Foreign investors are expected to largely stay off emerging and frontier equities markets this year, extending exits from the Nairobi bourse on attractive major markets led by US stocks.
Analysts expect foreign capital to remain tied to developed markets on the strength of returns on offer.
“In general, we expect continued outflows due to relatively more attractive returns offered in developed markets,” noted analysts at Sterling Capital.
Foreign investors remained net sellers at the Nairobi Securities Exchange (NSE) for a fourth straight year in 2024 as they fled emerging and frontier markets to advanced economies on the prospects of comparatively better returns.
Foreigners closed 2024 with net sales of Sh16.5 billion, albeit lower than Sh21.2 billion in exits recorded in 2023 according to data from the Capital Markets Authority (CMA).
The selloffs were despite improved performance of the NSE particularly on a dollar-denominated basis where the market boasted of a 61.8 percent return in 2024 from losses of 42.9 percent previously.
The improved dollarised returns, however, incentivised foreigners seeking to exit the bourse as they would receive more dollars for fewer shillings from the rebound of the local currency against the greenback.
The US equities were largely the destination for fleeing foreign flows as the market marked back-to-back years of a bull run, supported largely by gains from tech and artificial intelligence (AI) linked stocks.
The S&P 500 index, which tracks performance of the 500 top listed firms in the US for instance ended a second year with gains exceeding 20 percent.
“The S&P 500 charged ahead in 2024 with the second straight year of 20 percent or better returns, bringing the total gain since the bull market began in October 2022 to 70.1 percent including dividends,” RBC Wealth Management said in a note published on January 9.
Foreigners could, however, return to emerging markets such as Kenya should the risk of a US stocks selloff materialise, analysts say.
“Should the US enter into a bear market given how markets with exceedingly high price to earnings ratio tend to underperform in years following such lofty valuations, foreign investors are likely to return to emerging and frontier markets such as Kenya,” Sterling Capital added in its 2025 Economic Outlook Report.
Foreign investors are seen as a key party to trading at the NSE due to their notable participation in trades.
Their share of trading activity at the bourse dropped to a 21-month low 35.49 percent in December, highlighting the impact of increased local participation in the equities market particularly by retail investors.
The capital markets regulator notes that foreign investors slightly dominate trading at the NSE posing notable market risks especially during periods of significant outflows.
“Outflows pose an ongoing risk to our market, highlighting the necessity for targeted initiatives aimed at bolstering trading activities at the NSE. Such initiatives include the implementation of daily trading strategies and the reduction of investment barriers for foreign investors,” CMA notes.
