A Nairobi Stock Exchange Evaluation
By James Muchene
The birth of a new yea triggers speculation and expectations on the business and economic front without exception. With the ruts and potholes of 2008 -2009 seemingly over, there is the feeling of great improvement in terms of overall growth in the Kenyan Stock Market. The essence of this article is to highlight what the driving factors of anticipated events may be. Like most things in life, there are positive as well as negative elements.
2011 is an exciting year for the Kenyan stock market nevertheless there are factors to be weary of which could suppress growth prospects. The market regulator (Capital Markets Authority), The Nairobi Stock Exchange and its members are relentlessly working towards the improvement of the Kenyan stock market on several levels some of which are outlined in this article.
Inspiring Factors Driving the Kenyan Stock Market
Transforming from a mutual entity (member owned) to a corporation (shareholder owned) has a significant part to play in paving the road that will guide the Exchange to its vision. The members will exchange their rights of use for shares in the company’s new legal identity. The required activities for the transformation are already underway. Stock exchanges owned by members tend to work towards the interest of members alone, which could be detrimental to rights of other stakeholders.
Division of ownership between members and external stakeholders could prove to be a more balanced arrangement, removing conflicts of interest, creating greater management accountability, and being more mindful ofthe interests of other players. In order to remain well-off, stock exchanges require funds. While member-owned stock exchanges have limitations in raising funds, publicly owned stock exchanges can tap capital markets.
Publicly owned stock exchanges can exhibit more professionalism as opposed to member-owned organisations. Accordingly, the roles played by shareholders result in, strengthening of the management and the organization, greater transparency in dealings, accountability and market discipline. Demutualization enhances management flexibility. A publicly held company is better equipped to respond to changes when compared to a closely held mutually owned organization. Consequently, a corporation has the ability to expand through mergers and acquisitions.
New investment opportunities:
5 expected listings
The last Initial Public Offer by the Cooperative Bank of Kenya was in November of 2008. The Exchange is looking forward to welcoming five new listings this year resulting in increased market capitalization and new investment opportunities.
On February 8 2011, the shareholders of Trans-Century passed a special resolution of the Company authorising the Board and Management of the Company to pursue a listing by introduction on the NSE.
On February 10 2011, the British American Investment Company Kenya Ltd., announced on the NSE Trading Floor, plans to raise between Ksh. 6-7 Billion through an Initial Public Offer (IPO). The NSE expects that both transactions which are subject to CMA approval; are completed by June 30 2011.
The five new listed companies will have the ability to raise the necessary capital to improve and expand their activities with relative ease. Following the intricacies of an economy’s structure, the gains from these new listings will eventually find their way into the pockets of stakeholders resulting in enhanced prosperity. It is evident as to why stock exchanges are such a powerful tool in economic development. This point illustrates the efficient allocation of resources, or to put it differently, directing money where it is needed most and will yield more than it would otherwise.
2 expected cross listings
There are currently seven (7) Kenyan companies listed on the Uganda Securities Exchange (USE) and five (5) listed on the Dar-es-Salaam Stock Exchange (DSE). These companies contribute an estimated eighty-four percent (84%) and sixty-five percent (65%) of market capitalization on the USE and the DSE respectively.
The cross-listed companies include East African Breweries Ltd (EABL), Kenya Airways Ltd (KQ), Jubilee Holdings Ltd (JHL), Kenya Commercial Bank Group (KCB), and Nation Media Group (NMG) which are listed on the USE and the DSE; Equity Bank and Centum Investment Company Ltd are also listed on the USE. On the Rwanda Stock Exchange (RSE) are KCB Group and the Nation Media Group.
The NSE however does not as yet have companies with a primary listing on the other EAC Exchanges listed on its platform. With a view to offering Kenyan investors access to the economic growth potential of the EAC Partner States, the NSE is targeting two regional cross-listings into Kenyan market by the end ofthe fourth quarter of 2011. By cross listing on the NSE, issuing companies from the other EAC Partner States can look forward to increased liquidity, and deep pools of capital. Last but by no means least, cross-listing provides a public profile in the Kenyan market through which the listed company can market their goods and services.
Introduction of SMEx:
Our capital markets are playing their role as envisaged in the Vision 2030. Progress has been made to achieve the Medium Term Plan objectives of raising stock market equity capitalization from fifty percent (50%) to ninety percent (90%) of GDP and raising stock market debt capitalization from sixteen percent (16%) to thirty percent (30%) of GDP.
The Exchange is working together with the Authority to develop rules and regulations for a market that will enable our small and medium sized companies to raise long term funds from the capital markets – the SMEx. The small and medium sized index due to be launched by the 4th quarter of this year will present investors with new, fresh and exciting opportunities with which to grow their money.
Small and medium sized companies present the highest growth potential but are in most cases unable to explore that potential because ofthe difficulty of accessing capital for expansion. As listed companies on The Exchange, these companies will have the ability to grow their operations and returns domestically and in the EAC region; investors will be rewarded for taking on the associated risk. The NSE is aware ofthe enormously important role that medium and small capitalization firms play in the Kenyan economy. Its objective in this respect is to ensure it delivers a tailored offering to growing businesses which will be the regional multinationals of tomorrow.
Introduction of a bond index:
The debut of the Government of Kenya 30 year Savings Development Bond is an exciting new addition to the fixed income securities market. The Bond which was open to retail investors attracted bids amounting to Kshs.18.26 Billion. The Government of Kenya accepted Kshs.8.13 Billion at an average redemption rate of 12.96 percent; the coupon rate was fixed at 12.0 percent.
The listing ofthe Bond, with lengthen the yield curve to thirty years and additional issues of similar maturity can provide a platform for the pricing of mortgage products of similar maturity for the Kenyan market. In support of Government initiatives to lengthen the yield curve, increase trading in the secondary market and manage the risk of investing in fixed income securities; the NSE will introduce a domestic bond index. The index will provide a benchmark in the performance of fixed income portfolios as well as support tools for decision making in the portfolio management process.
Introduction of FTSE / NSE equity index:
Consistent with the Exchange’s corporate objective of enhancing its brand, the NSE intends to collaborate with FTSE International to create new index series. FTSE Group is a world-leader in the creation, commercialization and management of over 120,000 equity, bond and alternative asset class indices. FTSE was voted ‘Global Index Provider of the Year’ for the years 2009 and 2010.
Increased foreign investment is likely to be drawn in through the adoption of FTSE’s globally respected index techniques. Partnering with the FTSE Group will also boost the capacity of the market to introduce index and index related products that conform to world best practise. This new equity index is expected to take-off in the 3rd quarter of this year.
Introduction of ETF’s:
The Exchange Traded Fund (ETF) is a listed investment fund security which tracks an index, commodity, or a bundle of assets. It holds the underlying assets which could be the constituent stocks in the index, commodities or bonds. Its value is consistent with the value of the underlying asset it holds. This type of security enables investors to diversify their risk through the purchase of one security.
As an added advantage, an ETF can be traded like a stock on an exchange making it a liquid security to own. ETFs are attractive as investments because of their low costs, tax efficiency, and stock-like features. The Exchange is looking to introduce ETFs based on its indexes before the close of 2011.
Measures taken to improve the market
Implementation of the Broker Back Office
A joint initiative by the Capital Markets Authority(CMA), The Central Depository and Settlement Corporation, the Nairobi Stock Exchange, and the Exchange’s Member firms through the Kenya Association of Stock brokers and Investment Banks (KASIB) to procure the Broker Back Office (BBO) software for all the licensed stock brokers in Kenya is going to have a monumental positive impact on the way business is conducted in the capital market.
The software developer responsible for the Acquisition, Installation, Testing, Training and Commissioning of a BBO System, and provision of Systems support and maintenance for the provided BBO is Chellasoft. Chellasoft have a dazzling reputation in software development. They have over 200 man years of product development, and some of the leading global financial institutions are their long standing customers. This new interface is without a doubt going to result in capacity building in the Kenyan stock market.
The system is going to provide end-to-end automated solutions directly to individual brokerage firms with seamless integration to electronic trading, central depository and the national clearing and payment systems. It will support trading of equity and debt instruments with full internet trading capability, centralized control and in-built risk management mechanisms across the entire trading process. The system will also have a detailed audit trail and log-file tracking with reports.
Reduce the settlement cycle to t+3
Settlement is the post-trade process that ensures securities are exchanged for cash, completing a transaction. A shorter settlement cycle will mitigate liquidity risk in the trading process. This is risk stemming from the inability of an investor to buy or sell an investment quickly enough to prevent or minimize a loss. A reduction in the settlement cycle from t+4(time+4 days)) to t+3 should make a great improvement in the trading of securities in the stock market. Furthermore a shorter settlement cycle will enable higher volumes to be traded as a result of time saving.