Kenya's stock market faces tough times as the year comes to an end despite putting up a bullish performance over the nine months to September 30.
Analysts told The EastAfrican that share prices of most companies are likely to fall further because of the current political uncertainty, which has seen foreign investors exit the market.
Kenya's equity market is more than 50 per cent controlled by foreigners, although daily prices are largely determined by local speculators who buy and sell shares for quick returns.
"The outlook is very gloomy, at least for quarter four (October-December). Turnover for instance declined significantly in the early days of this quarter mainly because of the politics. As long as the political environment is uncertain, we don't see activity improving. Foreigners are expected to continue exiting, prices may decline further. On aggregate, foreigners have been net sellers this year," said Dominic Ruriga, a research analyst at AIB Capital Ltd.
Nathan Mundara, a research analyst at Kingdom Securities Ltd, said that company earnings are declining while foreign investors have suspended their investment plans in the market.
'wait and see' approach
"The extended political uncertainty in the country has seen foreign investors cut trade in their 'wait and see' approach at the exchange. We are optimistic that the market will return to normalcy once a lasting solution to the present political stand-off is found," said Mr Mundara.
"Company earnings have been declining and future revenues will likely be impacted negatively leading to a reduction in dividends to investors," he added.
In the week ending October 4, the Nairobi Securities Exchange reported declines across all its market indicators.
The value of the shareholders wealth, measured by market capitalisation, was down 1.48 per cent, with equity turnover shedding 10.11 per cent on account of a 27.24 per cent decline in total shares traded.
According to chief executive of Uganda's Crested Capital Robert Baldwin, the trend at the NSE appears to be a "flight to quality", where investors sell investments they perceive to be high risk in favour of low-risk investments such as Treasury bills and bonds.
Interest rate caps
Kenya's equity market started the year on a low note mainly due to low earning expectations and lack of clarity on the impact of the interest rate caps.
According to analysts at Standard Investment Bank, the bourse started recovering during the second quarter (April to June) due to the generous dividend payouts by most companies for the financial year 2016.
The payouts caused the NSE All Share Index to go up 24 per cent, to 162.21 in Quarter Three (July to September), from 130.5 in Quarter 1 (January to March).
The NSE 20-share Index increased 20 per cent to 3,751.4 from 3,112.5 in the same period.
Foreign inflows during the first quarter were $16.67 million with outflows of $96 million; in the third quarter inflows were $3.29 million and outflows were $108.18 million.
Companies that posted an increase in share price during Quarter Three included Safaricom, Kenolkobil, Equity Bank, KCB, Co-operative Bank, Britam and Kengen.
"Quarter Two (April to June) saw earnings releases coming in in a mixed way. The banks reported better than expected performance, but the same cannot be said about the other segments. Dividend announcements were also better than expected. This triggered a rally in the market," said Mr Ruriga.
Local institutional investors started coming back to the market in Quarter Three (July to September), attracted by the low share prices and new regulations that insurance companies needed exposure in stocks and bonds.
The risk-based model regulations require insurers to underwrite their business based on their core capital.
This is determined by looking at the nature of assets they hold, such that liquid assets such as stocks and bonds are given more weight than properties in determining the amount of business each insurer can underwrite.