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Bleak times for investors as share prices at NSE fall to new lows

Sunday January 15 2012

It’s an odd way to start the year for fund managers, investment firms and insurance companies.

These firms — which control a huge chunk of investments at the Nairobi Securities Exchange (NSE) — are currently carrying out an audit of their books to present their full year 2011 results starting next month.

And things are not looking good because the drop in share prices in 2011 at the NSE has left many of them with either a significant drop in profits compared with the previous year or they are in the red.

This means, pension funds are expected to report lower returns and investors to hold back in buying shares of investment companies and insurance companies on news of profit warnings or payment of fewer dividends.

For the fund managers, investment firms and insurance companies it is yet another trough in the cyclic performance of their portfolios at the stock market as share prices drop. In 2010, they benefited from a rally in share prices at the bourse.

It is now expected that this year investors will continue to put their eggs in other baskets such as real estate, fixed income and government securities to reduce the over-reliance on the stock market.

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British American Investments Company (Kenya) Ltd last week issued a profit warning six months after its Initial Public Offering was undersubscribed in August last year. Its profits for the financial year ended December 2011, are expected to drop by at least 25 per cent because stocks, which are part and parcel of its investment portfolio, fell for most of 2011 due to concerns over the high inflation, high interest rates and slowing global economy.

“The board is of the view that the financial results for the year ended December 31, 2011 will be adversely affected by the prevailing market condition compared to the same period in 2010 when the market conditions were favourable,” said Nancy Kariuki, the company secretary for British American Investments Company in a notice to the stock market.

The NSE20 and NASI indices for example declined by 27.6 per cent and 30.5 per cent to end the year at 3,205.00 and 68.03 points respectively.

On the next trading day after British American Investments Company released its profit warning, its shares dropped by four per cent to trade at US cents 5.

Standard Investment Bank analysts noted that the negative sentiment, among investors on the outlook of the insurance company results, dragged across the sector with Jubilee Insurance shedding 0.65 per cent to trade at $1.75 on thin volumes.

However, Pan Africa, edged higher after coming-off in the previous session and CFC Insurance remained unchanged.

The insurance firms have been diversifying their investment portfolios by going into real estate markets in the region to avoid relying on their investments at the stock market.

Pan Africa Insurance has put up and sold houses in Nairobi’s upmarket estate of Runda. Centum, the cross-listed firm at the NSE and Uganda Securities Exchange, has also moved into real estate putting up commercial and residential buildings in Kenya and Uganda.

Ms Kariuki said the management has taken steps to reduce the impact of stock volatility on the group’s performance by increasing focus on growth opportunities including investments in real estate and taking advantage of the good returns available in the fixed income markets segment.

Not enough profits

But some fund managers say the returns of the fixed income market in 2011, with the high interest rates, were not adequate to cover the losses in the stock market to leave them in the black.

“The returns (fixed income) would not recover the drop in the stock market, they were negative. Those who bought bonds at the beginning of the year, did not sell them, they are waiting to reap from new bonds,” explained Peter Wachira, a senior investment manager with Pinebridge Investments.

Fund managers who bought bonds at the beginning of the year, when interest rates were low, did not want to sell them because the rising interest rates in the course of 2011 meant bond prices fell.

So if a fund manager bought a bond when the interest rates were low, the benchmark 91 day T-bill was 2.95 per cent in January 2011, selling when interest rates rise meant they book a loss in their books. When interest rates rise bond prices fall and vice versa.

At the beginning of 2012 interest rates have risen, the 91 day T-bill is at 20.69, offering the fund managers and investment firms to earn higher returns this year. But there still remains an air of caution among most investors.

“Although economic fundamentals are improving, investors are still wary of the likely negative outcome in 2012 as stock market failed badly at the close of 2011,” explained Judd Murigi, head of research at African Alliance.

According to the Stanbic Investments (EA) Ltd, a mix of domestic and external factors will influence economic growth.

The weather pattern, the direction of monetary policy, the local political conditions and global economic developments are key factors likely to affect growth.

“A slowdown in credit growth will also curtail growth in investments and consumption.

Externally, weakness in European demand due to the euro zone woes poses a threat to international trade,” reads part of the report.

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