Kenya ranked eighth overall within the simply launched Absa Africa monetary markets index (AFMI) 2022, an enchancment from place 10 in 2021. Nevertheless, Kenya misplaced some floor within the Pillar One of many index, scoring 43 out of a most rating of 100, in comparison with a rating of 46 in 2021.
Broadly, there are six pillars within the index. Pillar One evaluates the scale and liquidity of home capital markets, together with the range of listed asset lessons and the existence of ordinary options that improve market depth. This low rating speaks to 2 components. First is liquidity, as measured by the turnover ratio. This primarily compares the amount of shares traded to the variety of shares excellent.
If there’s a excessive degree of share turnover, this means that buyers have a neater time shopping for and promoting their shares. It is a important measurement for buyers to pay attention to, for a low share turnover fee signifies that it might take time to unload a share holding.
Statistics from the Capital Markets Authority present that fairness turnover ratio on the Nairobi Securities Change (NSE) remained under one % all through 2021, which is kind of skinny.
Certainly, the fairness market has traded on skinny liquidity and bettering turnover ranges in the long term requires extra listings in addition to elevated investments by each institutional and retail buyers. Moreover, current product improvements such securities lending and borrowing ought to assist drive up exercise (and therefore liquidity).
The second issue is a scarcity of major supplier system. In any monetary markets, major sellers underwrite any major sale of securities, whether or not equities or bonds, which they in flip re-sell to different market contributors within the secondary market. By doing this, they carry out two capabilities: offering market making and value discovery. Market making within the sense that they supply a prepared marketplace for any investor seeking to promote a safety.
Value discovery, alternatively, is achieved by way of two-way quotes; which mainly signifies that if I can promote it to you at a sure value, then I additionally present you my buy-back value. Within the Kenyan context, this has been a lacking hyperlink and continues to contribute to the low rating.
The shortage of major supplier system within the fairness market additionally (partly) explains the preliminary public provide (IPO) drought on the NSE.
Give it some thought. At the moment, any entity wishing to lift fairness capital by way of the IPO route should content material with pitching to tons of of potential buyers with none assure of securing funding. They must undertake a home and cross-border roadshow, relying on the provide dimension.
The roadshows and the pitches may be so many work. It might be a lot simpler if such an entity would solely meet three or 4 funding banks in a gathering room and acquire an endeavor to totally underwrite the fairness elevate (after which the funding banks will promote down within the secondary market).
The identical idea applies to the fastened earnings market, each company and sovereign. And within the case of presidency bond market, the central financial institution, being the federal government’s fiscal agent, approves an inventory of major sellers (utilizing its personal standards for choice). The absence of major supplier system within the public markets has given extra vitality to the personal fairness market.
Merger and acquisitions knowledge from the East Africa Enterprise Capital Affiliation reveals that the worth of reported and disclosed transactions between 2018 and 2021 stood at $3.1 billion, when there was no single fairness capital elevate on the NSE. Primarily, there’s a extra exercise within the personal market in comparison with the general public market, and it’s all right down to (lack of) major dealership.
It’s noteworthy that neighbouring Uganda, which operates a major supplier system in its authorities bond market, scored greater than Kenya.
Finally, the insights from the Absa Africa monetary markets index presents some kind of wake-up name to reform the construction of the home capital markets.
The author is an funding analyst. @GeorgeBodo