In the past one month the country has witnessed among other eventualities, the exposure of more corruption scandals involving government officials, trade protests over the Electronic Tax Registers (ETR’s), huge losses through government contracts and not to forget the usual whining by the current Members of Parliament. Of even greater importance is the suspension of the Central Bank of Kenya’s (CBK) governor from duty, over corruption allegations.
The shocking reality is that the Kenya Shilling, despite all the hurdles has continued to gain strength against the world’s major currencies notably; the USD, the STG and the EUR. The stable position at such times of economic and political uncertainty is unjustifiable.
According to the CBK the major currencies maintained a strong exchange position even when the headlines in a whole week read corruption cases day after day.
Kenya Shilling Exchange Rates
Source: Central Bank of Kenya
Date US Dollar Sterling Pound Euro 1 00Jyen
24/3/06 72.33 125.50 86.57 61.30
27/3/06 72.39 126.40 87.20 62.06
28/3/06 72.38 126.34 86.89 61.87
29/3/06 72.33 126.11 86.86 61.39
30/3/06 72.20 125.62 87.12 61.41
Turning to our stock market, the reality is even more unusual. We have witnessed astounding performances by some stocks that even after valuation, many ended up with strong sell recommendations. A valuation done by one of Kenya’s leading investment banks with operations in Uganda did a survey on low priced stocks. They then gave an analysis on the traits posed by many retail investors. Most of them are in a rush to buy any “attractive” stock. Irrational investors are easily convinced that a lowly priced stock is more attractive than a company that is highly priced.
A good example is A Baumann (Listed under the Alternative Investment Market Segment of the Nairobi Stock Exchange, NSE). With a high Net Asset Value, the prospects looked very good in the speculative market. On the flipside however was an ensuing court battle surrounding the company. This should have shunned any investor being guided by fundamental analysis. In spite of that, the A Baumann stock has been very illiquid. In fact, according to Dyer and Blair Investment Bank, the Company posted a 70% price appreciation in 2005 alone.
Another interesting case is that of Uchumi Supermarkets Limited. At first was their rights issue in 2005 receiving high subscriptions from Kenyans. This came in after the the company announced losses amounting to billions. After a bit of restructuring, management, adoption of inventory controls and adoption of the Franchising business model, its stock price started rising. Then the bad news came that there were no dividends to be issued in the next three years. It was not a surprise that the stock price kept increasing until the KenGen fever hit the market bringing most stocks to their lowest this year. Uchumi’s price was affected greatly but in spite of its negative returns, emotions will see the prices go upe a tad in the successive months- a chartist’s point of view.
Warren Buffet, speaking on market efficiency once said; “Id be a bum in the street with a tin cup if the markets were efficient”.
The issue in our markets today, just like in any of the global markets is; should we cash in on the market inefficiency or encourage professionalism and thorough market research that will move investors from trends to a solid and more grounded investing that has an inclination to long term positive gains? The movement of stock prices in the stock market is among the phenomenon that has cut across the boundaries of academic disciplines and has a cumulative research spanning almost a century. I will not take you through the theory on the Efficient Market Hypothesis (EMH). Generally, the EMH states that the stock prices reflect all available information in the market. There are usually strong, semi strong and weak form of market efficiencies. The Kenyan market can be described as generally weak for the obvious reasons as demonstrated in the previously discussed examples.
Some market anomalies well explain why market inefficiency still rules trade in today’s stock markets. One of them is the January Effect that states that average returns are usually higher in the month of January as compared to other months. Another evidence is the Monday effect which usually shows a tendency for returns to be negative whereas they are negative on other days of the week. A powerful strategy which works in this case would be buying stocks on Mondays and selling them on Fridays. In Kenya, the most felt anomaly is the Over/under reaction of prices to Earnings announcements. For example, most banks (financial and investments sector) had until March to submit their published accounts and publish them in the local dailies for public and investor scrutiny. This made many stocks gain substantially within a short period of time as people bought largely because they were anticipating good dividends following the close of books. This trend was echoed by Kenya Airways in the Commercial and Allied Sector and Rea Vipingo Plantations (RVP) which is in the Agricultural sector and specializes in Sisal plantation.
This forms a basis of recommendation that is based on guesswork. The truth is that it has for long guided trading at our stock markets. A research that was done at one time proved that there is evidence that it holds in many countries. Even the New York Stock Exchange(NYSE) and NASDAQ considered to be among the largest stock markets still has its traders counting on the inefficient market to make gains. This is more steered by the brokers themselves who at most times influence buyers to turn to a particular stock.
It is important to therefore disregard this market inefficiency. This is because its advocates, the Chartists care less about the elusive intrinsic value of a company or any other factors that preoccupy fundamental analysts such as the management, business models or competition.
The Capital Markets Authority (CMA) and the NSE should gear up towards attracting talent in the registered financial service member firms. This will change the focus for investor funds from shorter term gains to a fundamental ground. In so doing, market activity will increase and if stock prices generally reflect all available information, then the good buys will be distinguished from the laggards making a sound investment strategy. But then, every strategy has its merits. Whereas fundamental is more of a long term strategy, technical is a shorter term. Our market, if relied on more fundamentals would be a bigger bear than it is with the chartists dominating the market. This will call for investor education, introducing a competitor to the NSE and an Over the Counter Market (OTC).
By Michael Musau
CEO Emerging Africa Capital
Licensed by The Capital Markets Authority as Investment Advisers
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