Over the recent past, investing in African stock markets has been very lucrative. There has been a sort of universal Bull Run in most Africa’s bourses, with the Nairobi Stock Exchange (NSE) rising from an index of less than 2,000 in 2002 to over 5,000 by the end of 2007. Even the most unlikely places like Zimbabwe have produced some of the best returns in the world. 

Excluding South Africa, African stock funds returned 50 per cent on average in 2007. The Morgan Stanley Capital International Emerging Markets Index rose 36 percent in the same period.

The general growth prospect of above 6 percent in many Sub-Sahara countries is very promising. But even against this very promising growth back drop, unexpected events such as the recent post-election violence in Kenya have had a very negative effect on these economies from time to time.

Events in Kenya are perhaps a timely reminder that while attractive returns can be generated across the African continent, political risk always needs to be taken into account when investing in Africa.

Such unprecedented events in most African countries have worked so much against the general investment mood that most African governments are trying to create and attract investors in their countries. Since the successful elections of 2002 that ushered in a new government in Kenya, the government has been on a re-branding mission. The re-branding of Kenya as a safe haven for investors seemed to work, until the recent post election violence that has made many investors review their investment decision in Kenya.

Particularly, both foreign and domestic investors have become very wary of the NSE. It’s just a matter of time before most of them move out of the market for other safe havens. The political stand off in Kenya at the moment has created a lot of uncertainness. This is not good for an emerging economy.

If this stand off continues, the mid-term to long-term prospects of the economy growth in Kenya will dwindle as some of the major sectors take a beating. Already the tourism sector has suffered a very big dent that may take several months if not years to recover.

The stock exchange is not autonomous from the country’s economy, but rather a reflection of the general state of the economy. It therefore should be understood that the NSE would most likely follow the recession likely to affect the Kenya’s economy.

However even in these darkest periods characteristic of many African countries, some sectors have continued to prosper. In the case of Kenya, companies in the building sector such as cement manufacturers stand to gain a lot as people embark on reconstructing their businesses and homes following the post election violence. Health is another sector that may see its revenue raise due to increased number of patients.

As many investors leave the Kenyan stock market, probably for neighboring Uganda, the remaining few large investors may be tempted to distort the market prices in their favour. This may give a wrong impression of the performance of the bourse. However, with a strong regulatory body in place their fear can easily be averted.

In the short-run events in Kenya may solicit negative effect to the bourse, but for investors with a long-term view, this is not an issue. In fact, the election protest may create a great buying opportunity. However, it should always be taken into account that investing Africa is not for the faint hearted.