What you need to know:
- Foreigners have extended their sell-off run, dumping shares worth Sh568.8 million in October.
- Cumulatively, the foreign investors have dumped shares worth Sh19.5 billion between start of the year and end of October, albeit at a slower pace than outflows of Sh21.8 billion at the same time last year.
- This year is set to be the fourth straight one of net portfolio outflows by foreign investors since the advent of Covid-19 in 2020.
Some 6,256 foreign investors fled the Nairobi Securities Exchange (NSE) across nine months to the end of September.
The exit, which is equivalent to 42 percent of the total foreign investors at the bourse, mirrors the sharp negative returns from the market with the NSE market capitalisation falling to an 11-year low of Sh1.33 trillion as at last week.
According to data from the Capital Markets Authority (CMA), the number of foreign individual investors and foreign corporate investors has plunged to 8,621 investors as of the quarter ended September from 14,877 investors in December 2022.
Foreign investor flight has been the primary driver of lower stock and market valuations this year, with the investors being critical to market performance based on their dominance of trading at the Nairobi bourse.
“Persistent value erosion spilled over into the third quarter. This is attributable in part to the value-agnostic capital outflows by foreigners from emerging and frontier markets, coupled with the protracted earnings recession by most corporates. The dynamics of demand and supply in our characteristically foreign-dominated market are imbalanced, thereby adversely affecting equity market valuations,” noted analysts at Genghis Capital.
During the third quarter, for instance, foreigners slightly dominated trading, with their turnover averaging 46.85 percent of total market activity.
The exit of foreigners has hit hard at counters dominated by foreign holdings, including Safaricom, Equity Group, KCB Group and Britam.
Safaricom’s share price, for instance, touched a low of Sh11.65 on Friday against a 52-week or year high of Sh29 while KCB has come off highs of Sh43 to Sh17.30.
The pair’s year-to-date losses stand at 51.6 and 57.4 percent respectively, putting the two blue chips among the worst performing stocks of 2023.
Rising interest rates in advanced economies and a weak local currency against the US dollar have primarily lowered the attraction of foreign investors to the domestic market leading to the heavy sell downs and sell-offs.
With central banks in advanced economies hinting at keeping interest rates elevated for longer, foreign investors have deduced their home markets as safe haven to global volatility.
“The domestic capital markets registered negative returns with the MSCI Kenya Index declining by 39.66 percent on a year-to-date basis in US dollar terms in the third quarter.
“This is on the back of a tough operating domestic and global economic context,” noted CMA director of policy and market development Luke Ombara.
Consequently, foreigners have extended their sell-off run, dumping shares worth Sh568.8 million in October.
Cumulatively, the foreign investors have dumped shares worth Sh19.5 billion between start of the year and end of October, albeit at a slower pace than outflows of Sh21.8 billion at the same time last year.
This year is set to be the fourth straight one of net portfolio outflows by foreign investors since the advent of Covid-19 in 2020.
The foreign investors have been net sellers at the NSE for eight out of 10 months so far with rare buys being recorded in June and August.
The pace of outflows by the foreigners has nevertheless begun to ease after outsized outflows of Sh10.6 billion in March.
Despite local investors being expected to step up and fill the void left by foreigners, local retail (individual) investors have plunged in number from 1.936 million investors in December to 1.247 million investors.
The number of local corporate investors has also plunged from 74,558 to 41,131 investors over the same period.
While the proportion of local investors is higher than that of foreign investors, the CMA notes that the share of quantity held by each investor on a per capita basis remains low.
Additionally, the markets regulator has highlighted the persistent capital flow/exit by foreign investors as a risk to the market and has highlighted the necessity of targeted initiatives aimed at bolstering trading activities at the NSE.
“Such initiatives include the implementation of day trading strategies and the reduction of investment barriers for foreign investors. These measures are intended to stimulate market liquidity and attract foreign investment, thereby fostering a more vibrant and resilient marketplace,” the CMA stated in its third-quarter market soundness report.
Last week, the markets regulator also disclosed that it would license market makers or broker-dealers who would support stock prices at the market by being off-takers to sellers and a seller to buyers at the NSE.
The CMA has bet on a turnaround of investor sentiment going into 2024 to anchor the return of foreign investors' interest in the domestic market.