Foreign investor flight from the Nairobi Securities Exchange (NSE) has pushed the market to its lowest point in a decade, wiping out a significant portion of wealth in just nine months.
The latest market data shows that investors at the Nairobi bourse have lost 15 per cent of the paper wealth they had at the beginning of the year in a routing that has seen the benchmark NSE 20 share index plummet to 2,755 points — a level last seen at the height of the global financial crisis in March 2009.
Investor wealth as measured by market capitalisation has since January dropped Sh384 billion to stand at Sh2.137 trillion by close of trading yesterday.
Market capitalisation touched an all-time high of Sh2.89 trillion in the first week of April but a shift in global economic positioning — especially the better returns from US markets — has seen foreign investors leave frontier markets such as Kenya where they have been sitting since the 2008 global financial crisis.
The decline has been headlined by sustained foreign investor selling on the blue chip counters that form the backbone of the market.
The plummeting of share prices has been intensive and has not spared key stocks such as Safaricom #ticker:SCOM, which has dropped from an all-time peak of Sh33 in April to the current Sh23.75.
The Nairobi bourse’s plight is in step with a global trend that has seen investors de-risk by selling equities in frontier markets in favour of the US where rising interest rates have made the financial market more attractive.
Investment analysts attribute the share price declines to a mass exit of foreigners that has persisted since May, even as local investor confidence in the stock market remained modest.
“Foreigners have been net sellers for a large part of the year and it is the decision of some locals to pick up some of the stocks that has helped slow down the share price erosion, especially in the second quarter,” NIC Securities analyst Bill Oloo said.
The net selling by foreigners, Oloo said, has continued in the third quarter, with locals standing on the sidelines as concerns over emerging market tensions hit fever pitch.
“The NSE has kept on tanking as a result. The emerging and frontier markets selloff has eroded confidence and it’s unfortunate that Kenya has been significantly roped in despite the fact that our fundamentals are not that bad,” he said.
Foreign investors sold shares worth a net of $223.2 million (Sh22.5 billion) in the nine months ending September, data compiled by Standard Investment Bank (SIB) shows. In the whole of 2017, this segment of investors held a net selling position of $117.4 million (Sh11.8 billion).
The resulting fall in share prices underlines the influence that foreign investors hold in the market in spite of owning just 20 per cent of the listed shares at the bourse.
Foreigners have invested most of their funds in large blue chip firms that have the necessary market liquidity to accommodate large transactions.
Due to the persistent selling pressure, the four largest firms at the Nairobi bourse are now trading at lows not seen for more than a year.
Safaricom’s price of Sh23.75 a share represents a 13-month low, the share having fallen to a low of Sh21.75 during Monday’s trading before recovering on Tuesday.
Equity Holdings #ticker:EQTY and KCB #ticker:KCB are both trading at 17-month lows of Sh35 and Sh36 a share respectively, while EABL #ticker:EABL is trading at a six-and-a-half-year low of Sh183 a share.
These stocks also make the bulk of pension fund investments in equities, meaning retirees can look forward to diminished returns for the year if share prices do not recover by December.
The dramatic fall in share prices coupled with rising inflation now risks pushing pension funds’ net returns into the negative in real terms.
Analysts also point out that the poor fortunes in the stock market are surprisingly disconnected from the performance of other key economic indicators, backing the view that the market is suffering from global factors rather than poor local fundamentals.
Ideally, the performance of the market should mirror that of the economy, and to some extent the local currency.
In the first half of the year, Kenya’s economy grew at an average of six per cent, while the shilling has bucked the trend among peer currencies in strengthening against the dollar by 2.3 per cent this year.
“As a barometer of economic sentiment, the stock market seems to be carving a divergent path from the economic outturn, staging its longest bear run since the political crisis of 2008/09, which was aggravated by the global financial crisis,“ said Commercial Bank of Africa (CBA) economic analysts in their October 2018 monthly report.
Mr Oloo reckons there are few catalysts that can lift the market in the last quarter of the year, especially if foreigners keep up their selling action.
Local institutional investors, mainly funds, also tend to wind down active investment towards the end of the year as they close their positions and may not provide the demand to counter the supply from exiting foreign investors.