Thursday, November 06, 2008

What drives the NSE?

The NSE like most developing markets has drivers that are "localised" as well as the normal drivers that ones sees in every other market. You can do all your due diligence in terms of evaluating the various shares on offer, but if you don't understand these drivers, you'll be left hanging dry like many have been by the current bear.

The normal drivers are:

  1. The presence of institutional investors: Specifically NSSF, company pension funds and principal/anchor shareholders who tend to be in the market for the longterm. With the exception of a very few, most principal shareholders are foreign (a key reason for encouraging strong investment clubs). They stablise the market and without their presence the NSE would not attract...
  2. Fund managers: Who in the main are target performers given this is the onlyway they can mobilise the funds and fees that go with the business.
  3. Fundamentals: The economy, other LEPEST issues pertaining to the country, the counter's industry, the performance of the counter, the future outlook for the counter, peer review of the counter against industry rivals, counter's swot all fall under this category. The two types of investors above will usually invest on fundamentals. Others will use technical charting.
  4. Foreign investors: Without proper data from the NSE, its impossible to confirm what proportion these form, but my intuition confirmed by articles such as this as well as the timing of the recent slump is that they play a key directional role especially in the blue chips.

Other drivers that are more common to the NSE and are as important if not more are:

  • Brokers: I've said a lot about them, so all that can be added is to understand how the NSE still works, you need to go back to its operations pre-2002 i.e. the New Stanley price setting era. A broker will decide when to execute your buy/sell order (forget about all that jazz about the CDSC queu system-the order has to get into the system first); a broker will decide whether to short-sell or front-run your order. A broker will decide what the allocation in a right issue will be and can also decide when you get your cheque or whether to play with your cash.
  • Retail investors: Apart from the other NSE, no other market in Afrika has a higher proportion of investors who are retail. Retail investors mean footfall and therefore broker commission. Furthermore, many operate on rumours and peer reviews or on recommendations from brokers. Others buy in for "divindend".

So to respond to Maishinski, one can do all the analysis, fundamentals and charting, but without being aware of these other drivers, you may need to always go long-term. As an example, I've bought Equity at various prices starting at ksh134 in 2006 and even at ksh300. Even though my average remains low (around ksh126), I was on out of the money last week for reasons unassociated with fundamentals...

So your NSE share capital gains formula maybe summarised as follows:

Cg = F + FI + II + FM + R - B


Ssembonge said...

Maina, Though you mentioned it in passing, I believe sentiment instead of cash and fundamentals is what drives the market. Both upwards and downwards.

MainaT said...

But whose sentiment? This is the key thing that one needs to understand especially with respect to the NSE.