Buying and selling patterns of non locals provides an insight into confidence levels of the economy.
Investment flows can provide powerful insights into economic and market trends. Both long-term foreign direct investment and shorter-term portfolio flows can be viewed as the business and investing communities’ judgement on the investment environment. For stock market investors, short-term capital flows are increasingly becoming a must-follow signal.
Focus on foreign flows into fixed income and equity can help us understand sentiment by the foreign investor community.
Strong (weak) foreign buying is often interpreted as a vote of confidence (waning confidence). But are these flows a reliable market indicator? Is tracking these flows profitable? These are great questions and so, let’s find out.
In the past three months, as calm has slowly returned to the political scene, foreign investors have also begun trooping back.
Corporate governance reforms, undervalued stocks and a recovery in domestic demand are some of the key catalysts luring them back after selling off a whopping Sh11 billion of equities last quarter.
But these investors had never really gone away. In fact, despite occasional outflows, their net cumulative foreign investor flows topped Sh46 billion since 2011 through to last September – the chart below displays a history of these flows.
What’s more, their market activity still account for a substantial percentage of the daily market turnover – north of 60 per cent in the last three months. As a group, they still control about a fifth of the total market wealth – approximately Sh483 billion.
That said, running a seven-year monthly correlation between Kenyan equities (represented by the Nairobi Securities Exchange (NSE) 20 share Index) and foreign fund flows reveals an interesting outcome. Correlation stands at 0.0234 – a very negligible relationship.
In other words, foreign investor activities have zero impact on market direction. Tracking these flows is a waste of time.
So, as foreigners return to capitalise on Kenya’s favourable dynamics, there’s more benefit in following other technical indicators such as Accumulation/Distribution, On Balance volume, Momentum et cetera. With that settled, here’s an important question; is it prudent for one to assume that the negligible relationship is here to stay? Hard to tell. Correlations do get stronger or even negative depending on a variety of factors.
But for speculative purposes, the plans to introduce global depositary receipts (GDRs) may help the NSE draw in large foreign investors “strong” enough to positively shift the status quo.
Likewise, a win for an emerging-market status from MSCI (its indexes are used as benchmarks for tracking investor assets) may achieve the same end.
At present, the NSE is still stuck in a lower tier frontier grade. Caution again, this is just speculation, no one knows the future. All this remains to be seen. As things stand today, foreign investor flows are a lousy indicator. This approach simply does not work.
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Note: The results are not exact but very close to the actual.
