Nairobi: Week ended July 16, 2010

Global and local market conditions

US Stocks dropped steeply on Friday, wiping out all the gains accrued earlier in the week. The Federal Reserve lowered its estimate for economic growth. That was followed by a pair of disappointing regional manufacturing surveys (Business Week). Stocks of major companies such as Bank of America and Google fell heavily after reporting lower than expected revenues. Most global indexes: the FTSE, Nikkei, Bovespa etc fell across the board in tandem with the US fallout. The Nairobi Stock Exchange is still on an upward trend with 34 out of 55 stocks either gaining or flat for the week. With foreign investors retreating due to events back home, local investors seem to have taken up the slack and held the market up. While local factors such as lower interest rates, good rainfall and strong corporate results keep the Kenyan market humming, investors should be on the lookout for bearish global trends which will eventually affect the local economic situation.

Select commodities price movements:

Tea 0%, Coffee(Arabica) 1.7%, White Sugar -14.1%

(Sources: African Tea Brokers, Financial Times)

Central Bank of Kenya Mean Exchange Rates: July 16, 2010:

USD 81.43, GBP 125.50, EUR 105.11

Top NSE Movers review

Gainers:

Barclays Bank 10.3%, East African Cables 7.4%

Losers:

Williamson Tea -8.3%, Kapchorua Tea -6%

Barclays Bank
Barclays Bank has rallied in the week due to the expectation of good second quarter results. The first quarter results were lower than expected due to a one-off staff expense (The Standard, June 1 2010). The staff costs had increased by over Kshs 500 Million in the first quarter compared to the previous year. Exclusion of this cost alone should make a significant positive impact to the bottom line in the second quarter. As an investment idea Barclays is expensive compared to its peers. Barclays bank has had an almost nil growth in total assets compared to the previous year. Equity Bank, CO-OP, KCB and even StanChart have been growing their loan books much faster. Barclays had been the top bank in Kenya by assets for decades but has been overtaken by KCB in recent years. If the current asset growth trends continue Equity Bank and CO-OP Bank will also pass Barclays in asset size within two years. Barclays has been highly profitable because of cost control but the top line is under threat. A small float and historically good performance has kept the value of this share high.

Williamson Tea
The prices of tea stocks have been hit by fears of oversupply. According to the Business Daily (July 19, 2010), there is already a glut which is driving prices down at the Mombasa Auction. Williamson Tea and Kapchorua Tea have small floats, which can magnify price spikes and drops: while the news is negative the recent price drops are overdone. Long term investors should accumulate this share on further drops in the share price. The earnings per share in the last year were Kshs 92, which translates into a PE ratio of slighty over 2 at the current price. Even with lower tea prices in the near future, the share looks cheap. In the long term, increasing demand from consumers in Emerging Markets will push prices of tea and similar commodities higher.



Quote of the week:
"Think and grow rich." Napoleon Hill