To what extent do you expect quantitative easing to affect portfolio inflows on the NSE bourse?
PETER MWANGI: The end of quantitative easing will probably have an impact. We have seen foreign participation at very high levels, with foreign investors’ contribution to turnover at about 50%. It makes a big difference for these investors if there are higher yielding risk-free assets in other markets. At the same time, investors that have been focusing on frontier markets, especially in Africa, will continue to execute that mandate. It is a balance between those two forces. Quantitative easing will have an impact on capital markets globally, but the kind of investors in this market will stick to what they know. From a monetary policy point of view, there is an effort to maintain a low interest regime to spur economic growth. As an exchange, we hold the view that foreign inflows will largely be determined by the performance of the listed companies. The fundamentals are thus right for us to expect increased foreign inflows in our market going forward.
Given its current size, how at risk is the NSE to volatility in a single sector?
MWANGI: We do not have as many listed companies as we would like. As a business, we have two sides: a listing business and a trading business. The trading business is volatile, and our over-reliance on one revenue stream is a strategic concern. The NSE is making moves to try and address this. Currently, we have a revenue stream from trading equities and bonds, with the introduction of new products in the course of the coming year. One of these is the real estate investment trust, which will appeal to a lot of investors that currently have property assets that they want to digitise and monetise. There are tax advantages to transferring these assets into the real estate investment trust. In addition, there are also advantages for small investors who want exposure to this sector, which has traditionally performed well. Diversification is a significant opportunity and will help to stabilise the NSE’s performance.
How large of a threat is posed by companies wishing to delist from the NSE?
MWANGI: Markets have to provide free entry and exit. If companies are not free to leave, then they will think twice about entering in the first place. At present, we would like to see more listings rather than fewer, but everyone that comes in does not have to stay. Such dynamism is good for the economy. There are sometimes good reasons for taking a company private, but there are more reasons for taking a proportion of these private companies public. We went through a bullish phase in the early 2000s before the global financial crisis. There was a big pipeline of companies wishing to list. As the market picks up, more listings are likely. We now have the junior market as well, which was launched in 2013. We expect to see three listings on the junior market and another three on the main market. Historically, when the index is at, or above, the 5000 mark, it tends to trigger activity in initial public offerings, which is understandable because anyone coming into the market wants to get good valuations for their stock.
What are the long-term prospects for the introduction of a capital gains tax?
MWANGI: Capital gains tax has been suspended since 1985. While discussions are ongoing, it is not clear what shape a tax would take. The preference is for capital markets transactions to remain exempt, as they were originally this way for a reason. As a small market, the benefits of having a robust capital markets sector outweigh whatever revenues there are from capital gains tax. It is not clear whether there is more money in it, as investors will often change their behaviour. In all likelihood, the government will maintain that incentive. The introduction of capital gains tax in other countries has been challenging and there is no need to put a lid on capital market growth. Under Vision 2030 there are clear targets for capital markets. Once we hit critical mass, such a tax will make sense, but there is a lot to lose by introducing this step prematurely.
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