NSE #ticker:NSE foreign investors' fortunes swung sharply for the worse in the past one month as dollar-denominated returns turned negative with the fall in share prices and a slight weakening of the shilling, latest market data shows.
An analysis of market performance by African Alliance shows that by the end of September, annualised dollar returns on the FTSE NSE 15 index stood at -13.2 per cent, compared to 7.2 per cent in August.
The FTSE NSE 15 index, which tracks the performance of the 15 largest firms at the Nairobi Securities Exchange by market capitalisation, is mainly used by foreign investors when picking their portfolio. Foreign investors almost exclusively invest in large cap stocks.
The negative dollar returns mean that foreigners exiting the market are realising less value for their portfolio compared to a month ago, although this has not stopped the recent trend of foreign selloffs at the bourse.
Upon conversion of sales proceeds to hard currency when exiting a stock, foreign investors can either make a currency gain or loss depending on the strength of the shilling in the duration they held the stock.
Analysts say the exodus from the market is also being caused by rising interest rates in the US, which makes the American market more attractive for investors who had run to emerging and frontier markets in search of good returns.
ABC Capital corporate finance manager Johnson Nderi said foreign investors who had borrowed cheaply from their markets to invest in African markets may also be exiting in order to lock in gains and mitigate against rising financing costs back home.
“They are also looking at our twin deficits —current account and fiscal— which both point to a potential weakening of the shilling, leading to an even larger fall in dollar returns from the stock market,” said Mr Nderi.
NSE market capitalisation fell by Sh265.4 billion to Sh2.21 trillion in September, a trend that has seen investors lose Sh297.9 billion year-to-date.
During the month, foreign investors took out a net of Sh3 billion ($30 million) from the market, the third highest monthly net outflow this year after February’s Sh5 billion ($50 million) and May’s Sh4 billion ($40 million).
Some analysts have also pointed to the lack of clarity on taxes on banking transactions affecting the decisions of those who prefer to invest in a stable and predictable tax environment.
Kenya recently raised excise tax on bank transaction fees from 10 per cent to 20 per cent, while investors are waiting to find out the fate of the proposed 0.05 per cent “Robin Hood” levy on large cash transfers above Sh500,000, which would directly hit foreign investors whose transactions are usually in large amounts.
The current lower share price valuations are, however, offering an opportunity for local investors to enter the market, Mr Nderi said.
Retail investors are usually more sensitive to capital gains and losses on stocks compared to the longer-term institutional investors, who largely look at dividend yields on stocks. Foreign investor participation as a share of equity turnover in the market stood at 64 per cent in September, but is likely to come down once locals start taking a position on the cheaper stocks.