- here’s an interpretation that a weak shilling indicates a lack of confidence in the Kenyan economy - the Shilling has lost almost eight per cent of its value since 2017.
- Capital flow reversals are an integral part of international portfolio adjustment. But if the current situation worsens, it could further keep prices in a state of “funk”.
Since 2017, foreign portfolio investors have been net sellers in the market except for 2019 when they were net buyers.
Cumulatively, in the five years, they have pulled out nearly Sh64 billion or over half a billion dollars from the local market. Consequently, their month-to-month participation also shows a dip to less than 50 per cent (Q3, 2021) from a five year average of 64 per cent.
Notably, turnover rate has also declined from 6.81 per cent (2017) to 3.6 per cent (H1 2021) while the NSE #ticker:NSE 20 Share Index has also lost an average of 10 per cent annually since 2017. There’s one main question on investors' minds: what could be the driver of these large outflows?
Several aspects come to mind, one of which you’ve probably read from the headlines lamenting - the strong dollar is punishing stocks. There’s an interpretation that a weak shilling indicates a lack of confidence in the Kenyan economy - the Shilling has lost almost eight per cent of its value since 2017.
From a foreign investor’s standpoint, a weaker shilling means the value of stock market investments are devalued by changes in currency exchange rates.
It’s good to note that most foreign investors typically do not fully insure against FX risks on the grounds of cost and complexity. Thus, portfolio adjustments are made to protect from further weakness.
To add to this point, a weak shilling causes imports to be more expensive. With Kenya being a net importer, it means more expensive imports will have an outsized effect, making products more expensive, slowing growth and generally increasing inflation.
All these have a negative effect on the stock market rating, lowering PE ratios and raising earning yields.
Another possible reason would be the ongoing global uncertainties. Outflows are expected to increase given the key events such the Covid-19 and the monetary tightening by developed countries.
This year’s most anticipated event is the expected hiking of rates (forecasted to be at least three strikes) by the US Fed including its plans to reduce the stimulus. One more factor is the increasing downgrades on emerging/frontier market securities.
As an example, last year Kenya's credit rating was downgraded to 'B' by Standard & Poor due to rising fiscal and external pressures. Regionally, 11 African countries were downgraded in the first half of 2020 and 12 had their outlooks changed to negative.
Investment bank, JP Morgan also recommended selling emerging market currencies with views shared by Morgan Stanley and CitiBank. As a result, investors have taken note of the deterioration of macroeconomic fundamentals (due to the impact of high-interest rates) and withdrawn their capital.
In summary, it was bound to happen. As the participation of international investors has increased over the years, their portfolio allocation decisions, now significant drivers of overall capital flow into Kenya’s stock market, means we are vulnerable to these flows.
Capital flow reversals are an integral part of international portfolio adjustment. But if the current situation worsens, it could further keep prices in a state of “funk”.
Mwanyasi is the managing director at Canaan Capital