Kenya’s stock market has the lowest returns above those available on risk-free government securities when compared to 15 other frontier and emerging markets.
An analysis by investment bank EFG Hermes shows that investors on the Nairobi Securities Exchange (NSE) #ticker:NSE stand to earn average annual returns of 12 percent, a mere 2.2 percentage points above the interest rate on the 12-month T-bill.
This means that stock market investors are earning a small excess return for the risks they face, including share price decline and loss of capital when they sell stocks at levels below the purchase price.
Other markets have higher excess returns, technically known as equity risk premium, including Tanzania’s 9.6 percent. Sri Lanka has the highest risk premium of 16.1 percent.
The NSE’s poor rating is a reflection of the market’s long-running bear run and inclusion of many firms that are either in losses or suffering reduced profitability.
While there are a select few firms on the NSE with annualised yields above the 12-month T-bill, the market is weighed down by a majority of firms still reporting low profits or losses.
The search for yields has thus seen the NSE’s bonds segment outpace equities in turnover growth in recent years.
Last year, investors traded bonds worth Sh956 billion at the bourse, outpacing the previous year’s total of Sh691 billion by 38 percent. On the other hand, equities turnover fell by 7.6 percent to Sh137 billion from Sh148 billion in 2020.