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Safaricom share key to stock market recovery, say analysts

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SafaricomCEO.jpgThe recovery of the Nairobi Stock Exchange from its current slump heavily depends on how fast Safaricom’s share price picks up, market analysts have said.

But with the mobile phone service provider’s share price falling to a new historical low of Sh4.30 on Tuesday, the turnaround could take longer.

The NSE 20 share index, a key performance indicator, has over the past 12 months dropped by about 1,000 points, washing away about a quarter in returns.

That means an investor who brought shares on all the 20 counters included on the NSE 20 index in October 2007 has by now lost a quarter of his investment.

By close of trading on Tuesday, the index dropped 70.37 points to stand at 4090.37 points, to near its mid-September 2008 level when it hit its 30 months low.

“We still believe it will take the most capitalised stock in the market, Safaricom, to kick-start this recovery; though it looks like it will take longer than we forecasted,” a market research report released by Databank highlighted.

Databank is a Ghanaian-based investment bank with interests in African stock markets especially in Nigeria, Uganda, Ghana, and Kenya.

By market capitalisation, Safaricom accounts for about a fifth of the NSE wealth and hence the pronounced overall market decline on a slight decline in its share price.

Market capitalisation is derived by summing up each company’s listed shares and multiplying by unit price.

And by the very fact that the NSE 20 share index is a value weighted index, it also means that Safaricom’s weight on the NSE 20 share index is equally heavy and hence a slight fall in its share price translates to a huge fall in the index.

Since listing, Safaricom has dominated as one of the most heavily traded counters by moving the largest volume of shares each day.

Interviewed market players say they see a high correlation between the Safaricom share price performance and the overall wellbeing of the exchange.

With Safaricom selling at below its initial public offering price of Sh5, experts say the market will remain in a subdued mood.

Difficult

“The NSE is finding it difficult to consolidate its gains in order to spark the anticipated mild recovery for the last quarter of the year,” Databank says.

This opinion however goes contrary to views expressed by NSE directors.

In a speech delivered at NSE during the Exchange’s second anniversary of the switch from manual trading to electronic trading, the NSE chairman James Wangunyu sought to dispel the notion.

“The fact that the inclusion of the Safaricom stock increased trading volumes at the Exchange is not in doubt, however, that it is somehow responsible for the decline in trading volumes across other counters is inaccurate,” Mr Wangunyu noted.

Daily Nation

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