In many countries, the stock market is the primary means of wealth creation for citizens. Every year, many millionaires and billionaires are minted across the numerous stock exchanges around the world. Between 2006 and 2011, Kenya set out on a journey to fully expose its citizens to the great investment possibilities through notable listings such as Co-operative Bank, KenGen, and Britam. However, it was the Safaricom IPO which truly captured the imagination of Kenyans, attracting 860,000 applicants and resulting in an oversubscription of 532 percent. Sadly, this golden age of major IPOs came to an end and what followed has been a 10-year long drought on the Nairobi Securities Exchange. Making matters worse, has been the decision by major companies such as KenolKobil, Access Kenya and CMC Holdings to delist and exit from the bourse. And all this has taken place at a time when the Capital Markets Authority has struggled to contain insider trading as well as matters pertaining to conflict of interest. It will take some bold reforms to restore the stock market back to its glory days and the real hard work must begin now.
The need for reforming the stock market is particularly urgent given the shortage of investment opportunities around the economy. Traditional investments in land are proving to be less lucrative due to the recent drop in land value. Similarly, investment in rental units has led to an oversupply of apartments which has meant many landlords have been struggling to find tenants to occupy their empty spaces. Furthermore, investment in government securities is becoming increasingly unsustainable due to the frequent concerns around the high public debt that Kenya carries. The covid-19 pandemic has significantly affected the tax revenues of many African countries, placing them only a heartbeat away from defaulting. Zambia was the first casualty to give in to the weight of mounting debt, but commentators believe that many African nations will follow suit. This means that the equities market is the only remaining asset class that can effectively absorb the giant pool of money that is held by individual and institutional investors.
The fundamental problem of Kenya’s capital markets is that is has been predicated on the wrong strategy. There has been an overemphasis on looking for listing opportunities that arise from the privatization of state assets. According to CMA, each privatization tends to trigger three to six new listings. But this can never be the long-term strategy for any major stock exchange. Capital markets exist to channel the wealth of savers to those who can put it to long-term productive use such as entrepreneurs. The long-term goal must therefore be to create a seamless path from the moment an entrepreneur has an innovative idea all the way to the day it becomes a listed company on the stock exchange. Perhaps a useful benchmark would be the journey of Facebook Inc, that went from being an idea in a Harvard University dorm to becoming the largest IPO in internet history within a space of 8 years. However, it must be noted that the recent push to entice small and medium enterprises by the NSE under the Ibuka program has been a breath of fresh air and one can only hope that it is fully implemented.
Significant investment will also be needed to implement structures that can eliminate conflict of interest and enhance surveillance of insider trading activity. Recent media reports have cast a shadow of doubt on the integrity of trading operations thereby creating a trust deficit within the investor community. It is difficult to assess whether these reported cases have been isolated instances or whether they are part of an industrial scale of fraud. What we can be sure of, is that they don’t promote investor confidence and is possibly the reason why there is frequent concern as to whether the market valuations reflect the full price discovery, characteristic of an open exchange. Consider, the current market valuation of Safaricom on the NSE is about 1.0 trillion shillings. An analysis of the company’s latest cash flow reports places it at par with a comparable asset valuation of 5 trillion shillings, nearly 5 times its current market value. The long-term effect of undervaluation can compel blue-chip companies to consider cross-listing in larger stock exchanges that align with international standards.
Bold strategic reforms can bring back the vibrant activity that once characterized Kenya’s capital markets, and with it a real avenue for ordinary citizens to prosper.
Mr. Gichinga is Chief Economist at Mentoria Economics.
