Investor Education and Protection Key Amidst NSE Growth

Growth: The Nairobi Stock Exchange has grown by leaps and bounds in market capitalization and number of listed firms thanks to an increased Offers For Sale by private and public companies including Kengen, Scangroup, Eveready, AccessKenya, Kenya Re and Mumias Secondary offer. Alongside these Initial Public Offerings (IPOs) there have been increased rights issue by companies starting with the suspended Uchumi others are KCB, Diamond trust, Housing Finance, Olympia capital, NIC Bank amongst others. The activity at the bond market has also realized improved performance over the last few years and expectations are high for this emerging market with a focus by the Wall Street leading investment banks.

Heightened Activity: In the past one and half years, activity at the stock market has risen tremendously, drawing many new investors and the number of CDS accounts rising to over 600,000 occassioned by by heightened interest in IPOs during the financial year 2006/07 and this is expected to rise meteoriclly with expected increase in listings during the FY 2007/08.

Limited Knowledge: However, many Investors have limited knowledge on how the stock market works. Other than being attracted by the possibility of quick gains, the investors are sometimes shocked to learn that the prices also go down.
Most investors do not have much knowledge of the factors behind share price formation. But stockbrokers, fund managers or stock market analysts have more superior information on what goes on with share prices. They often have the technical know how on how to undertake technical and fundamental analysis. Further, they have the proximity to corporate decision makers and the shakers and movers of the Kenyan investments cycles as well as the Board of Directors and management of most listed firms who can confide fundamental information to guide their investment endeavors.

These information ranges from major announcements, mergers and acquisitions, profitability, rights issues, bonuses, dividends, splits, new products, new business deals, management changes and much more.

Standard and Poors Rating: From 2002 to 2007, the main NSE index rose 787% in dollar terms, according to Standard & Poor's, the investment research firm, making it one of the world's best-performing markets.

Anecdotes Doing Rounds: In the year 2006/07, stories of overnight wealth creation have created a huge frenzy for shares from people who have never invested in the stock market before. When KenGen, the state's biggest electricity company, listed its shares last year, there were queues at brokerages all over the country. Local media reported how small-scale farmers were selling their cattle to buy the shares. Banks suddenly offered "share loans" to people who had been considered unworthy of credit. This even extended to other subsequent IPos although with the market correction witnessed in early 2007 many have held back until prospects look rossy again.

Kengen IPO: The KenGen IPO was more than 3 times oversubscribed, and 70,000 people were allocated shares. The price quadrupled (Rose from 11.90 to everage at 40) on the first day of trading. Demand for a stake in last year's other big listings - including Eveready, the battery maker, and Scagroup, an advertising company - also dwarfed supply. By the end of the year, 15bn shillings of new money had poured into the market. This year AccessKenya was also oversubsribed as well as the state monopoly reinsurer-Kenya Re that realized 334% oversubscription. This implies that investors will get as low as 200 shares. However Qualified Institutional investors were favored by the allocations and got substantial portions.

NSE 20 share Index: In 2006, the NSE 20 Share Index had risen 60%. The NSE's resurgence began towards the end 2002 after emerging from a nine-year bear market. From a low of 1,000 points, it more than doubled in President Mwai Kibaki's first year in power bursting through the 6000 mark for the first time. This can be attributed to the following:

-A sound macroeconomic variables-Interest Rates, Inflation rates, exchange Rate.

-Economic growth figures of around 6% with positive future prospects for 2007/08.

-Tax collection has nearly doubled with plans to increase government revenue from taxes with the installation of Tax registers and stringent tax rules which are paying off.

-Vast sums of money have poured in from the diaspora with heightened marketing by government, NSE, real estate businesses and other ventures.
-Increased online blogs devoted to stock market investments and the investing in the emerging markets of Africa. This has created interests amongst foreign investors targeting emerging markets.

Information Asymmetry: The company insiders including brokers, Investment banks, fund managers have more information unlike any other average Kenyan stocks investor on the street and will always capitalize on this to make informed decisions. When the degree of information asymmetry is high, then there is more uninformed trading. This leads to price volatility that is unrelated to fundamental value of the listed company. But in an efficient market, no market player (investor, stockbroker or dealer) has an opportunity for making a return on a share that is greater than a fair return for the risk associated with it. I think Kenya however cannot be described as an efficient market.

Investor Education: The above neccessitates the development of comprehensive investor education programs by the NSE and the Capital Markets Authority (CMA) in their bid to enhance the growth of the capital markets, encourage most listings as well as attract more first time investors. It is noteworthy that there are hundreds of analysts and thousands of traders receiving new information on companies through electronic and print media and as such might not make any meaningful decisions within such a short time.

However, in emerging markets, policy makers and regulatory agencies should take up the case on behalf of investors who may not be aware of their entitlements. The quality of information is important for market liquidity. Quality accounting disclosures, for instance, are considered means of reducing information asymmetries and increasing the ability of equity traders to effectively execute stock trades when needed and at reasonable costs.

Investor Protection: In trying to bridge information gap, the International Organisation of Securities Commissions has championed investor protection as one of three core objectives. Investor protection has a positive effect on the efficiency of corporate governance, breadth and depth of capital markets and economic growth.

Further, there is need for proper and effective investor education programs being in place to woo many to stocks market investments that have been the preserve of those in the financial field and elites.

Securities and Exchange Commission: The SEC's Office of Investor Education and Advocacy in the US provides a variety of services to address the problems and questions you may face as an investor as well as help the to invest wisely and avoid fraud. This is a neccessity in our economy that is emerging from corruption quackmire and economic stagnation phase towards an era of heightened growth, equity investments and unparalleled stock market activity.