The Raila Effect
by andrew@JijniMarkets - Wed 05 Dec 2007
If the polls are to be believed and barring a major shock, Hon. Raila Odinga will be the next President of Kenya come January 2008. Some have predicted this spells doom for the NSE. Should NSE investors be worried?
Granted, Hon. Raila has not endeared himself to NSE investors by some of the comments he has made about the NSE and its recent performance. Political sound-bites aside, the question is what effect, if any, a Raila presidency - or any presidency for that matter - would have on the performance of the Kenyan stock market. To answer this question, we have to ask: What has been behind the recent returns posted by the NSE and what generally drives stock markets performance? The simple answer: Investor sentiment. Stocks' prices are determined by the simple laws of supply and demand. The more investors are willing and able to buy stocks, the more stock prices are likely to rise. The euphoria of change (when President Kibaki took over) created confidence in the economic outlook of the country which lead to a willingness to invest. The economic growth of the last few years has also given investors (both individual and institutional) the financial resources and ability to participate in the stock market. This has in turn translated into increased investor activity and improved market performance.
After the elections, the willingness of Kenyans to invest in the stock market may initially be diminished slightly due to the political uncertainty and perception that Hon. Raila is not fully behind the NSE but this is likely to be transitory and indeed Hon. Raila has made efforts to rectify this perception by visiting the NSE and emphasizing his backing of the exchange. Stock market dips during elections or when there is a change in political leadership are common but temporary blips in market performance. It will be no surprise if the first few months of 2008 see the NSE index dip as investors gauge the political climate - regardless of who is president.
What is more significant is investors' financial ability to invest in the exchange; this ability is dependent on the economy in general. Undoubtedly the presidency and government have an impact on the local economy but this impact is not as absolute as many may assume. Given that tourism and agriculture are the country's biggest economic drivers, Kenya is a country dependent on the world economy and the performance of the major western economies. It's no coincidence that the Kenyan economy has grown significantly at a time when the world economy (mainly driven by China and India) has been doing well. That is not to say that the current government has not contributed to Kenya's growth; for the global economic growth to be shared by Kenyans there needs to be a conducive local environment and to be fair to the Kibaki government it has made efforts to enable this.
That Hon. Raila as president will shut down the NSE is unlikely and expectations that he will directly affect the returns of NSE investors - whether positively or negatively - are misguided. What investors should instead be focusing on is the economic outlook of the country as well as that of its global partners. The credit crisis affecting the UK and USA, as well as the prevailing high oil prices are likely to lead to the economic slowdown of countries that the Kenyan economy is dependent on for trade, tourism and foreign investment. This is likely to impact global stock markets and the NSE is no exception. On the local economic front, I suspect we are unlikely to see much difference from what we have become accustomed to in local politics. Hon. Raila's government, like that of President Kibaki, will be made up of many of the same individuals that have been in government before; With the same cast and political stage, I doubt we will see much difference in the theatre of government. It is said that markets hate surprises; As to how the local economy will be managed, I predict there will be none.
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