Grand Corruption and Grand Rogue Brockers on the Loose

The BD has a detailed story of the simmering wars between them and the Capital Markets Authority over regulatory measures taken to stamp more authority in order to ensure that investors confidence at the market is restored.The licensing war has seen the exit of CMAs Chairman.

Undervaluation
You may recall that currently there has been jitters in the market over the supposed undervaluation of various counters as well as the reluctance of various foreign investors to remit their cash for investments in the emerging market.

There is more than meets they eye in this saga. For a long time CMA has been a toothless bulldog in hibernation.

With various cases of grand corruption including the Triton saga confidence in our emerging market might be waning by the day and more still needs to be done for investments opportunities to attract rallied prices and increased attention in 2009.

Triton Saga
The case of Triton and Kenya Commercial Bank loan has led to price scare for the counter at the stock market as the mystery of missing millions deepens by the day.
The Kenya Commercial Bank has sued Triton Petroleum Company, under receivership, for Sh2 billion guaranteed through various debentures to import crude and refined oil to the Kenyan market.

7 Billion
The lump sum is part of Sh7 billion the oil dealer owes other banks among them Eastern and Southern African Trade and Development Bank and a chain of oil companies.

Convergence
Bankers could soon be allowed to provide a diverse range of financial products including insurance services, if draft amendment proposals to the Banking Act prepared by Central Bank (CBK) are approved by the Attorney General.more

Emerging Stock Market Trends in 2009 (Part I)

As we move forward a look at the African stock markets amidst the contagion of the Sub prime Morgage crisis that emanated in the US might not be that rossy after all. The Capital Markets Authority did make a case for highly capitalized financial institutions and risk based supervision approach amongst other recommendations in view of the crisis.Business confidence did slide as most companies review their investment plans and strategies in 2009.

Global Financial Crisis
The year 2008 in global financial markets has been one of the most volatile since the 1930s.The last serious bear market originated in Asia in 1997, but this 2008 crisis originated in the US.

Currencies
During 2008,emerging market currencies weakened against the US dollar as a result of
the rush to the US dollar and US Treasury instruments.Investors sought “safe havens”
and US Treasuries were considered the safest haven.

ILower Interest Rates
Recognising the severity of the credit crunch,in October major developed and
emerging central banks lowered interest rates in an unprecedented globally coordinated monetary policy effort.This was followed by the implementation of fiscal stimulus measures and loosening monetary policies from governments and central banks in developed as well as emerging markets. Thus far, more than US$1 trillion has been pledged by governments around the world to rejuvenate their domestic economiesincluding China, the US, Germany, the UK, Taiwan, Spain, Japan, South Korea,Russia, France, Australia, Hong Kong, Singapore and Malaysia.

Fastest Growing Economies
It is expected that the BRIC (Brazil, Russia, India and China) economies to continue to be akey driver of global economic growth.They are among the fastest growing economies in the world. The four markets together account for more than 40% of the world population. Domestic demand growth also remains robust. Moreover, Brazil and Russia are resource-rich countries and although there has been a recent fall in commodity prices, the longer trend for commodity prices is to increase and these countries will benefit from global demand for oil, steel, aluminum, pulp and other commodities.China continues to take great strides towards becoming a major global player.

Capital
Capital availability is the key question for emerging markets in 2009.Those who have it should do well.As for those who don't - it may be better not to ask.

This year is not going to be easy for the developing world. Lower commodity prices and slumping Western economies will damage growth. But with the United States, Western Europe and Japan all in recession and unlikely to emerge quickly, whatever growth there is in the world - not much - will be concentrated in emerging markets.

Emerging Market stocks
Given the steep market decline, investors have begun to shift their focus to the
increasingly attractive valuations in emerging markets.
NSE Chairman alluded that assets at the NSE are highly unbdervalued due to the persistent bearish trends that have failed to attract investors amidst current inflation and increase in the cost of living. Most investors at the NSE are retail.Uncertainty in the global financial markets is also suspected to be fuelling the investors’ jitters, with the deepening recession putting into doubt the chances of a quick recovery of stock markets.

2009 Outlook
While it is believed that the longer-term outlook for emerging markets remains positive due to the relatively strong fundamental characteristics and faster growth rate than theirdeveloped counterparts, 2009 is expected to be challenging. We can expect more volatility in view of slowing growth and recession concerns in major world economies,volatile exchange rates and commodity prices, and a global credit crunch.
Investors should brace for lower returns in the first quarter of the year 2009.

CMA: A Toothless Bulldog in Hibernation

Capital markets developments:
The budgetary estimates laid down during the financial year 2007/08 spelt out the following developments as far as the capital markets is concerned:
• The percentage of IPOs reserved for East African residents has been increased from 25% to 40%.
• Dividends not claimed from listed companies after seven years are to be remitted to the Investor Compensation Fund (ICF), which shall now be overseen by an ICF Board.
• The CMA can now impose sanctions, including financial penalties (not exceeding Kshs 10 million for institutions and Kshs 5 million for individuals). These shall be paid into the Investor Compensation Fund. In addition, the general penalty under the CMA Act has been increased to Kshs 15 million.

CMA on the Spot:
The CMA over the last few years due to the collapse of giant Uchumi Supermarkets and Francis Thuo and Partners as well as issues of insider trading that has been allegedly the case in most brokerage houses. Other issues include the issue of bouncing cheques as proceeds from the sale of securities to their clients by some rather big brokers in full view of CMA.
Unlike the Central Bank of Kenya (CBK) that has been on its toes in the regulation of Commercial Banks and the Monetary Policy, the CMA has been in hibernation. The CMA has been a stumbling block in the establishment of new brokerage firms and investment banks in the industry due to its high handed rules and unclear underdeals that seem to be doing runs this institition.

Applications:
In essence there are more than 200 applications for brokerage firms estblishment gathering dust at the CMA premises but upto now nothing has been done to them and essentially means no new broekerage firm will be coming up to help meet the increasing demand amongst the investing public that has seen long queues behind brokerage houses during IPOs. Their weakness is also being demonstrated by their inability to allow the opening up of an Over The Counter (OTC) market which thrives in many countries.

Stocks Agents:
Due to CMA’s weakness, there has been a huge retail market that has sprung up since September 2005 in the form of small starters who practice as stockbrocking agents at a commission ranging from between 20-50% of the brokerage fee. Although this is a good starting point for practitioners in the industry, it denies many entrepreneurs the opportunity to receive full commission for the clients they serve very diligently and with a lot of professionalism. Indeed, the agents also need their cover to limit underpaying by the powerful brokers who control the industry. Further, there is also need for the establishment of the stocks agents association although there have been alot of stumbling blocks on the way. Infact these agents should also operate like insurance agents but apparently as of now they not allowed to serve more than one broking house.

Underdevelopment of Equity Market:
The CMA takes the blame for our underdeveloped equity market. It goes without saying that real growth should start from the root- the brokerage firms. My recommendation would be that the CMA encourages more players (brokerage firms and investment banks) to get into the industry. I would also encourage the CMA to get tougher on regulation to avoid conflict of interests that has seen an industry player being the shareholder of some listed companies as well as the chairman of the NSE. This creates a compromising situation and sometimes it would be difficult to differentiate between shareholding and management.

Quarterly Reports:
This will call for industry scanning and allowing for public scrutiny. I would propose quarterly publication of accounts in the dailies in the same way commercial banks do. This should be done with the help of external auditors to guarantee transparency. My justification for this is the fact that like commercial banks, they too are handling public funds and like a listed firm, it is of importance to know that a firm is not highly exposed and be assured of its credibility.
With such measures, there would be no cases of losers in the stock market as was witnessed in the Uchumi collapse where shareholders could not even get the par value of the share. The Capital Markets Authority recently came up with the Investor Compensation Fund.

Establishment of the Investor Compensation Fund:
The ICF is established under the Capital Market Act Cap485A of the laws of Kenya and stipulates as follows under Article 18:

18. (1) There shall be established a Fund to be known as the Investor Compensation Fund for the purposes of granting compensation to investors who suffer pecuniary loss resulting from the failure of a licensed stockbroker or dealer, to meet his contractual obligations.
(2) The Compensation Fund shall consist of -
(a) such moneys as are required to be paid into the Compensation Fund by licensed persons;
(b) such sums of money as are paid under this Act as fines or penalties or under section 34 as ill-gotten gains where those harmed are not specifically identifiable;
(c) such sums of money as accrue from interest and profits from investing Compensation Fund moneys;
(d) such sums of money recovered by or on behalf of the Authority from entities whose failure to meet their obligations to investors result in payments from the Compensation fund; and
(e) interest deemed to accrue on the proceeds of a public issue or offer for sale of shares of a company listed or to be listed on an approved securities exchange, between the closing date and the date of dispatch of shares certificates or refund cheques, to be determined at the rate prescribed by the Authority.
(f) such sums of money as are received for purposes of the Compensation Fund from any other source approved by the Minister.
(3) Moneys which have accumulated in the Compensation Fund may be invested by the Authority in such manner as may be determined by the Authority.

Fund Limits:
An issue of importance is that compensation is limited to ksh 50,000 per client whereas the total pay out should not be more than 50% of the fund. There is also a maximum of ksh 5 million per collapsed broker / investment bank is payable as compensation to investors. Since NSE and CMA normally gets commission from their sale/buy orders of 0.01% there is need to revamp and strengthen Investor Compensation leading to investors shying away from the same.

Speculative Tendencies:
As the market slowly rejuvenates and with good prospects of economic growth projected to be above 6% for 2007/08 things are looking good for our stock market. It is also important to note that the occurrences at Francis Thuo and Uchumi Supermarket have served as a good lesson to many equity investors, as they have realized that one can be a millionaire overnight (as witnessed in the KenGen IPO) or end up a poor man for the rest of his life- as was witnessed in the Uchumi collapse. But as with all speculative markets, risk takers will take positions when the market is at its lows.
In Kenya, we have a potential investment population that is almost equivalent to the number of Kenyan voters being served by only eighteen (18) brokerage firms, save for the new broker, Renaissance Capital ( Russia's biggest Investment bank and a leader in most financial sectors as asset management, corporate finance etc) that has recently been awarded the license to provide investment banking and stockbroking services in place of the collapsed Francis Thuo broking house.

Financial Deepening and innovations:
CMA and NSE have been very slow in the opening up of the Over-The-Counter (OTC) market as well as adoption of new markets and products such as financial derivatives-futures, forwards, swaps, options that would widen the scope of available investment options for investors. Therefore investors have been struggling to cash in on the few available options moslty shares, bonds and equities. In this sectors despite the rapid growth that has been witnessed over a few years ago dur to increased IPOs by companies, there is still limited options compared to other markets in Africa such as Nigeria with over 190 Listed companies and capitalization off $2.23B, Johannesburg Stock Exchange (JSE) with over 400 listed forms and Cairo Stock Exchange and Alexandia Stock Exchange which forms Egypt Stock Exchange has over 833 companies. NSE has only 53 companies and several IPOs slated for the year.

Rogue Brokers:
CMA has also failed to reign in on rogue broker some trading in clients shares to rake in millions without bating an eyelid. Some of these brokers have become overnight millionnaires whereas their clients are leading modest lifestyles save for their stocks. In the industy, it is evident that there is very little room for competition.which has encouraged unprofessionalism. You will be surprised at how many times you miss a good deal at the expense of someone with a bigger account than you do or how many times you have issued sale or buy orders to your broker only to call them back a week and they haven't executed the same. At times they are seemingly oblivious of the happenings therein with rude receptions to accompany it.

Frequently, brokers have told their clients that they were unable to execute their orders because on that particular day, they were ‘dealing for their institutional investors’. When you are in such a predicament, you have no choice but to wait until the day when the stock broker goes ‘retail’. Sad enough, this could be long after share prices changed tremendously.

Hereditary Management and Protectionism:
Again, the management of most brokerage firms stands a big test. Notably, most of the brokerage firms are family owned and have adopted a very cyclic management system where the next of kin is always the person to take over. This has attracted a traditional approach to trading where fundamentals do not apply. It is not wrong to argue out that due to this, the same management has paved its way to control the regulators and the other players namely the Capital Markets Authority (CMA) and the NSE. The implications of this are increased protectionism when it comes to encouraging new players and sticking to old rules. As always new entrants are often seen with a suspicious eye and have to be vetted by a clique that consist of the 18 broking houses. This always need one to be on good books with them lest the deal goes sour. This is not encouraging for Kenya as an emerging market.

Market Research:
The current family set up of the brokerage firms has also kept talent at bay always employing their next of kin or people known to them. You will perhaps agree with me that there has been very limited research and commentaries that come from brokerage firms and investment banks. Contrary, the Fund Managers and Asset Managers have done limited research aimed at giving buy and sell recommendations geared towards their client needs. For the many years that the NSE 20 Share Index has been the basis of investment for most of its users, there has been no research or proposal sent for approval to CMA.

US Markets:
Compare this to the United States that has over 10 Indices rating the performance of the overall market and at least one index rating every single market segment. Being the market pros to their routing trading activity; stock brokers and investment banks are the only people who can steer growth as far as research is concerned. The US also have the Securities and Exchange Commission (SEC) similar to ou CMA that has been instrumental in ensuring that the market players are closely watched to avoid major corporate scandals line Enron's saga.

Securities and Exchange Commission (SEC):
The United States Securities and Exchange Commission (commonly known as the SEC) is a United Stated government agency having primary responsibility for enforcing the federal securities laws and regulating the securities industry/stock market.
The SEC was established by the United States Congress in 1934 as an independent, non-partisan, quasi-judicial regulatory agency following years of depression caused by the Great Crash of 1929. The main reason for the creation of the SEC was to regulate the stock market and prevent corporate abuses relating to the offering and sale of securities and corporate reporting. The SEC was given the power to license and regulate stock exchanges. Currently, the SEC is responsible for administering six major laws that govern the securities industry.
These encompass the Securities Act of 1933, the Trust Indenture Act of 1939, the Investment Company Act of 1940, the Investment Advisors Act of 1940, the Sarbanes-Oxley Act of 2002 and the Securities Exchange Act of 1934 amongst other statutes.
The SEC enforces the statutory requirement that public companies submit quarterly and annual reports, as well as other periodic reports amongst other regulations. More...

Compensation of investors who lost their money in collapsed stockbroker Francis Thuo kicks off this morning amid a simmering row between the Nairobi Stock Exchange and the regulator, Capital Markets Authority, over what to do with whatever remains of the Sh250 million raised from the sale of the firm’s seat at the bourse.The two institutions are fighting behind the scenes over the more than Sh100 million expected to remain after all claims are paid

Parting Shot:
A seasoned stockbroker with a good track record is an indespensable person in the pursuit of wealth. In the same breadth, an efficient management authority, in this case the CMA is fundamental in the management of all the players at the capital markets to ensure proper performance, allay investors fears and ensure security of investments for the investing public.

CMA should stop being a toothless bulldog and bite where it ought to!

Africa Capital Markets; Which Way Forward

Immense Growth: The last decade has witnessed a rapid and immense growth amongst the African Stock markets in terms of market capitalization, listed firms, available equities, bonds and debt instruments listed, number of investors and brokers, innovative financial products that have enhanced the deepening of the African capirtal markets as well as the growing interest by Small and Medium Enterprises (SMEs ) to offer the shares through Initial Public Offers for subscription by the public.
Investors: There has also been a strong and growing focus amongst the investors in the developed economies of the world to invest in the African Stock Markets with a focus of capitalizing on the opportunities available therein in portfolio diversification and enhance portfolio return.
The African capital markets encompass the following:
-The African capital markets encompass 16 member strong African Stock Exchanges Association (ASEA) dealing in a broad range of securities and include the fast growing markets of Nigeria, Ghana and South Africa.
-An equities market representing a host of the Continent' s strongest , reputabe and profitable companies.
-The fast growing private equity and Venture Capital markets dealing in Small and Medium Enterprises.
-A fast growing bond and debt securities market.
-A growing derivative and innovative structured products market.
-Most of the African Stock Exchange Association (ASEA) members have totally deregulated their foreign exchange controls provide free and unfeterred access for investors around the world.
-In Nigeria, the Nigerian Stock Exchange in association with the Nigerian Central Bank have developed a pain free system for foreign investors to access and invest in the Nigerian Stock Market (Central Securities Clearing System is the securities clearing body) and repatriate their returns without hassle.
-The African capital markets are being rated as having the highest return in the World in dollar terms.
-The capital markets in Africa are beginning to open up and open up significantly. For example who would have forecast 12 months ago that, by this time this year Nigeria's markets would see $3bn worth of new issuances?
-Countries like Nigeria, Ghana, Kenya and even Zimbabwe are all offering investment opportunities.“Nigeria’s market has made average returns of over 30% this year and Zimbabwe’s returned over 100% this year even after adjusting for inflation, so there’s a lot of interest, and a lot of investment.
-Kenya is also rapidly gaining popularity amongst the western investors ands especially the top Wall Street Investment Banks with its rapid growth and increased IPOs that have been oversubscribed.
-The East African stock exchanges have mooted a plan to merge and form one East African Exchange that will be a step towards the integration of the countries in the East African Community. The Exchange will widen the scope of investment opportunities available to investors.
-African Capital markets are also contemplating forming a universal african capital market whereupon trading, listing and other financial market operations will run smoothly without any difficulting enabling investors undertake their investment decisions. Companies intending to list in other african exchanges will be able to do so without much stumbling blocks and hindrances set by countries.
-Egypt and South African stock markets have grown by leaps and bound and lead the continents stock market capitalizations and number of listing companies.
-Johannesburg stock exchange has for a long time attracted alot of investors from the developed markets as USA, London as well as from other parts of Africa. With the world cup 2010 being held in SA things are looking good for this market and if the current trends are to go by, investors in tourism, real estate, banking and such like stocks will reap bountifully.
-In Kenya the stakes raised with expectation of the continents much awaited listing of Safaricom, Kenya's leading and most profitable company cannot be overemphasized. The tender bids already issued have attracted hosts of major investment banks in Kenya , USA and far and wide, leading legal experts, brokers, top banks, as well as registrars and other operatives. We can lonly wait and see despite threats of impending court battles.
-The establishment of the privatization commission in Kenya is long overdue and with parliament forcing the minister of Finance to gazette the same, things are up and running and what more share we say except to invest, invest and invest in our lovely continent.

Investing In Africa Against whose Index?

Historical Bull and Bear Runs:

As the Nairobi Stock exchange (NSE) basks in the glow of a historical bull run that was was witnessed during the second half of 2006, as well as the increasing number of Initial Public offerings (IPOs) that have stirred the market and susbstatially adding to the market capitalization, analysts and market players alike have continually expressed concern that the NSE 20 share index may not be reflecting the true picture of the market.

The sales of the shares at the NSE have hit historical highs and the stock market has been flirting with irrelevance after failing to adopt new and more robust market performance indicators that are reflective based on the share price movements and mode of computation.

New NSE Index:

As you may wish to know the newly revised NSE 20 share index that was announced last month led to the replacement of 6 counters out of the 20 stocks that constitute the index. The new index saw the inclusion of ICDCI, Kengen, Mumias, Rea Vipingo, CMC (Cooper Motors Corporation) and equally led to the dropping of NIC, BOC, Unilever, Kakuzi, Uchumi and Williamson Tea.
The index that is used an indicator of activity at the bourse has declined by a total of 30.03 points in the 2 days since the inclusion of 6 new constituent counters on Wednesday. Contrary to this, the former index had shown a sustained rally in the recent past, rising by 180 points (3.61%) last week. This is indeed a clear disparity between the two indices in terms of composition and computation and further is a reflection of the lower prices of the 6 new stocks as well as the weights assigned to the new constituent.

NSE in the global market:

Statistics available indicate that the Kenyan stock market is the world's 6th worst performer this year after declining by about 5% between January and June when the market experienced an unprecedented bear run where the index declined from all times high of around 6000 points to around 4000 Points. The bear run was occassioned by surging sales due to increased investor news e.g school fees, low demands for shares, plummeting prices, emergent hig return investment schemes (Pyramids/Ponzi schemes) that have hirtheto collapsed. Furthermore was the evident market scare due to low returns from previous IPOs that had been expected to provide significant returns (excluding Kengen that realized remarkable feats).

The Nairobi Stock Exchange (NSE) is only outpaced by Sri Lanka, which declined by 6%, Trinidad Tobago at 8%, Saudi Arabia at12%, Jamaica at13% and Venezuela at 24%.

China's Unrelenting courtship:

On a positive note, China's CSI Index continues to surprise investors and has gained 112% year-to-date, an indicatio that local Chinese investors have discovered the stock market with a vengeance and China in turn seems to have discovered Africa in a big way this year with a rally to play a bigger role in Africa's development initiatives to the chagrin of the western counterparts who are feeling threatened by this emerging courtship.(Does the building of fly overs in Nairobi and dual carriage ways ring a bell?).

African Capital Markets:

The noticeable trend is that Africa's capital markets are expanding rapidly with corresponding adoption of the Information and Communciation Technology (ICT) in its operation. The NSE for example moved quite fast to adopt a Central Depository System and a computerized shares trading system acquired from Millenium Technologies of Sri Lanka at substatial capital outla. Other markets includinf johannesburg are ahead of the pack whereas others are still following suite.

All African markets with the exception of Kenya have performed very well so far this year. Nigeria and Botswana are among the world's top performing markets. Lagos Stock Market has risen 52% while the Gaberone Index gained 43%. South Africa is up 16%, Namibia 17% and Mauritius 20%.
Market Correction:

There are indications that the Kenyan Stock market has alot to offer and looks rather interesting with good risk/reward entry at current levels of valuation after shedding significant points (5%) beween January and June a trend seen by analysts to have been a market correction. There is a growing probability that the NSE will catch up with other African stock markets from the third quarter of this year, especially once the Initial Public Offer (IPO) of East Africa's most profitable company, Safaricom, is listed on the bourse.
Kenya hopes to raise Ksh 35bn from the sale of a 25% stake in Safaricom, East Africa's biggest mobile-phone company.

Foreign Direct Investments (FDI):

It is noteworthy that larger flows of foreign funds are expected to come into the NSE, which should again bring new confidence and renewed hope to the local bourse. For the longer-term investor, the market seems to be at an equilibrium now and the potential for upside gain most probably will be greater than the downside risk at current levels

NSE Making Progress:

Foreign investors are often positively surprised to hear that proportionally more people make

mobile phone calls in Nairobi than they do in New York. The younger generation of Kenyans more outward-looking, enterprising and better educated, less dependent on the patronage of state and local politicians are re-shaping Kenyan busines. More and more foreigners seem to take notice. Overall investment into African capital markets, however, is still rather small. But stock markets like the NSE are making significant progress. In October 2006, the NSE began automated trading, moving away from the open cry system of trading that had been used for 15 years (All Africa).

Global Fund Managers eyeing Africa:

A positive trend is that more global fund managers seem to agree that the risks of investing in Africa in general and in Kenya in particular are less then they are perceived to be. Africa often rakes in better returns for investors than Europe, Asia or America. For instance the Kenya Electricity Generating Company (KenGen) IPO that heralded more retail investor participation on the NSE saw the exchange's equity turnover rise by almost 300%, in May 2006 when KenGen was listed, to Ksh11,4bn.
New era of long term investing vis speculation:

With a significant number of Kenyans now partaking in the NSE, it set in motion a new era of stock market investing in Kenya, which went from one extreme of bullish sentiment to the other where some investors lost more money than they thought when the market had an expected and natural pull back. Instead of being "once bitten and twice shy" local investors might want to see the stock market more as a long-term investment instead of short-term speculation.(All Africa)