By Elijah Odhiambo
The Nairobi Securities Exchange (NSE) saw a steady decline in foreign investor participation to a record low of 30.1 percent in March, trading shares worth Ksh19.5 billion and forcing the exchange to rely on domestic investors with lower purchasing power.
The foreigners, who made up 81.6 percent of market activity in January 2019 with deals of Ksh26.4 billion, have been leaving the NSE due to rising interest rates in developed economies.
Additionally, the depreciation of the Kenyan shilling and the scarcity of US dollars on the local market, which damaged their returns and made it challenging to liquidate their positions, have alarmed the foreign investors.
The decline in shares of the foreign investors come at a time when the Nairobi Securities Exchange (NSE) lost Ksh229 billion in investor capital in the three months ending March 31 2023, as investors sought for safer investments options in other markets after an unfavorable run at the exchange.
The NSE market capitalization decreased by 11.57 percent in the first quarter of 2023, from Ksh1.98 trillion in Q4 2022 to Ksh1.75 trillion, according to the Capital Markets Authority’s (CMA) Q1 2023 Statistical Bulletin.
The drop saw the NSE 20 Share and NSE All Share Indices dropping by 3.22 and 11.54 percent, respectively, ending the quarter at 1,622.05 points and 112.76 points, respectively.
According to data from the Capital Markets Authority (CMA), the percentage of foreign investors decreased progressively in recent quarters to 30.1 percent in the three months leading up to March, which coincided with the reduction in market capitalization.
On April 26th, there was a Ksh13.3 billion decrease in the value of all stocks listed on the NSE. Due to their strong fundamentals and liquidity in terms of traded volumes, blue-chip companies like Safaricom, Equity Group, and KCB Group are among those hurt by the selloff.
Analysts say foreign investors have been struggling to access dollars after selling shares at the Nairobi bourse for repatriation of capital to their offices in Western capitals such as London and New York, with the currency problem acting as a disincentive to put new money in the local market.
“Early last year (March 2022) investors started to report that they were having delays in repatriating dollars from Kenya,” said Muathi Kilonzo, Head of Equities, Brokerage at EFG Hermes Kenya.
“These warnings culminated in an alert from investment research firm MSCI about the problem. This led to investors selling or reducing their participation in the NSE.”
The weakening of the shilling also remains a concern for foreigners trading on the stock market, exposing them to exchange losses upon exit.
Over the past 12 months alone, the local currency has depreciated 14.8 percent to trade at Ksh135.8 units to the US dollar.
As a whole, the NSE posted the worst dollar returns of negative 20.2 percent in the first quarter ended March among African peers, according to the Morgan Stanley Capital International (MSCI) Kenya Index.
Exchange Market experts say the shortage of dollars remains the biggest impediment to bringing back foreign investors to the bourse where Kenyan retail investors have little influence and domestic institutions like insurers have also cut their equities allocation in favour of government debt securities.
“Our indications are that some custody banks are still unable to source dollars for investors –ironically when it seems the supply of foreign exchange has improved, it has not improved for NSE investors,” Mr. Kilonzo added, further saying the situation needs to addressed as soon as possible.
“Until this problem is fully sorted the problem is likely to persist and participation continue to decline … capital will not flow in when there is a risk it will be trapped.”