Money flowing out of the Nairobi Securities Exchange (NSE) is getting uncomfortably hot. Equities have suffered a loss of foreign investor interest since the start of 2020. They’ve been fleeing the market on the back of mainly depreciating currency value - year to date, the Kenyan Shilling has depreciated by 22.9 percent against the US dollar, adding to the nine percent depreciation witnessed in 2022.
Currency weakness spells trouble for inflation which is running at 6.9 percent as at the end of October. But more importantly, it provides a big incentive for foreigners holding local assets to cut and run. Some reports show that in the nine-month period to September 2023, 6,256 foreign investors fled the NSE. As a whole, the NSE is posting some of the worst dollar returns.
But Kenya is not alone, across most of the developing world, outflows have gathered pace leaving many currencies at multi-month or multi-year lows.
And this time the outlook is dark. Money managers are not only actively reducing their exposure to wait on the sidelines, they’re planning to be out for a while as they expect more bad news. The narrative goes; that although any more rate rises in the US are highly unlikely, the two-year Fed-imposed monetary tightening journey has taken a negative hold locally (which may take time to unwind).
With inflation unhinged, the local unit remains extremely vulnerable. Is selling dollars an option? Unfortunately, this is not viable as the country has little hard currency to sell given import needs and outstanding external debt. Dwindling forex reserves currently stand at $6.8 billion (equivalent to 3.7 months of import cover), which is below the statutory requirement of maintaining at least four -months of import cover.
Further tightening by the Central Bank of Kenya (CBK) is not an option either. With the economy already weakening, it’s doubtful that policymakers will be willing to tighten policy. The real choice; let the shilling fall - a clear possibility now that a non-interventionist attitude prevails at the CBK.
Nonetheless, having both an inflation problem (or large oil import bills in dollars) and a huge dollar debt problem also means risking letting currency weakness go too far is unsustainable. At some point, a balance has to be found. That said, the selloff presents opportunities for local investors. When was the last time you saw equities yielding close to 10 percent (9.7 percent)?
That's almost treasury market level. In fact, some dividend aristocrats - Co-op Bank, Equity Group and KCB Group - are even spotting higher than the average at 14 perecent, 10.7 percent and 12 percent respectively.
And yes, buying stocks at the current price-to-earnings ratio of 4.7x to hopefully sell at the historical average of 12.2x is always a good bet.
In the end, with global fund managers dumping "uninvestable" Kenya holdings en masse, smart investors can up their positions. Plenty of blue chips trading dirt cheap. When there's little prospect of global conditions turning to emerging markets favour anytime soon, the advantage is snapping up good stocks at bargain prices.
Mwanyasi is MD Canaan Capital.
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