, which was down 47.2% due to political upheaval that toppled Hosni Mubarak.

“Institutional shareholders have been trashed in the bond market. The spike in the inflation rate, the excessive volatility of the Kenya shilling and a behind-the-curve Central Bank [of Kenya] have impaired the bourse,” says Aly Khan Satchu, CEO of Rich Management, an investment company based in Nairobi.

Kenyan billionaires in shilling terms, with huge stakes in the stock market, have seen their fortunes mauled by the bears. Investors lost an estimated $4.5 billion in the 12 months to December 31, 2011, as market capitalization shrank from $14.5 billion on January 1, 2011, to $10.1 billion at the end of the year.

But the six months between February and August suffered the deepest dip. Within the period, Chris Kirubi, one of the top investors at the NSE with 26.8% of Centum, lost about $7.7 million on the counter after the firm’s share fell 20% in the six months to August. Equity Bank CEO James Mwangi lost $20 million in the six months that saw the bank’s stock shrink by 30%.

Naushad Merali, the chairman of Sameer Group of Companies and ranked one of the wealthiest at the NSE, lost $6.2 million from his three listed companies—Sameer Africa, Sasini and Eveready East Africa—which fell 24%, 5% and 25% respectively, during the six months.

Most investors are shifting to less risky and now lucrative Treasury bills and bonds, as government increases borrowing to finance its budget. A sharp rise in interest rates, after the Central Bank of Kenya (CBK) raised its policy lending rate to an unprecedented 18% to tame inflation and buoy the weak shilling, is also squeezing money out of investors and limiting cash flow to the stock market.

Commercial banks have raised lending rates to above 22% in recent weeks, while CBK has steadily raised the coupon rates on Treasury bill and bond issues to attract investors. The coupon rate on the two-year bond, for instance, jumped to 22.8% in November from 16.5% in October, as investors bid for higher returns to hedge against rising inflation that touched a new high of 19.7% in November.

If the impact of two new listings at the NSE in the third quarter—Transcentury Limited and British American Insurance Kenya Limited (BRITAK)—is any guide, the chill at the Nairobi Stock Exchange is deep-seated. The BRITAK initial public offering (IPO) attracted a subscription of 60%. Analysts say this is an indication that investors are still skittish about stocks. Both Transcentury and BRITAK closed the year down 50% and 67.2% lower than their offer prices.

With an election year in 2012, there’s every reason for investors to be pessimistic. Most investment analysts project a sustained market recovery in 2013 after the elections.

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