Derivatives trade on NSE to boost foreign inflows

Commencement of trading in the derivatives and real estate stocks on the Nairobi Securities Exchange (NSE) is likely to keep foreign inflows coming into Kenya this year, an outlook by brokerage house Kestrel Capital says.

In the firm’s latest report on the economy, analyst Linet Muriungi says the shift by investors to economies that are not majorly supported by commodities should also encourage inflows to Kenya.

Investors are diversifying their investment destinations away from countries that are dependent on commodities whose prices have been falling.

Kenya is seen to benefit from the falling oil prices as it has a lower import bill.

This has relieved pressure on the current account at a time when the country is also importing more capital goods for projects and getting less from tourism and agriculture commodities.

“Investors may opt for oil importing SSA countries, while major oil exporting countries continue to experience challenges in the near term. Overall, we believe Kenya to be one of the beneficiaries of possible portfolio shifts of funds within sub-Saharan Africa frontier markets in 2015/16,” said Ms Muriungi in the report.

The expected inflows are also likely to have a bearing on the performance of the shilling, which is widely expected to depreciate this year in the face of a globally strong dollar.

Inflows would help slow down the depreciation by providing a supply of hard currency into the market, while also allowing the Central Bank of Kenya to keep hold of dollar reserves which would otherwise be sold in support of the shilling.

On the derivatives, the NSE expects trading in the instruments to start by end of June, while progress on the real estate investment trusts (REITs) listings has occurred with the appointment of a trustee.

READ: Derivatives trading at Nairobi bourse set to start by June

The NSE will roll out the derivatives market based on cash-based settlements which are easier to run, especially for a new market, before moving on to asset-based settlement in the future.

“We believe these alternative investment instruments will deepen the equities market and attract higher portfolio flows into the market in the medium term… the current forex derivatives OTC market is also expected to be pushed to the market, providing more investment options,” added Ms Muriungi.

Analysts at research firm Stratlink Africa hold the view that the relatively high growth of Kenya’s domestic consumption (up by 33.6 per cent between 2003 and 2013 to Sh3.2 trillion) makes the country attractive to investors.

“This indicates that even among Africa’s giant econo­mies and regional hubs, Kenya fares well and should be of key interest to investors going forward,” said Stratlink in their March 2015 markets report.

Kestrel cautions, however, that structural reforms targeting institutions, integration, and infrastructure remain important for the economy going forward.

However, the same report shows that other SSA countries might experience difficulties attracting foreign flows. Ms Muriungi said the tightening of monetary policies in emerging markets may result in some SSA countries facing less favourable financing conditions and a slowdown of private capital flow.