Gatuyuriana Explains: Why Kenyan Capital Markets are failing

The performance of our capital markets has started the year on low footing. Even though there is a significant improvement from the end of 2015 especially on fixed income securities, trading at the Nairobi Securities Exchange is still bearish. Listed entities in various counters have been issuing profits warnings.Is this a signal to our collapsing capital markets? If so, why do capital markets collapse? We interrogate:

1.Capital flight. This occurs when investors pull out of the market en masse either due to panic, which triggers an exit stampede. The market is left injured. In our case, foreign investors have been pulling capital out of Kenya and relocating to other emerging markets which are performing comparatively better than the NSE.

Charging_Bull_statue
We have a charging bull at Wall Street. Should we have a crawling tortoise at NSE?

 

2.Market bubble. This is when the securities value are exaggrated. Either, during an initial public offering, there is floated an hyped offer price which does not commensurate with the underlying assets of the issuer. We saw this in home Africa listing. In such instance, there is a rush to acquire the securities by speculators eager to make hay while the sun shines. The securities price shoots far above the listing offer.

Then there is a lull. Markets gyrations causes market correction, and eventually the stock finds its actual value. The bubble just explodes. The investors in the primary offer have already made a killing. The investors who acquired the securities in the secondary markets are left with valueless stock. They dispose it to count the losses, aggregating the situation. In the long run. this affects the markets, both in operations and confidence.

3.External shocks. The country may have no control over this. However, this could also be caused by inept legal framework. We saw this with the re-introduction of Capital Gains Tax on market Securities, an action which caused down turn on the markets.

4.Ethical deficiency. There are investors, regulators and industry sharks who deliberately engineer the collapse of the markets for selfish needs. They may push strategic issuers to precipice with an hidsight that the government would bail them out anyway. Could this may have been the case with KQ and Uchumi?

These reasons would have sank better if effeciently contextualized with more illustrations. Nevertheless, the reasons are visible and are causing our markets to fail. We expect the markets to boom this year, But this expectation is just a hope. For there to be booming markets, a potpourri of issues are at play. Most important, the regulators must play their part.

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