Our capital market seems to be coming of age, and this time at an earth-shattering pace. Within a period of not more than a year, Kenya has witnessed the greatest success as well as the greatest fall since the capital market was founded in the 1950’s.  It is only this year when the government relinquished control of the power generating firm, KenGen in what has become the largest Initial Public Offering (IPO) ever. Still in the same year, and just a few days ago, one of the largest, and the only publicly listed retail giant, Uchumi Supermarkets closed its doors in what stakeholders called, “a failed turnaround”. The closure has left many investors (both institutional and retail) worried and creditors losing money to the tune of billions of shillings.

One sad thing about the closure is that as the refund checks from the KenGen IPO went back to investors, most of them were being reinvested back to the low cap stocks of which Uchumi was among.  Most people, especially first time investors, were more attracted to the counter because of its price.

The sad story about Uchumi reminds me of one Ole Chiromo (Daily Nation, April 18^th 2006) who blamed the government for allowing “all manner of inconsequential characters participate in the share purchase”. According to him, the government efforts to market the IPO had the effect of shunning out the true players of the game and attracting too many first time investors.  This led to oversubscription by over 300% with institutional investors, who had applied for shares worth  Ksh. 42 million, only ending up with 6,431 shares worth Ksh. 76, 528.50. One thing that the government did not tell investors is that they could either loose or gain from investing in stocks if they were not very careful. The market savvy would have shunned Uchumi due to its fundamental values as a listed company.  But again, its fall was timely, proving a good example of what the market can do.

When most refund checks from KenGen had been issued by Kenya Commercial Bank and cleared, activity was slowly starting to pick in most counters.  When I visited one of our brokerage firms within the city centre, a chat between an ‘investment banker’ and an old client shook my finance wit. The banker was explaining the attractive counters in the market on May 30^th 2006: “Nunua Uchumi kwa sababu bei yake ni mzuri” (buy Uchumi shares because the price is considerable).  Surprisingly, the lady cashed in all her Ksh. 200,000 into Uchumi.  Two days later, the company shut its doors and trading of its shares at the Nairobi Stock Exchange was suspended.  This raises three issues:

1. Are brokers allowed to market for companies?
2. Should our brokers be allowed to employ staffs who do not know valuation techniques to enable them pick out industry winners?
3. Should the Capital Markets Authority (CMA) penalize investment banks and analysts for giving the wrong information to their clients?

I am still in conjecture over whether we should allow the market to operate without credible people who will give buy and sell recommendations that are sustaining for clients’ investment goals.

In addition, one would wonder what role if any, the CMA could have played to save the Uchumi Supermarkets.  To start with, if they saw the signs of a rocky turnaround, then they should have stopped the Ksh.1.2 billion rights issue which gave hope to investors. Secondly, setting up a fund to protect such small investors in listed companies would be necessary.  This is because in the case of Uchumi, it is the small investors who are paying for the mistakes made by the people they expected to run the company in a proper way and disclose the state of accounts as they were. With the maturity that our capital markets has attained from the days of trading at the Exchange Bar (Stanley Hotel) to the Nation House and now almost getting electronic, some issues can be addressed better than they are currently.

The government, as always, seems to control the affairs of those firms that it has long had stake in.  Even when the public expresses its interest, the government will never want to fully let go.  The government, last year, could not allow the Sameer Group to take the stake owned by the Kenya Wines Agencies Limited (KWAL).  As was at the time, Uchumi was thirsting for influential stakeholders to assist greatly in the turnaround. Evidently, Nashaud Merali, the Sameer Group Chairman would have provided the directorship required in the turnaround.  But failure by the government to honour the interest of the Sameer Group led to Sameer ditching of the 10% stake originally obtained from ICDC and not having the opportunity to acquire a board seat.

The brokers had their role in icing the bad Uchumi cake-depriving investors of growth stocks for the low priced tumbling retail store. But even prior to the broker recommendations, our research and portfolio management firms had the same flaw.  In September 2005, African Alliance released a report on various companies among which was Uchumi Supermarkets.  Uchumi had an overweight recommendation with a projection of Ksh.33.00 share price within the long term. Eight months later, the African Alliance revised their report as the Daily Nation reported:

“… African Alliance analysts have revised their September 2005 forecast on Uchumi downwards from expected return to profitability to loss of Shs. 855 million this year.  According to them, the firm would make a modest profit in the range of Shs.195 million in 2007”- Daily Nation, April 18^th 2006.

If based on the analyst’s report a client went ahead and made a stock pick, the analyst cannot be held liable, after all, the report only amounts to the analyst’s recommendation and not “an offer to buy or sell a certain security”. That means, whatever you do while investing, it’s not the broker, the analyst or your agent who bears any risk on your loss of an investment-you are all alone in the maze.

As the market slowly readjusts from the shock, we are bound to see more and more people turning from low cap stocks to high caps. In such a case, company’s management structures will stand a big test as investors take a cautious stand on what a good pick is and what to completely stay away from.  But again, Uchumi’s closure is not likely to change the way you shop.