The Nairobi Securities Exchange (NSE) wound up 2023 at a fourth straight year of net foreign outflows, weighed down by attractive returns in other asset classes and external developed markets.
NSE data shows that in the 11 months to November 2023, foreigners had withdrawn a net of Sh20.04 billion from the bourse, taking the cumulative net sales since the beginning of 2020 to Sh83.3 billion. The last year the market recorded a net inflow position was in 2019, at Sh1.32 billion.
The investors have exited the equities market in search of better returns elsewhere, both within the country and outside markets.
The biggest cause of the outflows has been the rate increases in the US, the UK and the EU, where high inflation from mid-2022 forced central banks to tighten their monetary policy to control the flow of money.
In the US, the Federal Reserve raised its base rate from near zero in March 2022 to the current target range of 5.25-5.5 percent (5.33 percent average) while the European Central Bank’s deposit and lending rates rose from 0.0/0.75 percent in July 2022 to the current range of 4.0 to 4.75 percent.
Global economic uncertainty also pushed capital to the safe haven of the US economy from frontier and emerging markets, putting their stock markets and currencies under pressure.
“There has been a rise in the opportunity cost attached to investing in stocks against fixed income securities (both local and global), commodities and equities in emerging and developed markets,” said Wesley Manambo, an analyst at Standard Investment Bank.
“This coupled with a weakening shilling has seen capital flight as investors with exposure to the aforementioned investment vehicle divested from key blue chips.”
Locally, fixed-income securities have offered higher rewards for foreign investors, even when accounting for forex losses when calculating dollarised returns on their investments.
For instance, the three infrastructure bonds sold in March, June and November this year are paying holders annual interest at 14.4, 15.8 and 17.9 percent respectively. The three bonds together raised Sh397 billion.
Infrastructure bonds tend to be popular with foreign investors, owing to their tax-free status.
The exits have also had an oversized influence on the general performance of the market, despite foreigners holding under 20 percent of issued shares and accounting for less than half of traded turnover.
This is due to the concentration of foreign activity on a few blue chips, which has contributed significantly to a price erosion on some of the NSE’s largest and fundamentally stable counters such as Safaricom, Equity Group, East African Breweries Plc (EABL) and KCB Group.
These four stocks account for 59 percent of the NSE’s total market capitalisation of Sh1.413 trillion, and are also included on the Morgan Stanley Capital International (MSCI) Kenya indexes, giving them a crucial visibility.
In the year-to-date, Safaricom’s stock has shed 41 percent in value while that of Equity has dropped by 24.2 percent.
EABL and KCB have in the period seen their share prices retreat by 37 percent and 45.7 percent respectively.