The stock market is staring at increased competition for capital from the local fixed-income market on rising interest rates on bonds as the government races to bridge the underperformance in its domestic borrowing programme for the fiscal year.
The Nairobi Securities Exchange (NSE) has already endured a bruising year in terms of foreign investor exits, recording net outflows of Sh19.3 billion in the nine months to September, up from Sh2.05 billion in the similar period a year earlier.
Economic difficulties locally have limited the capacity of local investors to compensate for the reduced foreign investor trading activity — meaning that share prices have trended downwards on lower demand.
Since the beginning of the year, investor wealth at the bourse has shrunk by Sh652 billion to Sh1.98 trillion, with key stocks such as Safaricom, KCB, Equity, and EABL showing volatility in prices.
The outflows are being driven by reduced investor appetite for emerging markets after a jump in interest rates in developed markets such as the US, where high inflation has forced their central banks to adjust rates upwards.
The Central Bank of Kenya (CBK) has also raised its base lending rate to 8.25 percent from seven percent in March, in response to local inflation going up, and a weakening shilling against the dollar.
After holding out against expensive bids in the monthly bond auctions, the CBK relented this month, breaching the 14 percent level in the sale of a 25-year paper.
Borrowing pressure from the Treasury, which is lagging behind its target for the year has partly influenced the change in stance.
“Having only met about 16 percent of its domestic debt target for the 2022/23 fiscal year at a time when external credit markets have tightened and local revenues are underperforming, the sovereign is expected to raise its appetite for local deficit financing,” said analysts at NCBA.
The stability of returns from government bonds has also proved attractive for investors seeking to protect and grow the value of their capital. This year, the holdings of government debt by retail investors have increased by Sh30.3 billion to Sh276.3 billion.
Meanwhile, there remains uncertainty over dividend earnings at the stock market, which have normally compensated for limited capital gains in the last few years.
Dividend yields are underperforming the returns available from bonds, with just 12 out of the 65 listed firms offering a yield above 10 percent at current market prices.
A need to conserve capital has also crept back into the market due to the economic uncertainty brought about by the Russian invasion of Ukraine.
The banking sector, which is one of the more stable in dividend payments at the bourse, has signalled caution in dividend payments this year after resuming payouts in 2021 as the threat from the Covid-19 pandemic eased.
Serial interim dividend payers Standard Chartered Kenya and Stanbic were among six listed banks to skip the half-year reward this year, pointing to difficulties in predicting external conditions and macroeconomic volatility.