Preference for the five biggest stocks traded at the Nairobi Securities Exchange #ticker:NSE (NSE) has climbed to a 12-year-high, new data has revealed, an indication of growing appetite by investors placing their hopes on only a limited number of counters.
On the flip side, the trend also shows that investors are concentrating their risk. Statistics by the NSE show that as at Friday, five stocks — Safaricom #ticker:SCOM, Equity Bank #ticker:EQTY, East African Breweries Limited #ticker:EABL, KCB #ticker:KCB and Co-operative Bank #ticker:COOP— accounted for Sh1.85 trillion or 75.4 percent of all investor wealth at the bourse. This marks a sharp shift from 2008 when the five stocks controlled 52.5 percent of investor wealth on the NSE — pointing to heightened concentration of risk in the market as investors opt to put most of their eggs in only a few baskets as opposed to spreading risk across the 65 counters.
Concentration risk refers to the likelihood of investors losing money as a result of having a large portion of their holdings in a particular investment, asset class or a given stock relative to their overall portfolio. The performance of the five stocks has defied attempts by the Capital Market (CMA) to lower risks on investors by offering wider choices through new products and listings.
Genghis Capital senior research analyst Churchill Ogutu said the number of counters deemed viable for investment on the NSE has gradually shrunk over the last decade.
"There has been price erosion in many stocks that were once darlings of investors. Many stocks have seen their blue-chip status eroded, leaving investors with narrow options," he told Business Daily.
The top five stocks were the biggest contributors to the NSE’s historic gains last year and the trend shows no signs of stopping, going by analysts’ bets, especially on bank stocks after the removal of the interest rate cap late last year.
In 2008, the top five firms were controlling 52.5 percent of NSE wealth. This later dropped to 51.4 percent at the end of 2012. However, their dominance recovered and crossed the 60 percent mark in 2016 and has since deepened, closing the fourth quarter of last year at 73.4 percent, according to data from the CMA.
"(This is) the highest in the last four quarters, confirming their dominance in the Kenyan securities market. Market concentration remains a key risk within the Kenyan capital markets landscape," CMA says.
Attempts by the CMA to lower the concentration risk through the Growth Enterprise Market Segment (Gems) have taken time to bear fruit.
According to Mr Ogutu, corporate governance lapses in several counters have in the past led to confidence crisis, which has led to skepticism among investors.
"Some good counters are not being rewarded. If you speak to clients, they already have blue chip stocks and are developing high risk averseness towards these other counters," said Mr Ogutu.
Stocks such as Atlas African Industries, Deacons East Africa and ARM Cement have collapsed in the recent past, even as once blue-chip stocks such as Mumias Sugar and Uchumi supermarket continue to struggle for survival. And with foreign investors dominating the bourse, the risk of sell-off in search for higher returns elsewhere could affect the market. This was emphasised by the Central Bank of Kenya (CBK) in the 2018 Kenya Financial Sector Stability Report.
"Abrupt sell-offs by this investor category can lead to excess volatility as noted in the first half of 2018 following interest rates hike in the advanced economies and emerging markets and the consequent search for yield," CBK said. CMA has been trying to woo big industry players to consider listing on the exchange but not much has been realised.
The NSE has also endured a long listings drought. There were eight major listing by initial public offering between 2006 and 2011 which brought into the bourse KenGen, Safaricom, Cooperative Bank and British American Tobacco (BAT).
Activities have since gone quite with just two IPOs - NSE Ltd and Stanlib Fahari - since 2012. However, the NSE has come up with a new programme, known as Ibuka, through which it is nurturing Small and Medium Enterprises as it prepares them for eventual listing.