Kenya constitution referendum puts confidence into Nairobi stock market

Kenya's referendum on the adoption of a new constitution appeared likely to pass with a two-thirds majority and without a single incident of violence. The statistical improbability of that outcome (especially when measured against the moving average) is noteworthy and plain extraordinary. The likes of the great economic philosopher Nassim Nicholas Taleb would be terming it a “Black Swan.”

It is easy to forget that just more than two years ago, Kenya’s political risk was flashing red, after a botched election led to violence that killed 1,300 people and displaced hundreds of thousands more. Kofi Annan and the international community had to strong-arm the main political players into a coalition government. Our equity market went into a tailspin and an even worse economic phenomenon called a “fat tail,” when prices get disconnected from any semblance to fair value. But 2010 has seen a powerful rebound. The Nairobi All Share index is up more than 40 percent so far this year and is the best performing stock market in Africa, bar none.

Now, the bourse has rallied about 280 points in the past five sessions as investors anticipated a “yes” vote and a squaring off of political risk.

Our previous constitution, which gave sweeping powers to the president, was crafted at Lancaster House and for a different century. The new constitution winnows down the presidential powers somewhat, gives citizens more say, and gives investors more confidence in a stable political environment.

And the market likes what it sees. Besides the 280-point jump on the Nairobi Stock Exchange, the value of Kenya’s currency, the shilling, has also risen to 79.7 to the dollar, the highest level in three months.

I expect further gains in the Nairobi Stock Exchange in the order of 25 percent into year end.

Kenya’s political stability, or lack of it, is felt throughout the region, and Kenya remains the gateway to the East African region, a market that stretches from Mombasa all the way to Kinshasa on a common language basis. In some regards, we are the jugular vein for the region. To get products to Rwanda, Burundi, Uganda, and eastern Democratic Republic of Congo, you have to enter and exit through Kenya.

International markets are generally agnostic about domestic politics, but when it comes to creating a stable, reliable form of government, markets definitely had much to love in the new constitution. The squaring off of political risk in Kenya will have an immediate effect because there was plenty of international and local money waiting on the sidelines. US Vice President Joe Biden said as much and was actually pretty forthright about it.

The passage of this new constitution cannot be underestimated at home. It is cathartic and the feel-good spillover will continue to prove a rising tide that will lift most boats.

--- Follow Aly-Khan Satchu at Rich Wrap-Ups.