Kenyans prop up bourse as foreign interest wanes

Improved performance at the Nairobi Stock Exchange has seen local investors streaming back to the bourse, edging out foreign investors who have been dominating trade over the last one year.

Activities by foreign investors had dropped to 36 per cent in May from 85 per cent in October last year, said NSE chief executive Peter Mwangi.

“Foreign investor turnover as a percentage of total market turnover has decreased as domestic investor participation increases,” he added.

Foreign investors’ strategy seems to have worked well when they bought as the market was heading south and now selling on the upturn.

They had 5,791 purchase deals compared to 870 for sales in 2009, but the trend is reversing.

“Since February 2009, we recorded more foreign purchases than sales on increasing volumes up to the end of the year,” said Mr Mwangi, adding that foreign capital has played an essential role in the development of equity market in the short to medium term.

However, foreigners’ turnover increased from Sh875 million in December 2009 to Sh3.9 billion out of the total Sh10.3 billion at the end of last month, which is in tandem with increasing equities value of many listed companies.

“In absolute terms, foreign investor’s participation in our market has only gone up slightly,” said Wycliffe Masinde, an investment analyst at Kestrel

Rising cost of living and waning confidence of local investors in the bourse from early 2008 triggered major re-alignments that saw many domestic investors exit, putting foreigners in control.

As local investors slowly pulled back, foreign investors stepped up participation, cherry-picking stocks that were perceived to be grossly undervalued, pumping an estimated Sh15.4 billion into the economy in 2009.

Foreign investors hold a significant stake, of up to 70 per cent, in about 12 listed firms, half of them being multinational subsidiaries like Barclays Bank, TPS Serena and Standard Chartered Bank. In most frontier markets, the trend by foreign investors is that of maximising on growth opportunities by seeking to tap into the competitive returns in these markets, which can range from 10 per cent up to 50 per cent rate of return owing to the fact that the markets are still nascent.

This creates a problem of market stability in the long-run.

It, however, does not compromise the long-term stability of the domestic financial market as there is a much larger proportion of domestic shareholding in most listed firms.

Kenya’s position as Eastern Africa’s financial hub has made the NSE attractive to many international investors who listed subsidiaries of major multinational companies throughout the ’60s and ’70s.

Trading data shows their participation has never crossed the 50 per cent threshold since 2004, but did last year.

High returns

In the last five years the NSE, one of the largest bourses in Africa, has posted high returns compared to developed markets, attracting the interest of international investors.

In 2008, the Safaricom IPO that had a special reserve allocation for international investors heralded the participation of foreign investors at the NSE who brought in over Sh39 billion or 40 per cent of total market turnover then.

This figure was more than double what was witnessed in 2007 where foreign investors’ turnover stood at Sh16.7 billion accounting for 18.8 per cent of market total, and a climb from the 2006 level of 10 per cent.

Foreign investors are capped at 75 per cent ownership in any listed firm.

Analysts say data on foreign investors in Kenya is debatable as some of the foreign entities are owned by local investors.

“The definition of who is considered as a foreign investor is still not clear in our market,” said Alex Muiruri, an independent market analyst.

The NSE 20 share index has risen 31.17 per cent in the first five months of 2010 to June 11, while capitalisation increased from Sh831 billion at close of 2009 to Sh1.1 trillion as at June 24