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November 21, 2018

Banking stocks drive NSE bull market


According to the popular definition, a bull market begins when a stock, commodity, or index rises 20 per cent from a low.

BofA Merrill Lynch Global Research defines a cyclical bull market as “a rally of at least 20% without a 20% correction using daily closing basis data”.

By that criteria, the Nairobi All Share, which is +10.30% in 2017 and at nine-month highs, entered a bull market last week having rallied +22.71% since March 9, 2017. The Nairobi NSE20, which is +8.04% in 2017 and also at a nine-month high, similarly entered a bull market last week, having rallied +23.41% since January 30, 2017. I recall the deep despondency in early March and it is oftentimes said that a bull market “has to climb a wall of worry”.

That wall of worry has included an August 8 general election [and we have form in this regard] and off the charts food inflation at +21% year-on-year last. Others are a sharp slowdown in private sector credit growth [expected to be negative in first quarter of 2017] and a rate cap which has rationed credit to ''riskier'' borrowers. Gross domestic product is expected to take a hit with Yvonne Mhango of Renaissance Capital downshifting her 2017 GDP forecast to 4.2 per cent.

The Nairobi bull market has already served up some mouth-watering year-to-date returns. Safaricom +13.577% underpins the bull market, while the banks after a big wobble have come back with a bang. KCB is +35.65% in 2017, StanChart +10.58%, Equity +26.66%. KenGen has exploded +30.973% higher this year.

The rally has been broad-based and has gathered momentum. A lot of folks [particularly in the banking stocks] are chasing dividends [in many cases double digit ones] , so we will surely walk into a correction in these shares when the dividends are paid.

The banks have been big buyers of government of Kenya debt as evidenced in their quarter one earnings releases. For the banks, government paper is treated as “risk-free” on their balance sheets and anything within 200 basis points of the rate cap has looked a “no-brainer”.

Local Institutions have also carried an overweight position in bonds. Returns of 12.5 per cent looked outstanding when compared to the stock market which was posting negative returns. However, just take Safaricom +13.577% year-to-date: There is no bond that is going to get close to that on an annualised basis. The next leg of this bull market will be driven by local institutions who will need to chase returns.

Actually and interestingly a number of African markets have entered bull market territory, and even Nigeria is at the cusp.

This bull market in Nairobi and in other parts of Africa was externally generated and at a macro level. You see it in Nairobi, you see it in the South Africa's rand [trading a great deal more robustly], you see it in sub-Saharan Africa's sovereign Eurobond yields which have rallied sharply and the government of Kenya should swoop on this opportunity to sell debt, in fact.

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