The Nairobi Stock Exchange (NSE) sectors reconfigured

A sector is a group of securities or a distinct subset of a market, society, industry, or economy whose components share certain common characteristics e.g. providing the same types of products or services. Thus a sector consists of companies in closely related businesses1 .Stocks within a sector tend to move together because companies within the same industry group are

affected in similar ways by market and economic conditions.

 

 

For example, the utility sector provides electric power, natural gas, water, or a combination of these services. A change in the market and economic conditions is most likely to affect the companies in this sector in similar ways. Sector analysis therefore allows a better analysis and comparison of stock performance within a specific sector (some firms are able to withstand or take advantage of changing market and economic conditions better than others) as well as an analysis and comparison of different sector performances (different sectors will perform differently as the market and economic conditions change).

 

The current configuration of the NSE sectors groups unrelated firms within the same sector heading. For example Kenya Airways Ltd., Safaricom Ltd. and Nation Media Ltd. have been grouped together under the Commercial and Services sector yet these companies provide dissimilar products or services and represent unrelated businesses. Their stocks have very little correlation. For a better comparison of

sector performance, these stocks would need to be grouped under different sector categories as current.

 

 

 

 

 

 

 

1  These are firms that are on the same side of the market, produce goods or services which are close substitutes and compete for the same customers.

 

Another example is that of Bamburi Cement Ltd., East African Breweries Ltd., and Kenya Power & Lighting Co. Ltd. which have all been grouped under the sector heading Industrial & Allied. Again these are firms that are unrelated with their stocks have very little correlation.

 

As a result the present sector classification of stocks by the NSE does not allow a true analysis of sector performance due to this inclusion of uncorrelated stocks within the same sector. Strong performance of

a set of correlated stocks (that should belong to the same sector) may be masked by the poor performance of a different set of correlated stocks because all these have been grouped as members of the same sector. This gives a misleading picture of sector performance under the current configuration.

 

To get a clearer assessment of sector and stock performance on the NSE the constituents of the NSE have been reclassified into more comprehensive and logical sector categories and the performance of identified sectors and sub-sectors tracked on a monthly basis from January 2008 to date.

 

This reconfiguration therefore allows a comparison of the performance of a given stock with that of its peers within the sector or industry as well as a comparison of its performance against the sector index and the market benchmark indices in this case the NSE-20 index and the NSE All- share index. The investor is able to identify stock and/or sector winners and losers within any given investment period and therefore adjust his portfolio allocation accordingly.

 

The tracking chooses monthly periods as the investment horizon and shows which sectors and/or sub-sectors would have returned the most as well as their performances vis-à-vis the benchmark indices on the NSE- the NSE All-share index and the NSE-20 index. One is also able to track the annual return for individual sectors and sub-sectors again revealing out-performers and under-performers for the year.

 

The reclassification of the sectors is shown below.

 

 

 

Using 1 January 2008 as the base date, we start off with an arbitrary number 100 (base value) chosen as the starting point (in very much the same way as a benchmark index is derived) and track the monthly performances of the various sectors and sub-sectors from this point onwards. These performances are also compared with those of the NSE-20 index and the NSE All share index which are also assumed to have the same base date- 1 January 2008. The comparison is shown on charts for the years 2008, 2009 and 2010.

 

Financials continue to hold the largest weighting on both the NSE All-share index and NSE-20 index which stood at 64 per cent at the base date- 1 January 2008.

 

 

 

 

 

 

 

 

 

NSE sector reclassification

Sector                  Sub-sector              Stock

Agriculture                                                       Rea Vipingo Ltd.

 

Sasini Tea & Coffee Ltd. Kakuzi Ltd.

Williamson Tea Kenya Ltd.

 

Kapchorua Tea Co. Ltd. Kenya Orchards Ltd Limuru Tea Co. Ltd

Eaagads Ltd.

 

 

 

Industrials

 

 

Building & Construction

 

 

 

 

 

 

 

 

Beverages

Athi River Mining Ltd

 

Bamburi Cement Ltd.

 

E.A Portland Cement Co. Ltd.

 

 

 

 

Food Processors

E.A. Breweries Ltd.

 

 

 

 

 

 

Other Industrials

Mumias Sugar Company Ltd. Unga Group Ltd.

 

 

 

British American Tobacco Kenya Ltd. E.A. Cables Ltd.

Sameer Africa Ltd. Crown Berger (K) Ltd. Eveready East Africa Ltd. A. Baumann & Co.Ltd.

About the Author

Patrick Kiragu Mwangi

Management Consultant

B.A Economics- Egerton University, Kenya

BSc(Hons) Applied Accounting- Oxford Brookes University, UK

M.A Management (Financial Analysis)- University of Northampton, UK

ACCA II

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