The weakening of the shilling by 6.8 percent in the first quarter of the year saw the Nairobi Securities Exchange (NSE) trail African peers in dollar returns, reducing the attractiveness of the market to foreign investors.
The Morgan Stanley Capital International (MSCI) Kenya Index, which guides foreign investors on local market investments, showed a return of -20.2 in the three months to March.
None of the other nine African markets tracked by the index had a return lower than negative seven percent.
In the NSE, the index currently tracks the performance of the shares of Safaricom, Equity and KCB in Kenya on dollar terms.
A combination of the exchange loss and the lower share prices of Safaricom and KCB stocks in the quarter resulted in the higher fall of the Kenyan index compared to its African peers.
The blue chips, which are heavily traded by foreigners due to the MSCI listing, were hit by the capital flight to the US and Europe following interest rate increases in those economies.
“Yields on US Treasury bonds have been adjusting upwards, pricing in the high-interest rate environment. As a result, foreign investors have been looking towards reducing their risk exposure in frontier markets. This, coupled with the weakening shilling and dollar liquidity constraints in the country, sparked concerns about dividend and return repatriation,” analysts at Actuarial Services East Africa (Actserv) said in a quarterly markets review.
Safaricom, which carries the biggest weight on the MSCI Kenya Index due to its status as the NSE’s largest stock by market capitalisation, dropped by 25 percent in price over the quarter.
Foreigners have outsized exposure to the stock, owing to its large liquidity and business performance, including profits and dividends.
The share price of KCB declined by 6.8 percent, while Equity was up by 2.2 percent.
During the period, the NSE’s benchmark 20 Share Index contracted by 3.2 percent, while the All-Share Index fell by 11.5 percent.
For the foreign investors, the paper losses were deepened by the exchange losses they would suffer if converting their sales to dollars, hence the bigger fall in the MSCI index compared to the NSE’s shilling indices.
When entering the market, foreign investors convert their dollars to shillings and do the reverse after selling to shift capital out of the country.
The shilling’s performance of the dollar is, therefore, a big factor in the stock market for foreign investors, who suffer exchange losses or make gains depending on whether it is depreciating or appreciating against the greenback.
A market offering better protection against exchange losses would, therefore, be more attractive to foreign capital.
