NSE: what looks good for 2012?

The NSE now actively trades both bonds and stocks and both are worth considering at any given time. In 2012, we ofcourse have the natural uptick in political risk which will probably go a notch higher due to the ICC (my head and heart tells me 2-4 will see charges levied). To the mix, add the Eurozone and oil prices. I expect that the Euro will reach some kind of cliffhanger once one o the smaller states has to withdraw. Although a lot of the risk has already prompted asset shifts, this withdrawal will unhinge markets further. Oil prices for me trend upwards this year (i.e. above $100) chiefly because Iran is the problem that is not being resolved fast enough.

In Kenya, inflation will trend southwards, though not as fast as economist opine. The rains that came in November/December have impacted the food regions differently and though food will be cheaper, it won't as cheap as opined. Finally, interest rates. Banks reacted naturally to avoid a massive npl problem and lengthened the repayment periods, but a Kenyan who had a loan in August now has more liabilities than he/she envisaged. For the tightening not to become another monetary policy screw up, its imperative that the governor and his MPC team reverse the interest rate increases by March at the latest.

Assuming the above holds, I expect the NSE not to trouble 3,500 with exception of the period between now and March reporting season. I will be looking at the following stocks:

• Car & General-has an expansive product range and now has the regional coverage to cater for pretty the whole of EAC and the horn. Clearly, it does feel the pain of any fx volatility, but its products have a strong future as the regional economies all grow and consumption grows.
• Centum, there are some who are sceptical about what James Mworia is doing, but I am convinced that by 2014, this stock will look very cheap compared to a Ksh12.50 entry price.
• Crown Berger-as I have said elsewhere, real estate growth will resume next year with a vengeance and this paint seller is well placed in this market.
• Equity remains a stand out in the banking sector. The agency banking model is still not being felt, but if you talk to saccos you get the idea that many realise what this model is doing which is to pitch the battle for deposits at their level. As a general comment, I think that if the credit spread control is brought, it will impact those banks that are heavily dependant on interest income. Equity still derives a bigger chunk from F&C compared to rivals.
• Eagaads-only NSE that gives exposure to coffee. The crop is not being stolen because its become edible, but because the price per kg is now comfortably around Ksh130, For farmers. Eagadds is able to get a premium over this. Secondly, Eagadds has very good real estate in the sort after Kiambu county.

NSE weekly catch up: Jan'09 report card gives it E

E is for empty on which NSE has been running on this past month. Apart from the global deliveraging which has had an indirect impact; inflation; school fees; directionless governance (think Titanic without a captain); winds buffeting the economy and broker scandals (SIB is now in the frame), have left investors in a contemplative passive rather than active mood.

Highest Gainers- Jan'09
EA Portland Ksh85 6%; Jubilee Ksh130 5%; BAT Ksh136 4%; StanChart Ksh161 1%
Biggest losers
Unga Ksh9 (51%) Mumias Ksh5 (35%) Centum Ksh14.55 (29%) Co-op Ksh8.55 (24%)

February and March will defintely be better months though with the profitable bankers announcing their results.
As expected, Equity has confirmed that it has acquired an investment bank licence from Juanco Investment. Funnily enough, Juanco used to be one of its shareholders and has never as far as I know participated at the NSE as an IB (its not a must I know, but its difficult to see what else you be doing in Kenya as of now)-in fact I wonder what criteria CMA used to guarantee it an IB licence. In any case, most brokers may as well close shop given Equity's distribution network and superior delivery mechanism. Equity on its part will need to sigficanctly gear up its risk management. Brokerage fraud is now a recurring theme as shown by the arrest warrant for SIB's officials.

Results announcement:
As with CMC, Car and General had a very good year (to Sept'08) with PAT up 23% supported by turnover which was up 62%. Gross margin at 24% was lower than prior year perhaps reflecting the weaker shilling's adverse impact on its import costs. Mumias on the other hand released horrendous interim numbers to December with PAT down to Ksh162m from Ksh564 in prior year. Kidero is blaming heavy rains; higher import costs; higher cost of cane among other reasons. Note cash flow went negative despite a Ksh2.4bn loan from abroad (I don't think anybody has learned from EA Portland). Investor hopes are now pegged on the power generation revenue. KQ announced improved numbers for Q3. Read CT's commentary.

Last week's summary missed out on Waruinge's resignation as chair of CMA (must be the little effect he had). It turns out he was driven to distraction by brokers who resent higher standards he was apparently trying to set. My view is that we'll have to have fewer but stronger independent brokers in the next 2 years if the bourse is to grow as it should and we can either get their via collapse of more brokers or an orderly merger or consolidation as envisaged by the higher capital requirements.

Other Markets:
I like Soros piece in the FT.