Emmanuel Were
26 December 2011
This has been a dismal year for investors in East Africa as stock markets flopped battered by high inflation, weak currencies and fears over the Eurozone debt crisis, but 2012 is set to be worse.
The next 12 months are likely to be more bumpy, especially for investors at the Nairobi Securities Exchange (NSE), with concerns of the political situation in an election year. The stock markets are also likely to be dragged down by high interest rates, volatile currencies and the Eurozone crisis, analysts say.
In 2011, as inflation soared central banks in the region increased the cost of borrowing to reduce demand for the domestic goods and save their currencies, which hit new lows in trading against the dollar.
But the high interest rates only served to encourage investors to move away from holding or investing in shares into fixed income investments, such as T-bills and government bonds with better returns.
“It was a no brainer going for fixed income where you could earn up to 22 per cent compared with the uncertainty in the stock market,” said Poonam Vora, an analyst with Dyer and Blair Investment Bank.
Investors’ preference for fixed income has seen the NSE 20-share index fall by 30 per cent and the e Ugandan Securities Exchange drop 34 per cent since January 2011. The Dar es Salaam Stock Exchange bucked the trend raising 44 per cent in the 12 months on increased interest from local and international investors. Also the initial public offers of Precision Air and Tanzanian Breweries increased activity at the DSE with foreign and local investors taking a keen interest especially in the brewer.
However, foreign investors kept off Uganda and Kenyan markets due to the eurozone debt crisis, analysts say. The foreign investors account for about 70 per cent of the trading at the NSE. With Kenya’s general election coming up next year the situation remains dicey.
“Foreign investors are very sensitive of the political situation,” said Ms Vora.
But while Kenya is expected to sweat on attracting foreign investors, Uganda, Tanzanian and Rwanda will see an interest from investors.
Uganda’s oil production is supposed to come on stream in the next two years hence attracting foreign inflows. This will most likely stabilise the currency, analysts say, helping attract foreign funds into the USE who bet benefits from the oil sector will trickle down to the broader economy.
Tanzania has been attracting interest from East African citizens and foreign investors as the country speeds up the listing of some of the profitable companies.
Rwanda’s plans to privatise more state corporations should see an interest from investors. In light of the uncertainty the analysts recommend defensive stocks. These are stocks that will benefit from growing demand by consumers in the regional markets despite the slow economy. EABL, Bralirwa and TBL are some of the listed beer makers seen as defensive stock. Tobacco manufacturers are such as BATU and BAT Kenya are also classed as defensive stocks.
The cigarette manufacturers will have the added attraction by benefiting from the export; should the currencies weaken then they earn more revenues to local currencies. Most of their exports are priced and paid for in dollars.
Investors will also be keen on some of the regulatory measures being taken by the capital markets authorities in 2012 especially to protect the small investors. The regulators have been keen on reining in on incidence of insider trading, poor corporate governance and ensuring the stock brokers are better capitalized.
“For an equity-investing culture to take root there must be trusted, transparent markets with strong protections for small investors, as well as the institutions and systems to provide easy market access. Rules and regulations may be in place in emerging markets today, but enforcement is often unreliable. When the correct conditions are in place, investors are likely to gravitate to equities for higher returns,” according to McKinsey Global Institute (MGI) in its report the emerging equity gap: Growth and stability in the new investor landscape released last week.
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