Why investors are squeezing their money into few stocks

Shareholders during a company's annual general meeting in 2019. Many investors are increasingly consolidating their shares in just a few counters.  

Photo credit: Salaton Njau | Nation Media Group

What you need to know:

  • For Alois Chami, a vocal and self-taught investor who joined the Nairobi bourse in 1973, he had one strategy: spread risks across all counters.
  • But now he says for many of his counters, waiting for dividends has become like watching the grass grow; sometimes it withers.
  • And now investors are increasingly consolidating their shares in just a few counters, in search of stability.

Some are buying. Others are selling. Both think they are right. That is what drives turnover at the Nairobi Securities Exchange (NSE).

For Alois Chami, a vocal and self-taught investor who joined the Nairobi bourse in 1973, he had one strategy: spread risks across all counters and spare yourself the need to keep looking at the trading board.

He knew that at one point, some shares would be gaining and others would be losing. And at the end of the year, some would pay dividends while others won’t.

But now he says for many of his counters, waiting for dividends has become like watching the grass grow; sometimes it withers.

“My first counters were East African Breweries, Nation Media Group and British American Tobacco. I have held on my stocks from IPS building, Stanley Hotel and Nation Centre to The Exchange,” Mr Chami reminisces.

“All listed companies were only growing then. But the ground has shifted now and am not getting as much reward as I used to. Maybe I should have put my eggs in a few baskets. But how could I predict the right baskets?”

The shift in the ground has come in the form of once sparkling counters such as Uchumi, Mumias, Eveready and TransCentury losing shine while others such as Rea Vipingo and Access Kenya delisting.

And now investors are increasingly consolidating their shares in just a few counters, in search of stability.

Top stocks

The five biggest stocks at the NSE were at the end of June dwarfing the rest of the stock market at an unprecedented level, holding Sh1.6 trillion or 76 percent of all the wealth of investors, the highest in 12 years.

This has increased the concentration risk at the bourse despite attempts by the Capital Market Authority (CMA) to introduce new products and listings to give investors an array to choose from.

CMA data shows Safaricom, Equity, East African Breweries, KCB and Cooperative bank command an unparalleled level of concentration thanks to their steady run over the years.

The current dominance by top five firms is significantly high from 51.4 percent in 2012, meaning that most investors are putting most of their eggs in just a few baskets as opposed to spreading risk across the over 60 counters on the bourse.

This implies that the NSE equity market inherently exhibits a high level of concentration risk as only a few stocks have a greater chance of influencing the direction of the whole equity market.

Concentration risk refers to the likelihood of investors losing money as a result of having a large portion of their holdings in a particular investment, asset class or a given stock relative to their overall portfolio.


An investor looks at the trading screen at the Nairobi Securities Exchange.

Photo credit: File | Diana Ngila | Nation Media Group

Genghis Capital senior research analyst Churchill Ogutu says that the number of counters seen as worth putting in money have been reducing over time. This is in contrast with over 10 years ago where there was a significant number of stocks regarded as attractive.

“Investible securities at the NSE have narrowed over time. There has been price erosion in many stocks that were once a darling of investors. Many stocks have seen their blue-chip status eroded, leaving investors with narrow options,” said Mr Ogutu.

The top five firms were controlling 52.5 percent of NSE wealth in 2008 before dropping to 51.4 percent at the end of 2012.

However, their dominance recovered and crossed the 60 percent mark in 2016 and has since deepened, closing the second quarter to June 2020 at 75.4 percent, data from the CMA shows.

“During the quarter, the top five companies by market capitalisation accounted for an average of 75.43 percent, the highest in the last four quarters, further increasing the exposure risk that the Kenyan market faces,” says CMA.

Gems market

The regulator adds that Safaricom share alone was ranging between 50 percent and 56 percent week-on-week over the review period.

Attempts by the CMA to lower the concentration risk through the Growth Enterprise Market Segment (Gems) have borne little fruit.

Corporate governance lapses among several counters have led to general skepticism among investors on the bourse, dampening CMA efforts.

Stocks such as Atlas African Industries, Deacons East Africa and ARM Cement have collapsed in the recent past even as once key stocks such as Mumias Sugar and Uchumi supermarket continue to struggle for survival.

And with foreign investors dominating the bourse, the risk of sell-off in search for higher returns elsewhere could blunt the market.

The initial public offer (IPO) rush in the mid to late 2000s, when companies such as Safaricom, Scan Group, Eveready, Access Kenya, KenGen, Kenya Re and Co-operative Bank entered the market, pushed the number of investors at the bourse upwards of a million.

However, many investors have sat out trading especially during the bear run (when stock prices are going down) at the NSE as only a handful stocks exhibit strong fundamentals.

Local investors account for 79.09 percent of the issued shares at the bourse, while foreigners command over 60 percent of the equities turnover. 

However, most foreign investors’ investment decisions are also influenced by the Morgan Stanley Capital International (MSCI) index.

Much like the NSE picks the best-performing listed companies to constitute the NSE 20-Share Index, the MSCI Index picks the listed companies that are deemed more investible, a pool from which global institutional investors pick.

Currently, Safaricom, KCB, Equity, EABL, Cooperative Bank and BAT are on this index, giving them more visibility in the eyes of foreign investors.

Many investors are unwilling to try anything outside this basket, further deepening the concentration risk at the NSE.

Mr Ogutu says the fall of traditional blue-chips, some due to governance lapses, has made many investors reluctant to try new stocks.

“For the former blue-chips, whether that lever that was there could come back will dictate picking. If the fundamentals don’t hold water, that doesn’t board well with investors,” he said.

“In the current environment, it is very difficult to see those fallen angels coming back and regaining their lost appeal.”

Fallen angels

Stocks such as ARM was at some point a darling of investors but fell with a thud as mismanagement hurt their business prospects.

ARM Cement top owners, the Paunrana family, watched in disbelief as the stock in September 2017 touched Sh12.7, taking the market value of their wealth down to Sh2.7 billion from Sh20.6 billion in August 2014 when the share was at Sh91.

Many other stocks such as Mumias and Uchumi have taken investors down this valley before. ARM only served to replay the movie.

And now Covid-19 has accelerated the red shoots being seen in most of the counters. But the key fundamentals were already weak even before the infectious virus hit Kenya.

CMA has been trying to woo big industry players to consider listing on the exchange but not much has been realised.

The Gems market has “nothing tangible to write home about,” according to Mr Ogutu. The delisting and price erosion in the Gems is impacting on uptake of any new products such as derivatives.

“Deacons is under-receivership and Atlas was delisted. So there is nothing exciting in Gems to reduce concentration from blue-chip stocks,” he said.

NSE’s 2015-2019 strategic plan was targeting to have a total of 88 equity listings by end of last year but this was not achieved.

Last year saw KenolKobil get delisted after buyout by French major Rubis Energie, while National Bank of Kenya was acquired by KCB Group. 

Other exits from the bourse since 2008 include Unilever, Access Kenya, Rea Vipingo, Marshalls East Africa, Hutchings Biemer, A Baumanns and Atlas East Africa.

NSE looks to suffer another setback given that the TransCentury board is set for a meeting with shareholders to vote for its delisting as it eyes private equity funding.

Kenya Airways is also on course to exit the bourse and fully revert back into government hands. The shares are currently suspended as the nationalisation process enters a crucial stage.

Deacons, ARM Cement and Mumias Sugar sunk into receivership back to back in the wake of mounting debts, leading to a lengthy suspension from the NSE.