Foreign investors withdraw Sh24 billion from the NSE

The Nairobi Securities Exchange (NSE) saw withdrawals of foreign investors totaling Sh23.9 billion in 2022, the most in the previous three years, as a result of increased global concerns.

Since 2020, when foreign investors withdrew Sh28.6 billion from local stocks in response to Covid-19 shocks, the annualized portfolio outflow from domestic equities was at its greatest level.

With 2019 marking the final year of net inflows, the net selling position is the third consecutive year.

Stock valuations were lowered as a result of exits by foreign investors, with blue-chip businesses posting the largest annual losses.

For instance, Safaricom, the largest stock on the NSE by average market capitalization, lost 36.4 percent of its value from its closing price of Sh37.95 in 2021 to conclude 2022 with a share price of Sh24.15.

Other large-cap stocks that suffered the pressure of a declining market and fleeing foreign investors were Equity, KCB, and Co-operative, whose share prices fell by 15.6, 16.2, and 5%, respectively.

However, defying the trend, Absa, Standard Chartered Bank, NCBA, BAT, and Stanbic Holdings had gains of 3.8, 11.3, 56.2, 4.2, and 16.9 percent in the time period.

The five companies, which included Car & General, Crown Paints, Olympia Capital, and Limuru Tea and concluded 2022 with positive returns, were among the market outliers that primarily covered small caps.

However, the all-share index (NASI) suffered losses of 23.42 percent to conclude 2022 in bearish territory, closing at 127.47 points.

Interest rate increases in advanced nations gave investors an incentive to keep government assets in their home markets and local worries about macroeconomic deterioration, which together led to the increased foreign investor departures from a net selling position of Sh10.2 billion.

Central banks in leading economies raised interest rates throughout 2022 to tame soaring inflation brought on by a surge in global commodity prices.

For instance, the US Federal Reserve raised rates seven times throughout the year as inflation reached a new 40-year high, bringing the Federal Funds Rate from a low of 0.25 percent at the beginning of the year to 4.5 percent now.

In the meantime, the Bank of England (BOE) in the UK raised interest rates eight times, bringing the effective benchmark rate to 3.5 percent at the end of 2022, an increase of 3.25 percent on an annualized basis.

Gains in alternative markets inside African bourses have presented a contrasting perspective, even though rate hikes signal a return to home markets by investors in frontier and emerging countries.

“Other than these factors, foreign investors are not really moving back home but playing in frontier markets. There were better returns from markets such as Nigeria, Zimbabwe and Mauritius,” noted AIB-AXYS Africa Research Analyst Solomon Kariuki.

At the same time, Mr Kariuki said the relative availability of dollars in Kenya despite ensuing FX challenges including shortages has allowed foreign investors to exit.

Going forward, Mr Kariuki has tipped the portfolio flows to largely hold as challenges in the operating environment persist.

“I don’t think there will be anything different as there are still going to be challenges evolving in both the domestic and global economy. The key thing is where the return will be, foreign investors are likely to follow,” he said.

The slowdown and potential termination of interest rate hikes by advanced economies and low stock values are however factors tipped to favour a slowdown in portfolio exits and a potential flow reversal.

“This year, rate hikes will be quite contained which will help stabilize portfolio flows by foreign investors. This year portends some attractive entry points for foreign investors with low stock valuations across African bourses,” Churchill Ogutu, an economist at IC Asset Managers said.

However, Mr. Ogutu agrees with Mr. Kariuki that the increasing idiosyncratic risks in emerging markets, such as elections in countries like Nigeria and prolonged dollar shortages, might further dampen foreign investment inflows in countries like Kenya.

The major NSE market, for example, is currently trading at a price-to-earnings ratio of 9.35 times, down from a higher ratio of 22.49 times in 2021, as a result of the exodus of foreign investors.

However, the exodus of foreign investors has not only resulted in losses for owners of blue-chip company shares on the trading market; the NSE itself has issued a profit warning on anticipated 2022 full-year results.