Institutional investors have overtaken individuals in the share of equities trading at the Nairobi Securities Exchange (NSE) as the high-net-worth dealers shift part of their investments from government papers.
Data from the Capital Markets Authority (CMA) show that the share of equities trading controlled by local institutional investors, such as pension schemes and insurance firms, surged to 67.65 percent in the quarter ended June from 36.34 percent in the same period a year earlier.
They have outpaced retail investors whose share dipped from 45.28 percent to 15.21 percent in the period under review, suggesting individuals have cut back on share purchases as large-scale dealers upped their stakes.
The shifts emerge in a period when returns from the bourse continue to beat yields from the bond market.
ICEA Lion Group Senior Portfolio Manager Esther Muchai reckons that institutional investors have re-established their interest in local stocks in the wake of the market rally that started in the first quarter of 2024.
The NSE returned a gain of 34 percent in 2024 and has since marked gains of over 20 percent since the start of the year, mirroring resilience in the market rebound.
Returns on government bonds hit a peak of 18.5 percent last year from an average of 12 percent in 2022.
They have since receded to an average of 14 percent as the State seeks to lower its borrowing costs, triggering high-net-worth investors to boost their holdings at NSE.
“Last year, institutional investors had lower investments in the bourse because of high interest levels, while there was a slack in buying equities on the fear that the uptick would not last,” she said.
“This year, it is more apparent that foreigners are back and with the monthly contributions, which ensure the constant flow of income to institutional investors and maturities, this has enabled institutional investors to be constant players in equities.”
Institutional investors whose level of sophistication is higher than individuals usually adapt to market conditions in shifting their capital allocation.
High returns on government securities last year saw the institutional investors pour billions of shillings into Treasury bonds and bills on increased State borrowing amid fears of debt default that raised Kenya’s risk profile.
An infrastructure bond issued in February 2024, for instance, had an interest rate of 18.46 percent, the highest return of any government paper in over a decade.
This came in a period when the country faced the possibility that it wouldn't be able to cover a $2 billion Eurobond payment that loomed in June.
It bought back most of that bond and issued a new $1.5 billion note that it doesn't need to worry about until 2029, when repayments start.
The Central Bank of Kenya (CBK), from last August, started cutting its benchmark rate from 13 percent to 9.75 percent in June to provide further support to the economy.
The 25 basis points to 9.75 percent in June was the sixth cut in a row, sending signals of the State’s preference for a low-interest-rate regime.
The falling interest rates have diminished the opportunity cost of keeping cash in fixed income over alternatives such as equities, forcing investors to increase their risk appetite for a higher return.
Shrinking workers' disposable income has dimmed retail investors’ ability to buy shares at the NSE.
The average monthly real pay fell from Sh62,256 in 2020 to Sh55,451 last year, translating into an erosion of Sh6,805.
This is the fifth year in a row that workers have endured falling real wages, including a negative 4.1 percent in 2023.
“Retail investors have a limited pool of funds. If they locked those funds last year and they are not having more flows this year at a personal level, then they would not have more to invest,” Ms Muchai said.
“If you look at institutional investors like pension schemes, they have contributions every end of the month, meaning there is a constant flow of money that has to be invested.”
The participation of retail investors in equities trading, however, remains above that of foreigners, with offshore corporates having a share of 15.17 percent in the second quarter and 0.57 percent for foreign individuals.
East African corporate investors had a share of 1.24 percent at the end of June while regional individuals had a 0.11 percent share.
The NSE measured through the Nairobi All Share Index (NASI) has gained 40.13 percent since July last year to close at 153.43 points from 109.49 points.
The value of stocks or market capitalisation has meanwhile soared to Sh2.41 trillion from Sh1.71 trillion over the same period.
Market activity measured by shares volume traded has jumped by 32.31 percent to 1.44 billion from 1.09 billion, while equity turnover has improved by 4.82 percent to Sh29.76 billion in the second quarter from Sh28.39 billion in the same quarter last year.
