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.

Kenya Economy Reeling From Post Election Violence

Economy
The orgy of violence that has greeted Kenya's disputed election result has led to hundreds of deaths and forced tens of thousands to flee their homes.The post election violence witnessed in various parts of Kenya has indeed raised pertinent questions on the resilience of the economy to sustain long periods of civil unrest and violence.

Tourism
Kenya's tourism industry, which brings in some $900m (£455m) a year and attracts more than one million visitors a year, is sure to take a hit after four days of rioting and ethnic clashes. Its relative economic success has been helped in part by its thriving tourist sector, with visitors attracted by its abundant wildlife and pristine beaches.Provisional figures for 2006 from the Kenya's tourist board said the country had received 1.5 million visitors for the year, a growth of 5.2 per cent.

Repercussions
The stalemate over the election results has cost the economy billions of shillings with the repercussions being felt across East Africa.

Bankers Analysis
Several bodies including the Treasury, Nairobi Stock Exchange, Tourism sector, and financial organizations have given their predictions and analysis of the implication of the destruction and sporadic violence that errupted in the country against a backdrop of controvesial presidential elections and delays in announcements.
The effects are indeed immense and portends widespread implication for Kenya as an emerging economy that has recently been rated the fast growing and most preferred by investors seeking emerging markets.

East Africa
The pinch on the economy is not only being felt locally with close to 4B having been lost but has spilt to Uganda, Tanzania Rwanda and Burundi where essential products were not forthcoming as fuel passing through Kenya was unavailable due to closure of roads and violence.

Central Bank of Kenya analysis
Kenya’s economy has grown steadily in the past five years with all indicators pointing out that if the trend was sustained, growth would hit 10 per cent. The economic recovery that started in 2003 has achieved some major milestones and laid down solidly the growth fundamentals. The growth fundamentals laid down have reversed growth decline that had taken years. It is true that the recent violence in some parts of the country could adversely affect the tempo of economic activity, but cannot destroy the growth fundamentals so far laid down. more

Foreign investors
Private investment has been behind Kenya's thriving economy. It has averaged GDP growth of 5% since 2002 and the economy is expected to expand by 7% in 2007 - rates of growth that are only beaten in booming Asian countries such as China.
Kenya's shilling strengthened by 9% against the dollar in 2007 as foreign investors poured into the country's stocks and bonds, but those gains were largely erased when currency markets began trading on Wednesday.

Equity Market
The equity market on the Nairobi Stock Exchange lost 40 billion Kenyan Shillings ($591 million) in value on its first day of New Year trading Wednesday. Kenya has attracted a large number of multi-nationals and is home to one of the world's fastest growing stock exchanges.

Positive Prospects
Expected planned sale of Safaricom shares might stir the market once again back to its feet .

Kenya as an Emerging Capital Market (Part I)

Thanks to a blog comment by Bankelele, press statements and an email i got from Strathmore (which happens to have been my former university) on the upcoming finance conference on the capital markets i have ventured to look into this new phenomenon that is set to revolutionize the way business in done in this part of the world. The forum dubbed 'Kenya as an emerging capital market' will endeavor to address issues including monetary policy and capital markets, the integration of the East African capital markets, NSE as an engine for growth, private equity and venture capital, using capital markets to fund infrastructure and the the formation of the EA capital markets.
I therefore wish to expound on this issue that i hope will be comprehensively addressed during the capital markets forum on Friday 7th September 2007.

Emerging Markets
This is a term coined in 1981 by Antoine W. van Agtmael of the International Finance Corporation of the World Bank.
An Emerging Market Economy (EME), or Developing Market Economy (DME) is defined as an economy with low-to-middle per capita income. Such countries constitute approximately 80% of the global population, representing about 20% of the world's economies. The term emerging markets is commonly used to describe business and market activity in industrializing or emerging regions of the world.

What an EME Looks Like

• EMEs are characterized as transitional, meaning they are in the process of moving from a closed to an open market economy while building accountability within the system.


• As an emerging market, a country is embarking on an economic reform program that will lead it to stronger and more responsible economic performance levels, as well as transparency and efficiency in the capital market.


• An EME will also reform its exchange rate system because a stable local currency builds confidence in an economy, especially when foreigners are considering investing. Exchange rate reforms also reduce the desire for local investors to send their capital abroad (capital flight).


• Besides implementing reforms, an EME is also most likely receiving aid and guidance from large donor countries and/or world organizations such as the World Bank andInternational Monetary Fund.

Emerging Economies:
These are countries considered to be in a transitional phase between developing and developed status. Examples of emerging markets include China, India, Mexico,Brazil, much of South East Asia, countries in Eastern Europe, parts of Africa and Latin America.
The term "rapidly developing economies" is now being used to denote emerging markets such as The United Arab Emirates, Chile and Malaysia that are undergoing rapid growth.

Top 4 Emerging markets
According to the latest findings from the Grant Thornton International Business Report (IBR) published on April 19 2007, Mexico, Indonesia, Pakistan, and Turkey are the emerging markets to watch. They have identified them as the next generation of emerging economies set to have significant impacts on the world economy, although Mexico was already identified as an important economy in studies such as BRIMC (Brazil, Russia, India, Mexico and China), or as part of the G8+5. These countries may match or even overtake some of the commonly identified BRIC economies (Brazil, Russia, India and China) which are expected to join the global economic powers, although these economies are unlikely to match India or China in strength.

According to CEO of Grant Thornton, Indonesia and Pakistan, with their large populations, have the potential to grow their labour intensive exports and could capitalize on the process of low-cost production that mainland China has so successfully exploited.

World Stock Markets
Billions of dollars of share priced have been wiped out in world stock market, while credit markets have gone through a period of repricing that prompted fears of a meltdown. It is as if the world markets catch cold when the US market sneezes which set up the herd contagious instinct amongst investors. Contagion is the herding behaviour when expectations cause investors to pullout in response to a shock that hits the market. The expectations become self fulfilling when the behaviour causes a collapse of the markets despite sound fundamentals. As globalization advances, increased capital flows are likely to exacerbate the interdependence of economies and heighten the possibility of contagion.

EME vis World Markets
The integration and interdependence of financial markets has become evident in current years and the US markets being the largest in the world triggers contagion whenever a crisis such as the sub-prime mortgage loans hits it. This has far reaching effects on the emerging markets of Africa and Kenya is no exception.

Emerging Market Economies (EME) have to watch closely how the developed financial markets undertake their business operations in relation to their overall stability if they are to continually poise themselves for stable macroeconomic environments and capital markets advancements.

Local Politics vs. Global Economy
An emerging market economy must have to weigh local political and social factors as it attempts to open up its economy to the world. The people of an emerging market, who before were protected from the outside world, can often be distrustful of foreign investment. Emerging economies may also often have to deal with issues of national pride because citizens may be opposed to having foreigners owning parts of the local economy.
Moreover, opening up an emerging economy means that it will also be exposed to not only new work ethics and standards but also cultures as well: indeed the

Conclusion

Although emerging economies may be able to look forward to brighter opportunities and offer new areas of investment for foreign and developed economies, local officials of EMEs need to consider the effects of an open economy on its citizens. Furthermore, investors need to determine the risks when considering investing into an EME. The process of emergence may be difficult, slow and often stagnant at times. And even though emerging markets have survived global and local challenges in the past, they had to overcome some large obstacles to do so.

Kenya as an Emerging Market Economy (EME) therefore needs to brace itself for challenges that comes alongside this new recognition.

Mass Cross Listing in the Offing

11 Firms:

After my earlier posts on cross border listing (see Below), it is now emerging that eleven (11) firms have approached the regulators to cross list on the East African bourses. It is noteworthy however that although the regulators have been trying to level the playing ground, alot of issues still need to be addressed before companies join in this bandwagon.

East African Exchange:

With the establishment of an East African Exchange (EAE) also in the offing, the eleven companies are said to be as follows: Kenya with 5, 3 fromUganda and 3 from Tanzania.

Pioneers:

Earlier the Kenyan companies that had taken the cue to pursue cross border listing include East African Breweries (EABL), Kenya Airways (KQ) and Jubilee Insurance.

Listed Companies:

Among the east African players, Kenya still leads the pack with 53 firms and the number is expected to rise with the listing of Kenya Re,Safaricom and others soon to come. Der es salaam and Uganda Exchanges follows in the number of listed firms with only 7 and 6 respectively. This is excluding the Kenyan firms (EABL, KQ and JHL) that have poineered to cros list in the exchanges.

New Incentives:

The regulators have put in place alot of niceties for companies striving to cross list which include:

-Issuing a summarised Information Memorandum.

-No requirement of reporting accountant’s report.

-An abridged financial statements for the last five (5) years is acceptable.

-Provision of the latest annual or interim accounts submitted to the home exchange would be accepted as the latest financial statements.

-Standard initial fee of US$5,000 (Sh360,000) against previous amounts of US$21,126 (Sh1.5 million) to cross list its securities across Kenya and Uganda.

-However, only companies listed in the Main Investment Market Segment (MIMS) of both bourses will be eligible for cross listing. (Business daily)

Nonetheless, more still needs to be done to make the East African Integration a reality in all aspects then we can proudly talk about an Economic Integration, Political Integration and finally adopting a one currency for the East African Union.