While stock prices have recovered from their October 2019 lows, the volume of shares traded is close to 10 year lows.
Where has the volume gone? While turnover has skyrocketed during all previous upturn markets on the Nairobi Stock Exchange (NSE), this time it has not.
Annual trading volumes decreased by nearly a quarter to 4.8 billion shares last year from 6.3 billion in 2018. As a result, equity turnover at the bourse fell by 12.4 percent to Sh153 billion from Sh175 billion posted the previous year.In contrast, the NSE 20 Share Index rose by 9.15 percent ending the year at 2,654.39 points.
Why is turnover in equities becoming moderate? And is a low level of stock-trading volume warning of a new major down leg for the NSE? Here are a few thoughts.
One; foreign investor participation decreased dramatically last year. Average foreign investor participation in quarter four 2019 accounted for 62.96 percent compared to 81.55 percent recorded in the first quarter of the year.
As a result, the stock market turnover ratio dropped from 8.3 percent (2018) to 6.1 percent (2019) – a level below the 10 year average of 8.1 percent and 50 percent lower than the highest mark ever reached at 12 percent (2006). Consequently, the market anticipates poor performance for the market intermediaries – especially on brokerage fees.
If this group continues to scale down their trading operations, the lower the ratio comes in even without prices tracing the same path. That said, it’s interesting to note that no African stock market trades over 100 percent. Egypt and South Africa, the countries with the most active bourses, all trade at an average of 35 percent annual turnover ratio, the rest of the continent’s exchanges are below 10 percent.
Two; market concentration is another big contributor - one stock (Safaricom) accounts for over a third of trading activity and just 10 stocks account for over 80 percent of turnover.
Though we may not have data for average number of shares per trade on these stocks, it’s possible that this figure has been dropping.
Some of these names are hitting their peaks (read over priced) and historically, that’s been a near-term negative for the stock market. Interestingly, though their small cap counterparts are witnessing a well-deserved surge, their small “free-floats” make them inconsequential.
Three; the number of listed companies is falling. The main motive to go public is to raise capital.
However, when alternative sources of capital (read private equity) are part of the game, companies are reluctant to go public as long as possible and attempt to cover capital needs through these channels.
The number of listed companies dropped from 67 in 2017, down to 65 presently.
Will the dwindling volume spell trouble for investors during the next sell-off? Let’s wait and see. Though fully relying on price-volume correlation is a tricky business, volume has for some time been looked at as a leading indicator. Contracting volume indicates a lack of urgency by investors to buy shares.
This lack of enthusiasm especially if corroborated by other metrics, could be an early indication that the recent run in prices has got no legs. Therefore, as NSE trading volume trends lower, perhaps, there is genuine reason to be concerned.