The trouble with the bourse

Number of listed companies stagnant as regulator tries to calm investor fears

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An employee points to stock information displayed on an electronic screen inside the Nairobi Securities Exchange Ltd. (NSE), in Nairobi, Kenya, on Tuesday, Dec. 8, 2015. The government had planned to plug the 2016-17 fiscal deficit with about 240 billion shillings of external borrowing, and about the same amount raised on the domestic debt market. Photographer: Riccardo Gangale/Bloomberg

By Victor Adar

There is a debate going about why uptake of products of the Capital Market Authority has been low. It is the story of more of companies delisting rather than listing, a shift that could serve to discourage investment at the bourse.

The fact that big corporates, including Bidco and Airtel, are not listed at the Nairobi Securities Exchange (NSE), more likely than not sends the message that things may not so rosy. Further, what’s keeping fresh companies from listing? Is it because of low profitability, or losses?

Performance of the top 20, highlighted in the NSE 20 share index, has been on a decline this year with the highest point of 3,836 recorded on 5th April 2018 and the lowest of 3,273 recorded on 4th June 2018, according to the latest Capital Market Soundness report. The report notes that in the first quarter, there was a fall of more than 30% in prices of at least six listed companies that include Athi River Mining, Deacons, Uchumi, Nairobi Business Ventures, National Bank of Kenya and Umeme.

Although the fall in the index was also as a result of profit taking by foreign investors resulting into a decline in valuations, having taken out a net of Sh8.2 billion during the second quarter, with major activity being recorded by the Safaricom, Equity, KCB and EABL counters, generally other counters will soon start performing well.   

According to Metropol Corporation group managing director and CEO Sam Omukoko, this is the time for Kenya to make good use of NSE products. To him, investors and companies will not frown at listing if the government’s focus turns to solving business and economic issues.

“There’s a general market failure in this economy,” says Omukoko. “The number of listed companies has always remained at around 57 or 60… For an economy like ours, we should be talking about 200 to 300 companies on the stock market. There’s something wrong, definitely.”

Citing the theory of market failure, which states that if things are not looking up, and catching investors’ attention becoming tough, the government should come in and salvage the situation, Omukoko believes that companies which list and then delist even before making a return will only be put in a tight spot when effective structures are put in place by the regulator.

Dirty secrets?

Experts are of the view that companies that post impressive results but are not listed at the NSE could be hiding something – if they had a genuine source of income they would go to the capital market.

The number of listed companies has stagnated because of lack of interest from many companies. In some cases, it is due to the experiences gained from those who have tested the bourse. For example, how many companies list only for their shares to lose value soon after? When was the last time we had a major Initial Public Offerings (popular as IPOs)? Or does it mean that the people who are setting up businesses have another source of capital?

“It seems nobody cares about the capital markets,” says Omukoko. “The government should open the capital markets… Why is it that if you want long-term funding, the banks are the ones to provide that instead of capital markets? The banks give you consumer credit, they give you working capital and they give you long-term funding. So the power is still left to the banks despite the presence of capital markets, and that’s undesirable because it means banks will always get what they want.”

CMA has got a textbook explanation – market concentration is too low as companies which are expected to list continue to look away from the NSE – but is it enough?

The 2018/2019 budget statement echoed the government’s focus on the “Big Four Agenda” and at the same time, the CMA’s new strategic plan (2018-2033) that seeks to facilitate the channelling of capital markets financing to these sectors – of affordable healthcare and manufacturing, housing, and security – and provide solutions.

“There’s some light at the end of the tunnel. Stability indicators show that the market is not volatile; it’s fairly stable. For half a year, we’ve grown by 4 percent. If you forecast that, it means the market will be more stable in future,” says Luke Ombara, a director for regulatory policy and strategy at CMA.

Ombara says market development is not only about new products, noting that a number of jurisdictions around the world have been able to effectively and consistently leverage capital markets in a push to support growth and development.

“The authority will continue monitoring closely the preferred monetary policies of development economies and their possible impact on foreign debt and capital flows. It is time to examine the measures behind their (other jurisdictions) successes and determine what lessons Kenya can learn.”

Other countries

As the NSE products uptake fall, weighed down by lack of interest or something that we haven’t been able to fathom yet, it is not a situation unique to Kenya.

World Federation Exchanges indicates that the first six months of 2018 were characterised by a gradual month-on-month decline overall market capitalisation, with an average monthly growth rate of -1.3 percent. “This was in contrast to the trend observed in 2017 when there was a positive growth rate in market capitalization over the entire period,” the association notes.

Many countries have faced a decline in IPOs except for well-grounded exchanges, most of which are in Eastern Asia and the Americas, according to the latest Capital Market Soundness report.

While Kenya struggles, IPO investment flows across regions such as India, Australia and Indonesia are looking up thanks to falls in other markets, including China, Korea, Japan, Philippines, Thailand, Malaysia and New Zealand. The Chinese exchanges (Shanghai and Shenzhen), for example, saw listings decline by 74.4% during the first half of 2017.

What is needed now is a thorough look into the downward trend of listing at the NSE. This calls for a plan to step up campaign that will entice investors as far as listing is concerned.

But what will happen if the trend continues?

It is a delicate balance act, going by the stagnant number of listed firms. Non-listed firms ought to look at the advantage of taking up NSE products. That’s how the imbalance that currently exists can be contained – listing offers financial benefits which range from not only raising capital for growth to optimisation of balance sheet through equity and debt financing, but also unlocking value for shareholders through enhanced liquidity from secondary trading.

To check the imbalance, experts share the view that government should give more control to the Central Bank. Investors and companies will only start to see the NSE differently when the CBK has instruments to control capital markets – and this should be felt by Kenyans. The other way to look at it is to consider that the Bank it is unwilling to exercise to control listing.