Political risk keeps markets guessing

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By Alexander Van and Rishab Thakrar

Nairobi,Kenya:Cabinet: With professionals in Cabinet, Kenyans have high expectations of efficiency and growth driven goals to become visible in governmental bodies

The March 2013 General Election created speculation in regard to how the local markets would react to factors related to political risk. Unfortunately, the 2007-2008 post-election violence across Kenya marred the reputation of the historical political stability of the nation leading to travel warnings, bad press internationally and subsequent outflows of foreign direct investment at the slightest threat to stability.

The market capitalisation of the NSE accounts for over 10 percent of the nominal Kenyan GDP. NSE is also the largest securities exchange in the region and Africa.

Political risk

The dependency of the NSE on political risk factors was demonstrated by significant volatility on the Nairobi All Share Index from January through April of 2013. July 2012 to January 2013 saw stable growth of the index, with further progression from 4200 to 4575 representing 8.9 percent rise through January and February 2013 on positive election hopes.

The true demonstration of the volatility was clear following the peaceful elections on 4 March.  Between the 5th and 12th of March 2013 the index rose to 4980, a 10.2 per cent growth. The announcement of a court injunction from the CORD coalition saw the index drop by 4.6 per cent to 4750 points. The court announcement confirming the initial results and that the injunction was void, pushed the index to hit an all-time high of 5020, which was a 5 percent growth.

Thereafter the index stabilised at a 4800 range. All in all, the NSE All Share Index moved 19.4 percent between January and April 2013, most movement being based on politically driven speculation and doubt.

In retrospect, it is visible that the NSE is heavily influenced by socio political stability and the image of Kenya. Although true that every nation’s market and economy is somewhat dependent on its political environment, the FTSE 100 Index did not move 19.5 percent between the retirement of Gordon Brown and the election of David Cameron and his coalition government.

Then again, Kenya is a developing nation and the developed markets should be careful prior to turning a blind eye to their FDIs in East Africa. All this movement and disarray despite devastated sovereign wealth funds in Europe and yet to recover markets in the Americas, makes one wonder what the reason behind this volatility is?

Some say corrupt governments, bloodshed, poverty and transparency. In my opinion it is more likely that a lack of professionalism and bad governance is the root cause of the volatility. This however seems as though it is about to change. With a new government, a new constitution, corporate professionals in government and exceptional organisations, the Kenyan markets should no longer be judged and affected by a simple election, but instead by corporate performance, national budgets and sector growth.

In April 2013, the NSE hit an all-time high total market capitalisation of Sh1.7 trillion, having risen by Sh214 billion between January and April of 2013.  Safaricom posted after tax earnings of over Sh17 billion on May 14 2013. As at May 15, 2013, EABL and Safaricom combined represent over $6 billion in market capitalisation, which accounts for almost 10 percent of the Kenyan GDP at PPP.

This suggests that the Kenyan market is not an unknown irrelevant stock market, but instead a part of the African economy, and more importantly, a global exchange with internationally recognised, professional organisations listed on it.

Optimistically, the developed world should notice, that our nation and its success has surpassed days whereby politics defined the success of our companies. But instead, it is the quality and professionalism of our companies and their people that will define politics from here on.

The budget effect

As the nation waits in anticipation for the revelation of the new governmental budget, one may ask, what do we expect to have changed, and what does this mean for our market. Or more importantly, how will the market and the companies listed within it possibly affect and/or have affected the budget.

The government has changed and now it would be good to see it also change its methods of doing business. With business professionals in Cabinet, the Kenyan people have high expectations of efficiency and growth driven goals to become visible in governmental bodies.

They expect better use and allocation of funds to issues that matter to Kenyans. Although the commonly seen factors such as health and defense remain at the top of the list, the idea of long term development had to be addressed. Industrialisation, enterprise, anti-corruption, education, and development of a better and efficient free market should be considered.

At the end of the day, enterprise, industry, and vision not only add monetary figures to the economy, but stimulate the creation of jobs and utilise the investment in education, which leads to knowledge creation; essentially the bases for growth and development of a nation. 

-Alexander Van Schie is the Head of Corporate Finance and Rishab Thakrar, Business Analyst, Financial Advisory Services-Corporate Finance, Deloitte EA

The views expressed in this article are those of the authors and do not necessarily represent those of Deloitte East Africa