As you know i believe the NSE(Nairobi Stock Exchange) is overvalued.However, in investing you must look at different views (you could be wrong).There are several factors that could lead the market higher: 1.Demand has shifted.(higher demand higher prices)
More people are getting into the market, thus demand for shares is increasing but supply is relatively the same.New players are still getting into the market i.e. directly, via unit trusts and investment clubs.Almost everybody i know is buying or trying to buy shares.
2.Price is influencing price
'Higher prices beget higher prices' someone said(cant remember who).As prices rise people buy more shares in the hope of getting on the train of higher prices.Their purchases fuel a further price rise...and the cycle continues.Notice ARM,Mumias,NBK,NIC have been showing this kind of behaviour.
In comparison with other African markets(except South Africa) our prices(NSE) are still low in terms P/E multiples.Large companies are trading at P/E of 25 and above on the Nigerian Stock market NSE still has companies under 25 so there is still a ways to go.
I think NSE will cross 5000 mark this year. Bull markets last longer than anyone expects and crash faster and sooner than anyone does.Few expected the Dow Jones to cross 11,000 in its last recovery and the FTSE100 to cross 6,000 but they did.
Is the NSE Overvalued? YES and here's why The NSE is overvalued when you compare it to ther markets in terms of P/E ratio and dividend yields. Take the current darling of the exchange KENGEN. the whole week people have been telling me what a great buy it is at sh.37/- 34/-.The P/E is 41. the Dividend yield is 0.67% REMEMBER; that you can only make your money on the Stock Exchange in two ways :
1.The Earnings at Kengen grow at a fast rate 40% plus a year.Consequently the share price appreciates. You get Capital Gains(price rises lets say to Ksh.60)
2.The Dividend grows at a fast rate lets say 50% annually.
How likely is it that KENGEN's turnover will grow at a rate of 40% every year for the next 3 years.Remember its turnover is sh.11 Billion and Pre-Tax Profit is Sh.2.6Billion. If the Turnover grew at that rate it would be at Sh 30 Billion and profit at sh7.1 Billion in 3 years.That will be larger than EABL in turnover. I would say highly unlikely.
Then you are left with the second option, a high price that enables you to book Capital Gains.This is what is hapening now.But at some point the price has got to stop rising.Even a good company can become over-priced.Yes, you can pay too much for something.
Now don't get me wrong i'm not against KENGEN, i used to hold its shares and will buy them again at a cheaper price. The issue is that most of the co.s listed today can only make you money if the stock prices kept rising at current rates for the next 3-5 years(and dividends at least 20% annually).Look at ARM,Bamburi,CMC,HFCK,National Bank,KCB, EA Cables........... same story.
The NSE now is a traders' market not a value investors market so application trading tactics for success is necessary.
So, If the NSE is overvalued why is it still trading at high prices? There are two factors: INTEREST RATES: As long as rates remain below inflation and below 10% it still makes sense to buy a stock with 3% Dividend yield and 10% capital gain.If rates go back to double digits T-Bills will be popular again.
IGNORANCE: If people have no alternative investment avenues especially Fund managers. They 'll just keep pouring money into the market regardless of the valuations.After all in the short term they make a kill on the market, in the Long Run....heck it'll be someone else's problem.
There are alot of new players in the market who are unaware that the value of your shares can go up or down.They look at the relative price from Ksh.100 to judge the value of a share.The lower the price and the more often its mentioned on news-The higher the value. These are the people driving the prices up
NEXT WEEK i will give you an alternate view on the valuation of the NSE.
They dont speak VISA. I'm just back from Uganda. The country shows you what 20 years of Civil war and uncontrolled liberalisation can have on the National psyche.First of all coz of the war there are no long term established businesses. Most of the tycoons i.e. Mukwano, Wavamuno, Sudhir, Saleh...... really made their money in the past decade(with the exception of the Madhvani family).
Imagine if Kenya was at war in the past 20 years of course there would be no old time businesses & family businesses like Kenchic, Text Book Centre, Pattni Jewellers etc.Now that is downtown Kampala. It looks like Tom Mboya with exhibition stalls.Street after street is filled with buildings that are exhibitions. Imagine World Business centre on Tom Mboya replicated from Koinange street up to river road and you get the picture.
There are no large/significant indigenous enterprises, everyone is a suitcase Dubai/China importer so no one will oppose the mushrooming of such businesses. However from the Sheraton Hotel towards the State House it looks modern a mix of Gigiri/village market and Hurlingham.
The big firms i.e. MTN,Stanbic, Shoprite are all owned by South Africans.I went into a Shoprite supermarket and apart from Farmers Choice and Del monte everything was air- freighted from South Africa. The worst thing about the Shoprite supermarket was that i couldn't use my VISA credit card there. Then after buying on the way out i had to give my receipt to a watchman who tallied it with my shopping before i could leave the store.Can you imagine going to Nakumatt/tuskermatt/Uchumi then a watchie asks for your receipt before allowing you to go? That shows you how backward the country is.
Then i later discovered i couldn't use my card anywhere (unless it was an ATM), apparently they fear card fraud. so to use it in a hotel you have to be a guest. If you cant use VISA in a country, then definitely regardless of what they say, they are backward.
By the way cars, land,and booze(even in a 5 star place are cheap).But electronics are way cheaper in Nairobi(i think coz of competition).Some Electronics traders dont bother going to Dubai, they source their stuff in Nairobi.
P.S. I looked at the latest Actuarial numbers and Uganda is one of the countries which as at 2004 had no indigenous Actuaries.