Kenya has opened up its stock market to increased speculation by creating a window that will see sophisticated and highly informed investors make quick gains from falling stock prices that has characterised trading on the Nairobi Securities Exchange for more than three years.
The move is part of the recommendations by the World Bank to boost liquidity in the stock market where nearly 90 per cent of the 1.6 million share accounts are dormant and have not been actively trading in the past two years, according to data Central Depository and Settlement Corporation Ltd.
The dominant five
Analysts say the move that has also seen capital markets regulators cut the stock settlement cycle to within 24 hours from the previous three days’ period is meant to spur trading on the Nairobi bourse that has seen its daily turnover decline by more than 40 per cent to Ksh361 million ($3.61 million) from Ksh608 million ($6.08 million) in the last 10 months (January 16 to October 16, 2019) according to data from the NSE.
“This is a very good move for the market. Investors have always made money when they buy shares and sell them off when their prices go up. However, we have now opened up an opportunity for investors to make money when prices of shares decline,” said Paul Mwai, chief executive, AIB Capital Ltd.
“This type of trade is largely for informed investors who have a very good understanding of the market and who have analysed company shares. They will have to speculate by trying as much as possible to make accurate predictions on share prices for them to realise short-term gains.”
According to Mr Mwai opening up the market to more speculators will improve liquidity and enhance transparency and pricing in the market.
So far trading on the NSE is dominated by five companies (Safaricom, Equity Bank, East African Breweries Ltd, KCB and Co-operative Bank) which account for more than 70 per cent of the market capitalisation.
Last week the NSE officially launched a new trading system that allows for Short Selling and Day Trading with hopes of injecting a new lease of life into a stockmarket that is struggling to attract new companies and that has suffered massive exit of retail investors.
A study carried out by the Capital Markets Authority of Kenya whose findings were released last year shows that there is emerging stiff competition from other investment or quick return vehicles which are promising better short-term returns such as real estate, mobile money products and sports gambling compared with the long-term nature Capital Markets investments returns.
The EastAfrican has, however, learnt that by the close of the trading session on Wednesday last week the new trading platform for Short Selling and Day trading had not registered even a single trade, a development which the Nairobi Securities Exchange management attributed to lack of familiarity with the new investment platform.
“So far not yet. I think investors are still familiarising themselves with this trading platform,” NSE chief executive Geoffrey Odundo told The EastAfrican.
“What we are trying to do is to make the market more liquid and increase the turnover. It really has to do with sophisticated investors who are more informed,” he added.
Under this trading arrangement stockbrokers will borrow shares from clients and sale them under the prevailing prices with hopes of buying them back from the market when prices fall and in the process make a profit.
Usually, the lenders are long or medium term investors such as institutional investors (pension funds and insurance companies) and high net worth individuals.
Under this arrangement investors in the Kenyan stock market are expected to start lending their shares to brokers at a fee, thereby diversifying their incomes beyond company dividends, for which they have to wait for a year.
The profit on the shares an investor lends out to a stockbroker will either be cash or the shares lent out plus interest, after an agreed period.
This form of trading, called Securities Lending and Borrowing, will be guided by a contract between the borrower (stock broker) and the lender (investor).
The regulations for Securities Lending and Borrowing transactions were gazetted in January last year and the NSE and Central Depository Settlement Corporation upgraded their systems to accommodate it.
According to Kenya’s Capital Markets Authority, the introduction of SLB will reduce the risk of settlement failure if an investor unexpectedly finds himself short of stock.
“The borrowed stock can be used to meet delivery obligations resulting from short selling,” according to CMA.
According to the CMA’s Capital markets masterplan, introduction of securities lending and borrowing would give rise to selected firms that play the role of market makers by quoting buy and sell prices in certain stocks to ensure liquidity in the market.
For market makers to buy and sell stock, they will need to borrow shares from time to time to meet their obligations.