Chances are very high that quantitative easing from the US will end next week; as a result, US data has assumed more significance in influencing market volatility recently in the financial markets than it would ordinarily have as market looks for clues on the status of the economy. Good data means chances of another round of easing would be very slim and interest rates rise sooner. Bank of International Settlement alongside other institutions have warned on numerous occasions on the dangers of prolonging low interest rate periods and the potential impact they might have on the financial markets in future. Participants continue to express concerns over the Eurozone economy and Chinese economy as well. I think we should expect high volatility especially in stocks.
Oil fell back to retest major support zone at $80 area after inventory data on Wednesday and as I type is trading at $80.20. A number of investment banks have come out saying that the move lower may be overstretched and that we might see price recovery heading into summer. Goldman Sachs said although they are bearish on oil prices over the long-term, in the short-term they think that the market reacted to a supply glut that is not there yet. Varied reports have come out with regards to the impact of low oil prices on supply with some reports saying that they have started having a material impact on some shale oil companies. In my opinion at the moment, it is difficult to come up with something conclusive on the supply and demand in market. There is risk that a close below $80 might trigger some speculative longs to start unwinding positions and in the process push oil prices much lower. I have been seeing decent sized bids hit the market on moves lower but not sure whether it is buildup of long positions but might indicate that we might see more of range trading possibly in the $80-85 zone or rebound higher. Prevailing underlying trend is down but there is high risk of a short squeeze materializing.
Gold & CHF
Currently, bias in gold is for a move lower. There will be a Swiss referendum on 30th November this year. A yes vote will stop SNB from selling gold and will require that SNB stores all the gold in Switzerland. Gold will also represent at least 20% of SNB’s assets. It is not yet clear on how gold will respond to a yes vote but most participants think that it is likely to trade higher and might mean an end to the Euro vs Swiss Franc 1.2000 floor. SNB has been selling a lot of gold over the past few years that I had accumulated. Gold has traded higher since it closed above $1240. Market Chatter suggests there is still sizable selling interest ahead of $1280 area. Technical resistance on the upside is at $1265, End of QE will likely trigger knee jerk drop in prices.
I think the dollar is likely to continue rallying higher partly because of the movement of speculative capital and partly because of other Central Bank moves as they try to cushion their economies from after effects of rate hike and slow growth in global economy. There were reports last week that a number of big European corporates have started hedging actively against drop in the Euro. It is becoming increasingly likely ECB’s eventual move will be to conduct quantitative easing although it faces a lot of hurdles. European banks stress test results will be coming out on Sunday and pose a material risk that might see the currency gap significantly lower or higher on Monday market open. At the moment I think strategy remains selling into technical levels as all available tools will lead to an eventual depreciation in the Euro but there is also risk of a short-squeeze if data tomorrow comes out weak. Yen strengthened as stocks around the world took a hit but has managed to stage some recovery. A number of funds have most of their currency exposure in yen short sell position. I think strategy in usdjpy remains buying on dips as for the country to meet current inflation targets, yen will have to weaken substantially in the process. Authorities have however expressed concerns over accelerated depreciation in the yen which might negatively impact on businesses.
Kenya had a bond auction targeting raising Sh15 billion to fund construction of roads and other infrastructure projects and at the time of writing we are yet to know the results. Aggressive investment in infrastructure has been proven to help a country increase its ability to service debts and increase growth exponentially as it opens up flow of commerce but there is always the danger of investments being made in unproductive infrastructure due to political influence, like roads leading to nowhere and ghost cities like what happened to China in which case it may lead to bigger debt problems. Due to the aggressive infrastructure investments and falling interest rates, a huge number of investors expect real estate sector to see continued growth. Subsequently, the financial market has developed a habit of rewarding companies that announce real estate projects with higher multiples in stock market prices. Substantial risk remains on the impact of Ebola on the economy. Serious breakout would see the government divert resources that would have otherwise been used in development towards controlling the disease. There is also the aspect of fear would likely influence consumer and investor habits negatively. The authorities have been challenged over level of preparedness on dealing with the virus. I do not have sufficient information at the moment to gauge whether serious measures are being taken, but public education on symptoms and how to prevent spread, which might help reduce fear, has not yet been conducted effectively.
The company is preparing to fund raise for its multi-billion coal power plant in Lamu and has already advertised for the CFO position who will be tasked with fundraising and execution of the projects. The company’s share trader lower into sh53 area before running into bids.
The company managed to raise Sh600 million loan from KCB to fund expansion and refurbishment of stores. There is a danger of the rights issue getting under-subscribed if the share falls below sh9.00 given concerns expressed over its fundamentals.
The company reported a 55% jump in profits in its full year pre-tax profits to 102billion shillings driven by increased sales of electricity, higher tariffs and reduced losses due to improvement in power grid. Electricity sales grew by 10%. Plans are already in place to cut cost of power connection from sh105,000 to sh30,000. In my view I think the company is still undervalued in terms of book value and PE at current market prices. But rise in share value is likely to be met with a lot of profit taking after having traded lower for a long period of time and subsequently might see its share rise at a slower pace. From a technical perspective, weekly close in share price above sh16.50 is bullish and might trigger further upside momentum, support further lower at sh13/14 level.
The company reported a 5.9% decline in pretax profit 597.3 million shillings ($6.7 million) for its financial year to July 31.
The company’s shares recovered after dip into sh3-4 area to trade at around sh7.50. The Company has made investments in real estate.
The company share has had a parabolic rise from sh3 to around sh175. It is not yet clear what has triggered the sharp rise in the share. Their financials at the moment do no justify current valuations in my view, unless the spices project they recently embarked on is larger than most participants think it is or there is other information not yet in the public domain. Brokers I speak to didn’t have anything concrete as well. We cannot rule out aspect of price manipulation in my opinion given that the rise has been triggered by low volume in most instances.
The company closed its milling plant for eight weeks for maintenance and amid a shortage of cane for crushing. They said that the work will cost 1.5 billion shillings, which has been raised “internally”. The company is still struggling to reverse losses.
The share has been declining since it emerged that four former executives of the company’s asset management unit, who resigned as a group last month, have taken away multi-billion shilling real estate projects from their previous employer. Significant drop in share could as well partly be attributed stretched valuations which makes investors nervous. From a long-term perspective, it is a well-diversified insurance company and is in the process of buying a mortgage company that is likely to see increased growth over the medium term due to increased mortgage uptake. It is also expanding and has made investments in the real estate sector.
Crown Paint alongside Acorn group has started building a Sh1.2 billion office block in Lavington, Nairobi and will be targeting multinational corporations and local companies seeking high quality office space. They are also likely to embark on another project sometime next year.