Capital flight halves NSE investor wealth


Investor wealth at the Nairobi Securities Exchange (NSE) has halved since the bourse hit its all-time high valuation of Sh2.9 trillion exactly two years ago, paying the price of foreign investor flight from the market.

The stock market achieved its highest-ever valuation of Sh2.94 trillion on August 24, 2021, carried along by a rally in the share price of Safaricom to an all-time high of Sh44.95.

This has since dropped to Sh15.95 a piece, dragging down the market with it.

Since touching this high, the market has slid into paper losses worth Sh1.38 trillion to leave investors worth Sh1.56 trillion, actualising the concentration risk of a handful of stocks that drive the NSE.

The drop is set to discourage new investors in the capital markets, who are needed to turn around its fortunes.

Institutional investors such as pension funds and insurers that have significant exposure to equities have taken a big hit on their investment returns.

High net-worth individuals, who include founders of listed companies, have also booked losses running into billions.

“The major reason for the performance is the net exits by foreign investors, who have been drawn to the higher interest rates on offer in the developed markets. As such, they have realised the opportunity cost of investing in developing and emerging markets is rising by the day,” said Ronnie Chokaa, an analyst at Genghis Capital, a city-based investment bank.

“This (slide) also highlights the risk of a concentrated market. It gives the whole market a negative characterisation based on the issues or performance of one stock or just a few counters, which obscure the fact that there may be others in there that are doing well.”

Given that daily trading at the NSE is largely dominated by foreign investors, the market concentration has left the market with huge exposure to external factors such as the global capital flight to the West.

Two years ago, the top five companies at the NSE by valuation— Safaricom, Equity Group, EABL, KCB and Co-operative Bank— accounted for 80 percent of the market’s total.

This has since fallen to 67.8 percent due to the price fall on these shares on the back of the net sales worth Sh50.3 billion made by foreign investors at the NSE in the period.

Safaricom, which is the NSE’s largest listed firm by both market capitalisation and the number of issued shares (40.06 billion), has seen its valuation drop by Sh1.17 trillion over the two years to stand at Sh631 billion currently—effectively accounting for 85 percent of the overall paper losses suffered in the period.

Bank stocks have at the same time contributed market cap losses worth Sh129 billion, led by KCB (Sh73.9 billion), Equity Group (Sh51.1 billion) and Co-operative Bank at Sh14.3 billion.

Others with significant cap losses are EABL (Sh34.4 billion), KenGen (Sh16 billion) and Jubilee Holdings (Sh13.7 billion).

This is despite these companies being the most profitable among listed firms and the most consistent and generous in dividend payments.

Other sectors such as investments, energy, construction, commercial and services have also seen their valuations drop in the period, squeezing the opportunities for investors to make money in the market and thus discouraging demand.

Agriculture stocks have defied the negativity in the market, recording a collective gain of Sh4 billion.

The lower share prices have, however, raised the dividend yields of these companies, making them attractive for entry for new investors seeking regular returns and potential capital gains in future.

The portfolio outflows that have underpinned the decline of the stock market are unlikely to abate in the short term, however, given recent rate hikes in the UK, the EU and the US, on account of lingering concerns about inflation in these economies.

All three raised their base rates by 0.25 percentage points towards the end of July, signalling a continuation of the higher returns on their respective financial assets.

At the same time, the continued weakening of the shilling against hard currencies has cut the incentive for portfolio investments into the country, due to the potential of exchange losses for foreigners when they are exiting their investments down the road.

Concerns about the availability of dollars on account of an inefficient interbank market have also weighed on foreign investors.

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