KENYA'S STOCK MARKET FACES CAPITAL GAINS TAX HURDLE IN 2015

Investment brokers on the trading floor of the Nairobi Securities Exchange.

Kenya’s stockmarket realised positive returns in 2014 as investors showed confidence in the country’s economic prospects.

However, for 2015, market analysts predict distress due to instability in the global economic environment and the recent re-introduction of the controversial capital gains tax (CGT) on securities and property transactions.

READ: Kenya targets profit from sale of shares in return of capital gains tax

Kenyan stocks had a good year, with foreign investors, who control 60 per cent of the daily turnover, scrambling for stakes in mid-sized firms.

The Nairobi All Share Index (NASI) closed the year on a high of 162.89 points, from 136.65 in 2013, representing a growth of 19.2 per cent.

The NSE 20-Share Index, which tracks the performance of the top 20 blue-chip companies on the Nairobi Securities Exchange (NSE), underperformed, delivering returns of 3.77 per cent after climbing 28 per cent in 2013.

Since 2009 the NASI has risen 123 per cent, from a level of 71.64 in 2009 to 160.24 in 2014.

“Last year was a fantastic year for the exchange. We witnessed significant growth in prices and market capitalisation of mid-sized companies. These companies are not part of the 20 blue chip firms,” NSE’s acting chief executive Andrew Wachira told The EastAfrican.

“We hope the performance of our top 20 companies will grow this year, though that will depend on profit-taking by the investors. The only challenge we can see in 2015 is finalising and agreeing on the modalities of implementation of the CGT,” Mr Wachira added.

READ: Capital gains tax choking African stockmarkets, experts now warn

Data from the NSE shows that the insurance and agriculture sectors led the top performers, growing by 53 per cent and 31 per cent respectively. The investment sector grew 22 per cent, and the automobile and banking sectors both delivered 18 per cent returns to the investors.

The energy and petroleum sectors grew by 0.8 per cent, boosted by Umeme Ltd shares whose price rose by 61.54 per cent, to Ksh21 ($0.23) from Ksh13 ($0.14).

“There are strong positive sentiments about Kenya due to the discovery of oil and gas. We expect to see more investors coming into the market,” said Geoffrey Odundo. Mr Odundo was appointed new chief executive officer of the NSE on Thursday, and will take office on March 1.

READ: Capital markets player assumes regulator role at Nairobi bourse

The returns in the commercial and services and the construction and allied sectors dipped by 6.85 per cent and 1.89 per cent respectively.

The telecommunications and technology sector, represented by mobile phone operator Safaricom, rose 29.49 per cent, and the Growth Enterprise Market Segment grew marginally by 0.8 per cent.

In the manufacturing and allied sector, Kenya Orchards’ stock grew by 3,566.67 per cent to Ksh110 ($1.2) from Ksh3 ($0.03), pushing the sector’s performance up 409.36 per cent. Unga Group rose 120.83 per cent to Ksh 39.75. ($0.44).

The NSE, which self-listed during the year by offering 66 million shares to the public priced at Ksh9.50 ($0.1), gained 115.79 per cent after its share price rose to Ksh20.50 ($0.23)

“We expect the recent enforcement of the capital gains tax to be an issue this year, because this will have an impact on the cost of capital and the interest rate,” said Johnson Nderi, manager-in-charge of corporate finance and advisory at ABC Capital.

“I’m not bullish about our economic performance because of global events. We are not a strong economy. Other emerging markets such as China, Brazil, India, Turkey and South Africa are hurting. I don’t expect the region to do well,” said Mr Nderi.

Although the Kenyan stockmarket recorded a stellar performance in the first half of 2014, it underperformed in the second half of the year due to insecurity.

READ: Equity markets performance to dip for the remainder of 2014

Kenya Airways shares suffered due to multiple attacks in the country that led to a decline in passenger numbers, and cancellation of flights to West Africa due to the outbreak of the Ebola virus in the region.

“The equity market performed quite well in the year 2014, it was robust. However, in 2015, the equity market could slow down because of the introduction of the CGT of 5 per cent; the bond market may perform better than the equity market because it is considered as a safe investment,” said Joe Nyandiko, a senior research analyst at Kenindia Assurance Company Ltd.

“On the regional front, it will depend also on economic stability. Uganda is a bit unstable politically and could perform below par; Tanzania is approaching a change of government and may not perform well; Burundi is also unstable politically and may not perform well; Rwanda could be an alternative for foreign investors due to its open policy on investment,” he added.

According to Geoffrey Maina, an analyst at Old Mutual Securities Ltd, the bullish trend in 2014 could spill over into 2015. However, the CGT is a major cause of concern.

“We expect the bullish outlook for 2014 to continue into 2015. This is because of the resilient nature of our economy, as we have managed to weather external shocks that threatened to slow down economic activity. The wider sub-Saharan Africa region continues to present heightened opportunities for foreign investors, and we believe that their participation in the equities market, especially our local market, will continue to increase in 2015,” said Mr Maina.

“The implementation of the CGT is likely to impact on investment. The increasing tax burden is likely to slow the momentum,” he added.

The market remained bullish in 2014 driven by impressive company financial performances, dividend payouts, and improved economic indicators.

“The bonds market was vibrant in 2014, as we saw increased issues in corporate papers. Corporates are starting to appreciate the potential of the capital markets as an avenue for raising capital. We expect this trend to pick up momentum in 2015,” Mr Maina said.

In 2014, some stocks outperformed both the NASI and the NSE 20-Share Index, which grew by 19.2 per cent and 3.8 respectively. They include Centum Investment Company Ltd and Equity Bank Group, whose share prices closed the year at Ksh61 ($0.68) and Ksh50 ($0.55) and delivered returns of 84.85 per cent and 62.6 per cent, respectively.

Key stocks to watch in 2015 are growth stocks (Safaricom Ltd, Equity Group Holdings Ltd, Centum Group, KCB, Uchumi Ltd and Scangroup), value stocks (Standard Chartered Bank, Bamburi and East Africa Breweries Ltd), and rights issue opportunity stocks (Kenya Electricity Generating Company and National Bank of Kenya).

The East African