Investor wealth at the Nairobi Securities Exchange (NSE) #ticker:NSE fell Sh241 billion in the second quarter of the year as blue chip stocks slid under the weight of profit-taking.
The decline significantly reversed the gains that investors made in the first three months of 2018, when the market turnover rose Sh296 billion, leaving a net gain of Sh55 billion for the first half of 2018.
This erosion of gains is expected to particularly hurt insurance firms and pension funds, who were banking on equity gains to grow returns at a time when earnings from other asset classes such as fixed income and offshore investments have remained low.
The latest performance also defied earlier expectations that the NSE would be boosted by the feel-good factor that followed the reconciliatory handshake between President Uhuru Kenyatta and opposition leader Raila Odinga in March — which effectively marked the end of the bitter election period that had weighed heavily on the economy.
NIC Securities analyst Bill Oloo said that the profit taking was largely from investors, who had taken positions in the market in January, just before the quarter one rally in which most blue chips made double-digit gains.
“By the time they did their analysis at the end of March, companies such as Equity Group #ticker:EQTY, Safaricom #ticker:SCOM, KCB #ticker:KCB, EABL #ticker:EABL and DTB #ticker:DTK had all posted solid double-digit returns, forcing some investors to close out their positions after meeting their targets much earlier than anticipated,” Mr Oloo said, adding that the vigour displayed by investors in the first quarter may have tapered off resulting in the weak second-quarter performance.
The benchmark NSE 20 share index shed 14.6 per cent or 560 points in quarter two to close June at 3,283 points on the back of a fall in traded volumes that stood at Sh47 billion compared to Sh61.2 billion in quarter one.
Foreign investor profit taking has been a major factor in the decline in valuations, having taken out a net of Sh8.2 billion during the second quarter, according Standard Investment Bank (SIB) analysts.
The bulk of the net foreign sales were on Safaricom, at Sh4.5 billion, EABL at Sh1.9 billion, KCB at Sh1.8 billion and Equity at Sh1.5 billion.
The NSE 20 constituent counters account for 87 per cent of the market’s total capitalisation, making their performance a key determinant of the entire market’s direction.
Their collective capitalisation decline in the second quarter stood at Sh214.2 billion.
The biggest decline in market capitalisation was recorded on the Safaricom counter (Sh60 billion), followed by beer maker EABL (Sh37 billion), Equity (Sh29.2 billion), BAT #ticker:BAT (Sh17.9 billion), and KCB ( Sh17.6 billion). KenGen #ticker:KEGN went down Sh13.5 billion and Co-operative Bank #ticker:COOP Sh12.3 billion.
The biggest percentage fall in value during the period was, however, recorded by ARM #ticker:ARM, whose market valuation came down 63 per cent to Sh2.9 billion after its share price plummeted from Sh8.25 to Sh3.05 between March and June.
This erosion in valuations is expected to hurt pension funds, whose overall return of 6.7 per cent in quarter one was largely backed by equities translating to a 14.8 per cent return, according to analysis by Actuarial Service East Africa.
During the same period, fixed income returns stood at 3.6 per cent, while offshore investments returned negative results -1.8 per cent.
Analysts said there is cautious optimism about a recovery in the second half of the year that has just begun, mainly driven by bank stocks if Parliament repeals the rate capping law, and as the lenders become more comfortable with the IFRS 9 rules.
But there is fear that foreign investors could continue selling off as rising US interest rates continue to draw money into the world’s biggest economy, while the European Union is expected to slowly cut back its version of quantitative easing that has helped push capital flows to emerging markets.
“We have to take these factors into consideration as they inform actual decision making for a lot of the foreign investors and thus are likely to inform their collective risk appetite,” said Mr Oloo.