Nervous foreign investors cut NSE wealth by Sh100bn

Investors at the Nairobi Securities Exchange (NSE) have lost Sh100 billion in the past three weeks as the market reacted to a combination of bad news at home and abroad.

Investor wealth dipped to Sh1.63 trillion at the close of business on Friday from a high of Sh1.71 trillion at the beginning of the month and analysts said the decline was partly the result of news that the US Federal Reserve is cutting down its stimulus programme.

The programme has been the key supplier of global liquidity that has helped drive markets across the world.

Last week, stock brokers reported reduced demand from foreign buyers who have been the main drivers of the NSE’s Bull Run.

Analysts said the market has also been reacting to the uncertainties surrounding Treasury Secretary Henry Rotich’s announcement of plans to re-introduce capital gains tax.

Analysts at Kestrel Capital said it was inevitable that a global correction of markets would affect the NSE, especially given the fact that the Nairobi bourse is one of the world’s three best performing emerging markets and Africa’s leader.

“I would say that buying and selling by foreigners has slowed down in June. I believe the recent market correction at the NSE is a result of a reaction to what is going on in international markets, especially the recent correction in emerging markets,” said Kestrel Capital managing director Andre DeSimone.

Mr DeSimone said the market had also reacted to the threat of capital gains tax in Kenya saying the move would adversely affect the development of the country’s small and nascent capital markets.

Mr DeSimone said interest rates have started rising in many markets, including the US and this is likely to affect the direction investment funds will flow in the medium term.

Market data for June shows a sharp decline in the net foreign inflows from June 13-17, a development seen as resulting from Mr Rotich’s indication that capital gains tax will return in the next financial year.

The net foreign inflows from June 3-12 averaged Sh233 million compared to the average of Sh31.35 million reported between June 13-17.

On June 14, in the first trading session after the Budget presentation, the foreign trade segment recorded net outflows of Sh9.5 million, the only such session in the month so far.

NSE data, however, shows that foreign participation has steadily declined in the past four months, dropping from 56 per cent in February to 42 per cent in May. Foreign investors have been the key movers of the market and have consistently put more money into the NSE than they have taken out.

February, when pre-election jitters saw foreigners take out Sh10.2 billion against total inflows of Sh6.3 billion, was the exception, making it the only month in the past one and a half years to post negative net inflows.


Foreign demand was key to the steep stock market rally in May when huge price gains in the large counters saw investor wealth grow by Sh118 billion.

Weekly performance has also been declining since mid-June. The NSE 20 share index dropped 100 points from 4806 on June 14 to 4706 last Friday while the market cap was down to Sh1.623 trillion last Friday compared to Sh1.645 trillion on June 14.

(Read: FTSE indices drop after one year of consistent gains)

Three of the NSE’s largest companies posted a robust share price gain that left them with additional combined value of Sh88 billion.

Beer maker East African Breweries Limited (EABL) led the pack, having added Sh49 billion to its market capitalisation, Safaricom was second with Sh22 billion and Equity Bank third with Sh17.6 billion. The gains have, however, been wiped out by the June slump.

The Treasury has moved to calm investor nerves over the return of capital gains tax, stating that it has yet to decide which sectors will be subject to the tax.

Investor concerns over the proposed tax measures have extended to the currency market where the shilling has come under pressure touching a 13-week low of between 85.65-85 to the dollar and in danger of slipping back to the 86 units to the dollar mark last seen at the beginning of March.

Aly-Khan Satchu, who heads data vending and financial advisory firm Rich Management, said foreign investors have taken a defensive stance in the market, contributing to the June slump.

Mr Satchu said any move that upsets the nerves of foreign investors – who were the catalysts for the May Bull Run – was bound to negatively affect the market. Increased foreign investor participation saw the bourse rally to touch the 5,000 points mark more than once since March.

Mr Satchu also pointed out the link between developments in emerging markets (where Kenya belongs), frontier markets and the developed markets, adding that frontier markets were better placed to avoid any shocks coming from developed market policy shifts.

“Frontier markets have a 0.43 per cent correlation with the S&P 500, whereas emerging markets have a 0.85 per cent correlation. The investment case for the frontier is exactly that lack of correlation. However, the catalysts for the bull run in Nairobi were foreign investors who increased their allocation on a consistent basis,” said Mr Satchu.

Investment analysts, however, maintained that there was hope in the fact that foreign investors tend to be longer-term participants in the market rather than speculative fast money accounts whose exit may not be quick even with the US Fed’s decision to tighten liquidity at home.

The rise in interest rates would tighten liquidity supply for American investors, said Suntra Investment Bank research analyst Johnson Nderi, adding that this would expose companies whose stocks are supported by factors other than solid fundamentals.

“The contracting money supply would lower demand from the foreign investor pool. Especially at risk are stocks whose prices are not supported by fundamentals, whose earnings performance do not render themselves to the high price of their shares,” Mr Nderi said.

The US Fed has moved to cut back its quantitative easing programme – one of the most aggressive easing strategies in the Fed’s history – and is projected to ease aggressive buying of public bonds that has kept interest rates in the world’s biggest economies low. The move has triggered equities sell-offs as investors seek to protect their

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